VAT Focus

VAT grouping is an efficient way for multinational financial institutions to mitigate their VAT liabilities as intended by law, particularly as the UK’s VAT grouping rules are more generous than in many other jurisdictions.

Supplies made between members of a VAT group are, normally, ignored for VAT purposes, and therefore VAT does not need to be accounted for on any such supplies.

Broadly, the UK VAT rules allow two or more “UK bodies corporate” that meet certain control requirements to apply to HM Revenue and Customs (HMRC) to be treated as a single taxable person for UK VAT purposes.

If the application is successful, the VAT registration is made in the name of a “representative member” of the VAT group.

Yes, it is possible for an overseas group company to join a UK VAT group provided that it is a “UK body corporate” and meets the control requirements. A company which is incorporated in a jurisdiction other than the UK will fall within the definition of a “UK body corporate” if it is established in the UK (ie the essential management decisions are undertaken in the UK) or it has a fixed establishment in the UK.

Evidencing that an overseas company has a fixed establishment in the UK so that it is eligible to form part of a UK VAT group can be challenging.

In order to constitute a “fixed establishment”, a UK establishment of an overseas company must have sufficient human and technical resources in the UK to make a meaningful contribution.

In essence, this means that the UK establishment should have both:

• control over its employees; and
• control of the assets (for example, desks, computers, telephones) available in its office space which is comparable to the control exercised by an owner of those assets.

At the planning stage of any group reorganisation, it is important for businesses to consider and assess the quantum of any VAT liabilities that arise, or may arise, when a member of a VAT group leaves that group. This analysis should include looking forward to payments which may become payable in future in respect of supplies made by the company leaving the group before it leaves. This issue is particularly relevant to banks and building societies who cannot recover VAT in full.

The basic rule, in regulation 90 of the Value Added Tax Regulations 1995 (Regulation 90), is that where a continuous supply of services is made and the consideration is determined or payable periodically or from time to time, the services are treated as separately and successively supplied at the earlier of payment or the issue of the invoice.

However, the application of the basic rule in Regulation 90 is challenging when supplies are made between companies which are members of the same VAT group and the supplier of the services leaves the VAT group before the consideration for the supply is the subject of a VAT invoice or is paid. Is the supply disregarded on the basis that it is a supply by one member of a VAT group to another (applying section 43 of the Value Added Tax Acct 1994 (Section 43)) or does the disregard not apply because the consideration is paid/invoice issued when the supplier is no longer a member of the VAT group?

The above issue has been considered by the Supreme Court in the recent case of Prudential Assurance Company Limited v HMRC.

In that case, a company, Silverfleet, in the same VAT group as Prudential Assurance Company Limited (Prudential) provided Prudential with investment management services.  The consideration included performance fees payable if the performance of certain sub-funds exceeded a set return.  The performance fees were uncertain as to whether they would become payable at all and as to their amount if they became payable.

When Silverfleet left the VAT group, it ceased to provide management services to Prudential. Several years later the performance fees became payable and so Silverfleet invoiced Prudential for those fees.

HMRC decided that Silverfleet was liable to pay VAT on the performance fees but the First Tie Tribunal (FTT) held that no VAT was payable.  The Upper Tribunal (UT) and Court of Appeal held that the fees were subject to VAT.

The Supreme Court dismissed Prudential’s appeal.  Applying Regulation 90, the consideration payable for the services, namely the performance fees, was determined “from time to time” so that the services were treated as separately and successively supplied at the time that invoices for the performance fees were issued.  At that time, Silverfleet and Prudential were no longer in the same VAT group and so the supplies did not fall to be disregarded under Section 43.

At the planning stage of any group reorganisation, it is important for businesses to consider and assess the quantum of any VAT liabilities that arise, or may arise, when a member of a VAT group leaves that group. This analysis should include looking forward to payments which may become payable in future in respect of supplies made by the company leaving the group before it leaves. This issue is particularly relevant to banks and building societies who cannot recover VAT in full.