The European court recently released its decision in Högkullen, which provided a wide variety of support (including HR and IT support along with wider business management services) to its subsidiaries. In the period in question, Högkullen charged around £180k for its services; a value calculated using transfer pricing principles. However, the calculation of the charge in line with transfer pricing approach principles meant that the value of its charge ignored shareholder costs, which formed most of the expenses that Högkullen incurred (its total costs in the period were just over £2 million).

At this point, it’s worth noting that Högkullen’s subsidiaries were not entitled to reclaim all the VAT on their costs, whereas Högkullen did reclaim all its VAT. Consequently, an increase in the value of Högkullen’s charge would increase the costs of the group.

The Swedish tax authority argued that VAT anti-avoidance legislation permitted them to increase the value of Högkullen’s charge to reflect all its costs. It relied on the fact that the management of subsidiaries had no open market equivalent. Thus, VAT law stipulated that all Högkullen’s costs must be included in the value of its charge.

The CJEU's decision was not definitive. There was recognition that the diverse services Högkullen provided to subsidiaries should be regarded as separate and distinct (as Högkullen argued and contrary to the Swedish tax authority’s argument). Thus, the individual elements should be compared to third-party services. This implies that the transfer pricing value of the charge could be adopted in this case, suggesting Högkullen was successful. Significantly, this decision appears to contradict the UK courts approach in Jupiter Asset Management in 2021 which found that open market value (for VAT purposes) must include all costs.

The relationship between customs duty and transfer pricing is similarly fraught, with some customs authorities challenging the use of a value calculated in line with transfer pricing principles as a customs value at import.

This noted, two key judgements in European courts have not yet produced clarity and there is no single accepted approach to the treatment of transfer pricing adjustments for customs purposes. All of this leads to a situation where the same transaction may be valued and treated differently across corporate tax, VAT and customs (as well as differently across different tax authorities) resulting in a variety of competing approaches and risks.

While this latest European court decision is vague, one thing is certain; the Chancellor must find ways to increase Exchequer receipts as meaningful spending cuts seem difficult to achieve politically. Increasing the use of VAT anti-avoidance legislation and taking advantage of a complex customs valuation position seems a relatively straightforward solution for HMRC. This could lead to a situation in which corporate tax and VAT or duty values are different both on international and (for VAT at least) domestic transactions.