Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Place of Supply of Services

HM Revenue & Customs
, see all updates

Establishment making or receiving the supply: VAT Groups: Friends overseas

A scheme known as the ‘friends overseas scheme’ was used by a number of companies in exempt VAT groups. It relied on a combination of place of supply rules and VAT grouping to avoid tax.

The VAT group sets up a subsidiary outside the group. The subsidiary contracts with an overseas member of the VAT group to provide Schedule 5 services, usually leasing of equipment, which are supplied where the customer belongs. The overseas member then contracts with a UK group member to provide those services. In the case of leasing services, the goods remain in the UK at all times. Tax advisers have argued that the first supply is outside the scope of UK VAT and that the second supply is disregarded for VAT purposes under section 43(1)(a) of the VAT Act 1994, since it is between members of a VAT group.

However, the correct approach in law is to treat the VAT group as a single entity. We consider that the services are received at the UK establishment because that is the one most directly concerned with the supply. Because the supplier and customer are both established in the UK, the supplier must account for tax, which the exempt customer cannot reclaim.

The scheme was blocked by the introduction of sections 43(2A)-(2)(E) to the VAT Act 1994, which overrides the disregard in particular circumstances. In such circumstances the UK establishment has to account for tax on the receipt of the Schedule 5 services in the normal manner.

You may see a variant of this scheme, for example basic rule services not blocked by section 43(2A) of the VAT Act 1994. Please consult VAT Supply Team before you take any action.