If there was a competition for the trendiest VAT subject of the year, VAT grouping would win the 2024 prize hands-down.
With two high-profile tribunal rulings in the UK in March and August and one crucial decision by the Court of Justice of the European Union (CJEU) in July, practitioners and taxpayer members of a VAT group have had plenty to ponder in the past few months, but can now operate in a clearer fiscal landscape (albeit not one free from fiscal traps).
Barclays scrutinised
Of most interest to multinational entities with a significant presence in the UK is the decision released by the first-tier tribunal (FTT) on 29 August in the case concerning an appeal by Barclays Services Corporation (BSC) – a US subsidiary of Barclays – against the decision by UK tax authority HMRC to refuse its application to join the Barclays UK VAT group, even though BSC had a UK branch.
The branch did not have sufficient resources in the UK to be treated as a fixed establishment
HMRC rejected the application for two reasons: the branch did not have sufficient resources in the UK to be treated as a fixed establishment for VAT purposes; and BSC joining the existing VAT group would have had a detrimental effect on tax revenue collection. (Transactions between VAT group members do not trigger any value-added tax.)
The FTT agreed with HMRC on the first objection because, in the tribunal’s opinion, at the time of the application the branch lacked both human and technical substance. But it disagreed on the ‘protection-of-the-revenue’ argument, stating that any VAT savings arising from the admission of BSC in the VAT group would simply be a normal consequence of VAT grouping that cannot be denied.
Partially exempt groups may be pleased that HMRC failed to convince
Partial victory
In essence, this was a case where the contenders fought two battles and won one each. And even though winning one was sufficient for the tax authority to obtain an overall victory (BSC could not join the VAT group), partially exempt groups in the UK may be very pleased that HMRC failed to convince the FTT with its revenue protection argument.
The decision of the tribunal in fact implies that non-UK entities can continue to use VAT grouping to prevent ‘VAT leakage’ created by the provision of services by an overseas entity when the entity is grouped via a (sufficiently resourced) UK-fixed establishment.
Exit strategy
Disputes can also arise when a company leaves a VAT group, as demonstrated in The Prudential Assurance Company Ltd v HMRC [2024]. Here, the court of appeal was asked to rule on the chargeability of VAT when transactions occur between two companies that are part of the same VAT group but payments are settled when the two parties no longer share the same VAT number.
Was the tax point triggered when the services were provided or when payment became due?
This case in fact revolved around a Prudential investment management firm providing services to another Prudential legal entity when both companies were members of the same VAT group, with the investment management firm becoming eligible to receive a bonus fee payment years later, after it had left the group.
And here is the dilemma: was the tax point for VAT purposes triggered when the services were provided or when payment became due?
If the former was true, there would be no VAT to charge and remit to HMRC because transactions between group members are disregarded. If the latter was true, VAT would indeed be chargeable and, at least in part, not recoverable by Prudential by virtue of being an exempt or partially exempt business.
HMRC strongly argued that the services provided fell within the scope of the time-of-supply rules for continuous supplies of services, and so the tax point was triggered at the time of payment, hence after the departure from the VAT group.
Prudential instead stressed that no VAT was due because the commercial activities between the two companies commenced and terminated while they were both part of the same VAT group.
The CJEU’s release on the taxability of supplies between VAT group members was welcome
The court of appeal’s verdict was a split decision: two to one in favour of HMRC.
Meanwhile in Europe…
If this ruling came as a surprise or disappointment for most taxpayers, the CJEU’s release in July on the taxability of supplies between VAT group members (case C-184/23) was instead very welcome.
The case was initiated by the German federal fiscal court, which requested that the CJEU decide whether supplies between VAT group members must be disregarded for VAT purposes even if some of the activities of the group as a whole are classed as non-business.
Since, in principle, any VAT on costs incurred to carry out non-business ventures cannot be recovered as input tax, disregarding and not charging VAT on intercompany transactions for a VAT group with a mixture of business and non-business activities has the obvious benefit of minimising VAT costs.
In its ruling, the CJEU stated that supplies between members of a VAT group are not taxable, regardless of potential restrictions to input tax deductions in certain circumstances because – the court explained – a VAT group is a single taxpayer and not the sum of multiple taxpayer members.
