www.pwc.co.uk Indirect tax forum VAT establishments
Agenda VAT establishments basic principles Hastings Insurance Services Ltd - implications 1 2 Topical issues Questions 2 3 4 4 2
What are the basic principles? 3
VAT establishments basic principles Why is it important? A business establishment is typically the place where the business is run from where management decisions are taken The basic principles considered in determining whether a business has a fixed establishment are: Human and technical resources necessary for providing or receiving services Sufficient degree of permanence A temporary presence of human and technical resources in the UK would not create a fixed establishment. A business may have multiple fixed establishments, which could include branches or agencies, but only one business establishment. 4
VAT establishments basic principles Examples of a fixed establishment: A business sets up a branch in another Member State comprising of staff and offices to provide services. A business owns a property in the UK, which it leases to tenants, and appoints a UK agent or representative to carry on its business. Examples where there is no fixed establishment: A business that registers or is incorporated at its accountant s address but has no other offices or staff in that country. A temporary presence of staff carrying out a one-off project. The presence of computer servers alone within a country. 5
What is the impact of the decision in Hastings Insurance Services Ltd? 6
Hastings Insurance Services ltd: What was the issue? Facts of the case: Advantage is a related company with a business establishment in Gibraltar. Hastings sought to recover input tax relating to intermediary services provided to Advantage, including (a) broking, (b) underwriting support and (c) claims handling services. The terms of the agreement were considered to be negotiated at arm s length and the parties deemed to be operating as separate businesses with their own commercial aims and risk taking. Hastings argued that its services were provided outside the scope of UK VAT with credit, on the basis that they were received by Advantage in Gibraltar and within the scope of the Specified Services Order 1999 7
Hastings Insurance Services ltd: What was the position of HMRC? HMRC argued that Hastings constituted a fixed establishment of Advantage in the UK, and therefore: Advantage was making supplies of insurance services in the UK to UK customers; and The support services provided by Hastings to Advantage was to this fixed establishment in the UK, and were therefore exempt under item 4 of group 2 of the VAT act 1994. 8
Hastings Insurance Services ltd: what was the decision? The decision: The FTT concluded that Advantage did not have a fixed establishment in the UK, and supplies were made by Hastings to Advantage s business establishment in Gibraltar. It was held that Advantage did not have the necessary or adequate resources to be able to provide insurance services on an independent basis and that Hastings did not provide it with this. Rather, the key element of what is required for the supply of insurance services i.e. the ability to decide what/ who to cover and at what price, was carried out by Advantage in Gibraltar. Points of interest: Whilst Advantage did not have all the necessary or adequate resources to be able to provide insurance services, it was noted that it is not necessary to have all the human and technical resources available to it to constitute a fixed establishment. It noted that a business may have a fixed establishment either as a result of it obtaining limited functions of the business establishment, but it must have the resources that are necessary for the making of supplies. In this case, the FTT concluded that the ability to decide who to cover and at what price was necessary to the making of insurance supplies, and that Hastings did not have the capacity to do this. 9
Further points to consider in the current climate 10
Further points to consider in the current climate HMRC s current initiatives Risk reviews and scrutiny of VAT grouping applications, including substance of UK branches Consultation on VAT grouping rules Brexit Changes to transaction flows Setting up braches and subsidiaries in other territories and compliance requirements Adding branches to VAT groups Skandia Continue to consider the impact of Skandia, and the impact of VAT grouping on the VAT treatment of supplies to and by branches. Different positions being taken by EU Member States. Wider points to be aware of include BEPS and changing approaches as a result of the EU list of non-cooperative taxing jurisdictions 11
Key takeaways 12
Key takeaways 1 Substance: are there necessary human and technical resources? 2 Permanence: is there sufficiently permanent presence or are the resources only present temporarily? 3 Understanding the activities undertaken by the branch and establishing whether there are necessary and adequate resources to provide and/or receive the supplies 13
Questions 14
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