A head office buys a software platform and allocates the cost to its branches. The group accounts treat the entries as internal charges. For VAT, the answer depends on which establishments are in VAT groups and who receives the service. A recharge that appears routine in the transfer pricing file can have a different character on the VAT return.
That difference often emerges during an audit or a sale, when several years of charges need to be reconstructed. This article deals with branch recharges and fixed establishments. Part 2 will consider holding company recovery, management charges and year-end transfer pricing adjustments.
The starting rules
Ordinarily, a head office and its branch are one taxable person. In FCE Bank (C-210/04), the Court of Justice of the European Union (CJEU) found that a branch which did not independently bear the economic risks of its activity could not make a taxable supply to its head office. Article 11 of the VAT Directive nevertheless permits Member States to treat closely linked persons established in their territory as one taxable person through VAT grouping. Where a branch joins such a group, the boundary of the taxable person may change.
For services supplied to a business, Article 44 of the VAT Directive generally looks to the customer’s place of establishment, or to the fixed establishment receiving the service. Article 11 of Implementing Regulation 282/2011 sets the receiving-establishment test: sufficient permanence and suitable human and technical resources to receive and use the services for that establishment’s own needs. There are separate rules for particular services; the general rule should not be applied to every charge without checking what has actually been supplied.
When a branch joins a VAT group
In Skandia America (C-7/13), a US head office bought IT services and charged them to its Swedish branch. The branch belonged to a Swedish VAT group. The CJEU treated the branch as part of that group, rather than part of the head office for those supplies. The Swedish group therefore had to account for VAT on the services under the reverse charge.
Danske Bank (C-812/19) considered the reverse configuration. A Danish head office in a Danish VAT group made IT services available to its Swedish branch, which was outside that group. The Court treated the Danish VAT group and the Swedish branch as separate taxable persons; the Swedish branch had to account for VAT there under the reverse charge. It is therefore necessary to check grouping on the supplier’s side as well as the recipient’s.
The entries in the accounts do not settle the VAT position. Identify the service, the establishments that supply and receive it, the applicable grouping rules, and where the service is taxed. A reverse charge can be largely neutral for a business with full recovery, but can become a lasting cost for a bank, insurer or other partially exempt business. The local rules on documentation and valuation also need checking; an internal allocation does not automatically require the same invoice treatment as a third-party sale.
The UK position has changed
The UK takes a whole-entity approach to VAT grouping under section 43 of the Value Added Tax Act 1994. In Revenue and Customs Brief 7 (2025), effective from 26 November 2025, HMRC withdrew and replaced its three 2015 briefs on Skandia. It now considers that an overseas establishment of a business in a UK VAT group remains part of that group for UK VAT purposes, even if it is in an EU Member State that does not apply whole-entity grouping. A UK reverse charge should therefore not be assumed merely because the old guidance treated the overseas establishment as outside the UK group.
This is a UK VAT position. The authority in the other country may still treat the local establishment as a member of a separate VAT group and tax the flow there. The same transaction consequently needs an analysis at each end. HMRC also says UK groups that accounted for VAT under its former policy may be able to correct overpayments, subject to the usual error-correction rules.
There is a further UK check. Section 43(2A) to (2E) can impose a charge where an overseas establishment of one UK VAT group member buys in services from outside the group and uses them in making a supply to a UK establishment of another group member. The conditions and value must be tested on the actual costs: the rule is not a general tax on every overseas branch recharge. HMRC specifically reminds businesses to consider it when making claims following the 2025 brief.
What counts as a fixed establishment
Grouping is only one part of the analysis. A company can also face a challenge that it receives services at a fixed establishment in another country. The presence of an affiliate, property, or dedicated contractor may prompt the question, but does not answer it.
Dong Yang (C-547/18) held that a subsidiary does not, by its mere existence, create a fixed establishment for its foreign parent. Titanium (C-931/19) rejected a fixed establishment based on leased property where the owner lacked its own staff to perform the relevant activities. Berlin Chemie (C-333/20) and Cabot Plastics (C-232/22) examined service and manufacturing arrangements with local affiliates. The resources used to supply a service cannot simply be treated as the foreign customer’s resources for receiving that same service. An exclusive arrangement alone does not transfer them to the customer’s disposal.
Adient (C-533/22) continued that approach in 2024 in the context of intra-group processing services. The practical question is whether the foreign company genuinely has suitable resources at its disposal in the country, with sufficient permanence to receive and use the particular services. Common ownership, a long contract or close operational cooperation is insufficient on its own. The contracts, staffing and conduct on the ground must be read together.
What to review before an audit or sale
Start with the recurring charges, not the organization chart. Trace the principal shared costs through the head office, branches and VAT groups; record which establishment uses each service; and check the treatment in both countries. For a partly exempt group, quantify the VAT that cannot be recovered. If a local subsidiary or contractor is involved, establish whose people and systems perform the work and whether the foreign company can actually use them as its own resources.
A short review can also identify past returns that require correction. In the UK, that includes considering both HMRC’s 2025 policy change and section 43(2A). Keeping the contracts, cost allocations and VAT analysis together makes the position easier to explain when an auditor or buyer asks how the group arrived at it.
Conclusion
For branch charges, the first question is where the VAT group begins and ends. For a fixed establishment, it is whether the foreign company has the resources to receive and use the relevant service locally. Neither question can be answered from the transfer pricing label on a ledger entry. The UK’s 2025 change makes it particularly important to review existing arrangements against current guidance before carrying forward an old treatment.
