HMRC reverses position on VAT grouping related to EU branches

Bryn Reynolds and Andrew McCarthy of Pinsent Masons were commenting after HMRC published a briefing clarifying its latest position regarding its treatment of VAT grouping related to intra-entity services across the EU.

The new policy effectively reverses the impact of recent EU case law, particularly the Court of Justice of the European Union (CJEU) decision in Skandia to restore the ‘whole entity’ principle. Historically, where a company joined a UK VAT group, the whole company, not just the particular branch or head office located in the UK, became part of the UK VAT group. Post-Skandia, the UK had partially implemented this decision by requiring the VAT group to assess for each branch in another country, regardless of whether the other country had implemented Skandia.

As a result of the policy change, this requirement, which has been in place since 1 January 2016, has been revised. Consequently, an overseas establishment of a business VAT grouped in the UK will now be treated as part of that UK VAT group, even when located in an EU member state that does not operate ‘whole entity’ VAT grouping. The change took retrospective effect from 26 November 2025.

Although the policy change does not require any legislative amendment, HMRC said that any VAT groups that have previously accounted for VAT under the previous policy will now be able to submit an error correction notification to reclaim any overpaid VAT.

Tax expert Reynolds said the change would be significant for any business with a UK VAT group that contains an entity that has an overseas establishment in the EU. “Although this is relevant to a potentially narrow group of taxpayers, the change of policy is quite striking. The previous policy was overly confusing for businesses and meant that the UK VAT treatment hinged upon the tax policy decisions of other jurisdictions.” he said. “The open invitation to make claims will make it worthwhile for all affected VAT groups to consider their position as early as possible to prevent claims from falling out of time.”

HMRC’s revised position also provides an interesting contrast with recent guidance published by the Irish Revenue Commissioners, which states that Irish VAT groups will now be restricted to Irish head offices or Irish branches. This mirrors the approach taken by most other EU member states following the CJEU ruling in Skandia and in a separate case involving Danske Bank, and highlights an example of diverging UK VAT policy in the post-Brexit landscape.