Q:
Hi
My understanding is that inter company services (eg consultancy or management
advice) from a business in one EU state to its branch in another are subject
to reverse charge by the recipient branch. However I have stumbled across
the FCE Bank ruling, which states that services supplied by a Head Office to
its branch located in a different member state are not supplies of services
subject to VAT.
How do I determine which inter company services fall within FCE bank, and
which are subject to the B2B general rule stating that VAT should be reverse
charged by the recipient business?
Thank you
Robert
A:
Hi Robert
My apologies for the delay in replying to your query. It’s actually a difficult area of VAT and I wanted to make sure that I’d considered the main issues properly before replying. I’ve been advising a client on the same subject this past week so the subject is quite topical!
Head Office/Branch or Company/Company
First of all, I can confirm the issue mentioned in FCE about transactions involving different parts of the same legal entity – eg head office in one country and a branch in another country. It’s important because generally speaking, transactions between different parts of the same legal entity, such as a recharge of management costs from head office to a branch – aren’t normally regarded as supplies for VAT purposes, as in FCE Bank.
This applies generally throughout the EC as the concept of VAT is that it applies to transactions between separate “taxable persons”, which means separate legal entities. So whether it involves recharges of management costs between a UK head office and a French branch or from the London head office to the Manchester branch, recharges of this nature don’t normally represent supplies for VAT purposes.
If the transactions are between separate companies within a corporate group, then they would be supplies for VAT purposes unless the companies were registered for VAT as part of a UK VAT group registration. Transactions between different members of UK VAT groups, ie separate companies are normally disregarded for UK VAT purposes, ie not subject to UK VAT or reverse charge VAT on imported services.
However there are some anti-avoidance rules that can affect the treatment of transactions between members of the same VAT group, so you’d need to be aware of these if your situation involves companies within a UK VAT group registration. Also the UK VAT treatment for UK VAT groups only applies to UK VAT – for example transactions between 2 French branches of different UK companies would be liable to French VAT even if the companies were members of the same UK VAT group registration.
Finally, I’m not sure how other countries deal with VAT group registrations – I understand that some countries don’t have the facility for group registration, so for the purposes of this note I’m only referring to UK VAT groups. And as is always the case, the VAT treatment of any transaction can differ between different EC member states so any information I can give here is in respect of UK VAT, albeit that EC countries are supposed to follow the same rules.
So let’s assume that we are dealing with transactions involving different legal entities, for example a French company (A)and a UK company (B) which are NOT registered in a UK VAT registration.
B2B Transactions: VAT Notice 741A: The Place of Supply of Services
VAT Notice 741A: Place of Supply of Services which is here on the HMRC website: http://tinyurl.com/ye67t2s. It deals with all types of international services including including those B2B transactions that are subject to the reverse charge. The Notice is long and detailed and quite difficult to read, but once you’ve got your head around the main issues it’s a very useful notice – I regularly refer to it when dealing with any issues involving international services.
As you will see from the Notice, different rules apply to establish the VAT liability of different types of services. But the types of services involved in FCE that fall within the B2B rule, such as professional, management, financial, insurance or consultancy services, are listed in detail at section 15 of the notice. These are the “supplied where received” services, usually regarded as “intangible” services, to differentiate them from services relating to land, or work on goods or performance type services. Normally these services are liable to VAT under the reverse charge rule in the country of the recipient.
There is a further category of services which have special treatment called the “use and enjoyment” rule, which are listed at Section 16 of the Notice, “Use and enjoyment of letting on hire of goods, telecommunications services and radio and television broadcasting services”. Under this rule, if your contract is to supply such services to say the New York head office of a US company, but the services are “used” by directors/employees of the company while they are in the UK, then the services concerned are liable to UK VAT.
There is a useful index at section 24 (page 90) of the Notice that lists all of the services dealt with in the Notice and where to look for information about the VAT treatment of that particular type of service. It’s very handy and I often use it.
Concept of “Belonging”
The other important issue in considering the VAT liability of international services is establishing WHERE the supplier and recipient of the services belongs. This is important as, of course, the VAT liability will of course be different if you are supplying services to a business in the UK or a different country, so for VAT purposes we have to establish in which country the parties “belong” – a bit like the concept of residence for tax purposes.
This is covered in section 3 of Notice 741A. You will see that it deals with a variety of situations, including transactions involving different parts of the same legal entity which are based in different countries.
Why is it important?
Quite simply it can change the VAT treatment – and hence the cost – of the supply. For example, suppose I was providing consultancy services to a US bank based in New York. As my services are covered by the B2B rule, then I don’t charge UK VAT and as the bank is outside the EC and not subject to the EC “reverse charge” rules, the bank receives my services free of VAT. That is how the rule is supposed to apply.
But if my services were in practice provided to the French branch of the US company, for example because I was required to work with the French branch and send my report to the Paris office, then under the concept of “belonging” the customer would be deemed to be the French branch. The French branch would be required to account for reverse charge VAT at the French standard rate of 19.6% on the value of the imported service. Most banks can only recover a very small proportion of their input tax so the addition of the VAT could add up to 19.6% VAT to the cost of my services, depending on the recovery rate of the French branch.
There have been several VAT cases over the years about the “place of belonging” in such cases so it’s worth understanding this concept.
Hope this all helps, probably a bit more information than you were looking for but I thought I’d write it down as I’ve been working on it for a client anyway and it was fresh in my mind.
Marie