What is ‘business establishment’ for VAT purposes?

TaxTalk - May 2024

read timeRead time: 21 mins

Rarely does a definition matter so much and have so many implications for VAT. We look at the confusions often caused by misinterpretation of the term.

The term ‘business establishment’ is not defined in VAT law. But it was considered by the Court of Justice of the European Union (CJEU) in the VAT-related case of Planzer Luxembourg Sarl (C-73/06).

The CJEU ruled that ‘business establishment’ means the place where the essential decisions concerning the general management of a company are made, and where the functions of its central administration are carried out:

“Determination of a company’s place of business requires a series of factors to be taken into consideration, foremost amongst which are its registered office, the place of its central administration, the place where its directors meet and the place, usually identical, where the general policy of that company is determined. Other factors, such as the place of residence of the main directors, the place where general meetings are held, the place where administrative and accounting documents are kept, and the place where the company’s financial, and particularly banking, transactions mainly take place, may also need to be taken into account.”

The HMRC definition

This ties in with HMRC’s long-held interpretation of ‘business establishment’ for VAT purposes, as a company’s principal place of business:

“The business establishment is the place where you have established your business and the main functions of the business’ central administration are carried out. This will usually be the head office, headquarters or ‘seat’ from which the business is run. This is where essential day-to-day decisions concerning the general management of the business are taken. A registered office alone is not sufficient to create a business establishment.”

It goes on to say that “an overseas company that registers or is incorporated at its accountant’s address but has no other offices or staff in the accountant’s country” is not considered a business establishment.

Business establishment: what it takes

So merely being incorporated in the UK and having a UK-registered office is not sufficient for a UK company, or branch of an overseas company, to have a business establishment in the UK for VAT purposes.  What is required is at least one of the following:

  • UK-resident employees and / or UK-resident self-employed contractors

  • UK-resident directors

  • a UK office which employees, directors or contractors use to conduct business for the UK company or branch

  • physical in-person board meetings taking place in the UK.

What if a UK company or branch is not eligible to be UK VAT-registered by these criteria? The good news is that as well as not being UK VAT-registered itself, the UK suppliers of general services to that company should not charge UK VAT on their services.

If charges have been incorrectly made, the company should request refunds of the VAT on historic services from those UK suppliers. And VAT should not apply in future, unless a UK presence for VAT purposes (as described above) comes about for the UK company or branch.

But there’s bad news too. If a non-UK company has UK-resident directors (as described above), it may be required to register for UK VAT. What’s more, its UK suppliers may have to charge it VAT. And it may only be able to reclaim part of that, to the extent that it makes VAT-able supplies.

What knowledge does the supplier need?

From the perspective of a UK supplier of general business services, it needs to know where its customer is located so as to correctly charge (or not charge) UK VAT. It may be that it doesn’t charge UK VAT to a non-UK company. But if that non-UK company has a UK business establishment to which the supplier supplies general business services, then the supplier should charge, and account to HMRC for, UK VAT.  

Failure to charge, and pay on, that VAT means the UK supplier will owe HMRC VAT and interest (currently 7.75% p.a. on a straight line basis). There may also be a potential penalty of up to 30% of the VAT that should have been paid to HMRC. 

If the UK supplier’s contract with the non-UK company allows the supplier to pass on the VAT, interest and any penalty to the non-UK company, then the non-UK company has an additional cost. And only the VAT element of this may be partly or wholly recoverable from HMRC once the non-UK company has received a VAT invoice from the UK supplier. 

If the supplier has a contract that says only that its fees are “exclusive of VAT” (or similar), with no mention of late VAT payment interest or penalties payable to HMRC, the supplier will have an interest or penalty cost for which it cannot obtain a tax deduction. VAT may have been paid late, for example, if the customer had not told the UK supplier about its business establishment in the UK.

When VAT is charged in error

So what about the opposite scenario? If a UK supplier incorrectly charges UK VAT to a UK company that does not have a business establishment in the UK, what then? If the UK company is incorrectly UK VAT-registered and incorrectly reclaims some or all of the VAT charged via its UK VAT return, the company will incur an HMRC interest charge. It may also have to pay a penalty of up to 30% of the VAT that was incorrectly charged. 

Real-life scenarios

Here are examples of the two situations:

  • A UK group of trading companies had a Jersey-incorporated holding company. All the directors of the holding company lived in the UK. Its board meetings took place physically in the UK. The holding company was a member of a UK VAT group, together with the UK group of trading companies. This proved that HMRC considered the holding company to have a UK ‘business establishment’ for VAT purposes.  A UK consultant did not charge VAT on its consultancy fees when it should have done and so incurred HMRC interest and also a ‘careless error’ penalty, neither of which could be passed on to its client and for which it did not obtain a tax deduction.

  • An Australian group of trading companies had a UK-incorporated holding company. All the directors of the holding company lived in Australia. All its board meetings took place virtually, with the directors at home in Australia. The holding company was registered for UK VAT – but HMRC then cancelled its registration retrospectively. A UK consultant charged VAT on its consultancy fees when it shouldn’t have done. It had to claim back the incorrectly charged VAT from HMRC (it couldn’t adjust the error on a current VAT return because its value was too large) and refund the VAT to its client. Meanwhile its client incurred an interest charge for reclaiming from HMRC the VAT that the UK consultant incorrectly charged, together with a ‘careless error’ penalty.

If you would like more guidance on VAT issues arising from ‘business establishment’ status errors, please contact Mark Ellis.