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HMRC intend to legislate to give statutory effect to extra-statutory concession 3.2.2, with a technical consultation taking place in May. Revenue & Customs Brief 16/11 has been published to set out how the concession should be applied in the interim.
It affects UK VAT groups with an overseas member that buys services from persons outside the VAT group and uses them to make supplies to the UK members. Anti-avoidance legislation was enacted in 1997 requiring a tax charge to be declared on certain supplies by the overseas members to the UK members of the group.
The purpose of ESC 3.2.2 was to ensure that this provision was limited to removing the tax advantage from such structures. It works by restricting the tax charge to the value of reverse charge services bought in by the overseas member. These services were listed in VATA 1994, Sch 5.
However, as a result of a change to the place of supply of services rules in 2010, Sch 5 was repealed.
In the meantime, until the concession has been legislated, the reference to Sch 5 should be read as one to the new general rule for supplies to businesses in s 7A(2)(a).
The concession will continue to allow VAT groups to value the tax charge by reference to the services the overseas member has bought in that would now be treated as subject to UK VAT, if the UK group member bought them direct.
Evidence of the value of the services bought in, and that they have not been undervalued, will still be needed.
