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VAT - where is a service received? Back  
In the case of Zurich Insurance Company vs HMRC, the UK Court of Appeal has decided that the place-of-supply of services is not determined by where the contract is concluded but by other factors such as where the service is consumed and where the predominant benefit arises. The decision will be of interest to financial services businesses who receive services under global contracts.
Zurich Insurance Company ('Zurich')
Zurich had its head office ('HO') in Switzerland and a branch in the UK. Zurich HO sought to implement a new financial accounting and reporting system for its worldwide operations, including the Zurich UK Branch. To support the worldwide implementation, Zurich HO contracted with a Swiss-based consultancy company for the supply of consultancy services. The contract was concluded between Zurich HO and the Swiss consultants. For the work related to Zurich UK Branch, the Swiss consultants subcontracted the delivery of the services to its own subsidiary in the UK (Zurich UK Branch did not enter into any contract with the UK subsidiary of the Swiss consultants).

The UK Court was asked to determine which 'establishment' of Zurich had received the service from the Swiss consultants. In other words, whether the Swiss consultants supplied their services to Zurich HO or to the Zurich UK Branch. If the answer was the latter, then Zurich UK Branch would have to pay 'reverse-charge' UK VAT.

The tribunal decision
The UK VAT Tribunal decided that the services were supplied to Zurich HO and not to Zurich UK Branch. The Tribunal based its decision principally on the fact that the contract was entered into in Switzerland between Swiss parties, and that the 'establishment' most closely connected with the supply was the contracting entity, Zurich, in Switzerland.

The High Court judgement
The High Court rejected the Tribunal decision as untenable and held that the 'establishment' to which the services were supplied was the Zurich UK Branch. Justice Park held that the services were supplied primarily for the benefit of the operation of Zurich UK branch and were 'consumed' in the UK albeit that this was a global contract. In addition, the services were supplied by a subcontractor in the UK, and the importance of the services to Zurich UK branch outweighed their importance to Zurich HO. The UK was therefore the place-of-supply of the services.

The Court of Appeal
The Court of Appeal upheld this High Court decision. It confirmed that no significant weight should have been attached to the place where the contract was concluded in the circumstances. The High Court had considered the earlier case of Berkholz in which the ECJ had indicated that the place where the supplier had established his business was the primary point of reference, and that regard was to be had to another establishment if that did not give rise to a rational result for VAT purposes. The Court of Appeal confirmed that the rational result in the present appeal was to tax the services in the UK, in particular on the basis that use and enjoyment of the services was in the UK and the services were performed at the place of the fixed establishment in the UK.

Although UK case law is not binding on the Irish courts, this case may be a persuasive precedent in Ireland and the reasoning should be considered in determining place-of-supply issues going forward.

The case is of practical relevance to businesses engaged in the provision of VAT exempt financial services who receive services under a global contract. If the place-of-supply of those services is considered to be Ireland, a charge to VAT at 21p.c. will arise under the 'reverse-charge' rules.
It is important to note that in the Zurich case, the UK business of Zurich was conducted though a UK branch. If the business had been operated though a UK subsidiary, the decision in this case may have been different. However, the question would then arise as to whether Zurich HO had acted as some kind of agent for Zurich UK in procuring the supply of services to Zurich UK by the Swiss consultants, or whether Zurich had on-supplied (i.e. bought and sold) the service to its UK subsidiary. These questions can be difficult to determine. It is interesting to note however that EU VAT law has recently changed to allow Member States to impose transfer pricing rules on services supplied between connected parties.

The case did not directly address the issue of the VAT treatment of head-office to branch transactions (dealt with by the ECJ in the case of FCE). However the UK tax authorities sought to rely on claims for a UK corporation tax deduction for the consultancy costs recharged from Zurich HO to Zurich UK Branch to support its case that the benefit of the service arose in the UK.

Zurich had claimed (for corporation tax purposes) that the costs were incurred entirely by the UK branch for the benefit of the UK branch. Although not attaching any link between the position for the purposes of the corporation tax and VAT, it was pointed out that facts presented for corporation tax purposes can be relevant for analysis of factual issues affecting the VAT position and demonstrates the need for joined-up thinking between VAT and corporate tax.

The Zurich case is an important precedent and businesses that may be impacted, such as those with global contracts with service providers, should review their agreements and charging arrangements.

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