This brief gives notice of changes to UK legislation following
the decision of the Court of Justice of the European Union (CJEU)
in Le Credit Lyonnais. You can read the full text of the decision on
Partly-exempt businesses with establishments both within and
outside the UK will need to be aware of these changes. Financial
institutions, such as banks and insurers, are most likely to be
In Le Credit Lyonnais the CJEU
found that the VAT Directive could not be interpreted so as to allow a
company to take into account the turnover of its foreign branches when
calculating how much input tax it can deduct in the member state where
it has its principal establishment, using a ‘single pot’ calculation.
It also found that a sector in a partial exemption method could not be
based on a geographic location.
To reflect that decision, the March 2015 Budget announced our
plans to exclude supplies made by overseas branches from partial
exemption methods. As a result of feedback on the subsequent
consultation, we have narrowed the scope of changes to those set out
We exposed draft regulations to implement the necessary
changes for a limited consultation in October 2015. We have revised the
draft regulations in response to comments received.
the VAT Regulations 1995
Regulation 101 will be amended to make it clear that the value
of supplies made from establishments outside the UK cannot be taken
into account by businesses using the standard method.
Regulation 102(1A) will be amended to make it clear that:
where a sectorised method is used, each sector within it
must reflect the use to which VAT-bearing costs are put in the business
and in that sector, the structure of the business and the type of
activity undertaken by that sector
the value of supplies made from establishments outside the
UK can only be taken into account in a sectorised method
Changes will be made to Regulation 103 to mirror the changes
to Regulation 102.
Operative date of
Changes to Regulation 101 will have effect in relation to any
‘standard method’ longer period beginning on, or after, 1 January 2016.
Changes to Regulation 102 will have effect in relation to any
methods approved or directed by HM Revenue and Customs (HMRC) on, or
after, 1 January 2016.
Changes to Regulation 103 will have effect in relation to VAT
prescribed accounting periods beginning on, or after, 1 January 2016.
What this means
The value of supplies made by overseas establishments will be
excluded from the standard method.
Businesses that make supplies from overseas establishments and
currently use the standard method will no longer be able to recover
related input tax on the basis of ‘use’ under Regulation 101 and a
number of options will apply, as follows:
where such a business continues to use the ‘standard
method’ it will need to apply the UK recovery rate when recovering
input tax used to make supplies from overseas establishments
where such a business continues to use the standard method,
and the difference between the result of using that method and using a
method which fairly reflects the use of the tax bearing costs exceeds
£50,000 (or £25,000 in the case of group undertakings), it will need to
account for the difference because of the effect of the standard method
override set out in Regulations 107A - 107F
such a business can apply to use a special method
where such a business continues to use the standard method
and there is a material difference between the result of using that
method and using a method which reflects the extent input tax is used
in support of overseas supplies (whether a difference is material will
depend on the circumstances of the particular business, such as the
amount of VAT incurred and the difference in VAT recoverable), we will
expect that business to apply to use a special method pursuant to
Regulation 102 even if the standard method override is not engaged. In
the absence of such an application we may direct the use of a special
Methods that are not based on sectors cannot include the value
of supplies made from overseas establishments.
For partial exemption special methods, a business may only have a
method based on sectors where:
each sector within it reflects the use made of goods and
services in the business and in that sector, the structure of the
business and the type of activity undertaken by that sector
103 (foreign and specified supplies)
Where a business has a special method that does not attribute
input tax in respect of the foreign and specified supplies it makes, it
will need to reflect the changes to Regulation 103 in prescribed
accounting periods beginning on or after 1 January 2016.
Calculations that are not based on sectors cannot include the
value of supplies made from overseas establishments
For Regulation 103 a business may only have a calculation
based on sectors where:
each sector that it is based on reflects the use made of
goods and services in the business and in that sector, the structure of
the business and the type of activity undertaken by that sector
In practice, HMRC
will expect a business to keep sufficient records to demonstrate how it
allocates its VAT-bearing costs to the parts of the business
represented by sectors and how it uses those costs in each sector.
Guidance will be updated to reflect these changes. In practice
expects few businesses to be affected, since most businesses that make
supplies from overseas establishments already use a special method that
is compliant with the new legislation.