The Upper Tribunal have held that services performed during a period in which the supplier was within a VAT group but invoiced and paid for after it left that group were subject to VAT. In doing so it upheld HMRC’s appeal reversing the First-tier Tribunal’s earlier judgment that the payments were covered by the VAT grouping rules (HMRC v The Prudential Assurance Company Ltd [2023] UKUT 54 (TCC)).
The facts
Silverfleet Capital Ltd (“SCL”) supplied certain investment management services (“the services”) to The Prudential Assurance Company Ltd (“Prudential”). At the time when SCL rendered its investment management services, Prudential was the representative member of a VAT group of which SCL was a member. Given the time required to create value from the investments, a performance fee would only become payable in practice more than ten years after the investments were made. On 8 November 2007 a management buy-out of SCL was effected, as a result of which SCL ceased to be a member of Prudential’s VAT group. SCL also ceased at that date to provide investment management services. SCL invoiced Prudential at various dates between 16 January 2015 and 11 July 2016 for performance fees totalling £9,330,805.92 (the “performance fees”) plus VAT at 20% (which SCL subsequently applied to HMRC to reclaim).
The legislation
Under VATA 1994, s. 43(1):
- it is assumed that any business carried on by a member of the VAT group is treated as carried on by the representative member (“the assumption”); and
- any supply of goods or services by a member of the group to another member of the group are disregarded (“the disregard”).
However, under SI 1995/2518, reg. 90 where there is a continuous supply of services these services shall be treated as separately and successively supplied at the earlier of:
- each time that a payment in respect of the supplies is received by the supplier; or
- each time that the supplier issues a VAT invoice relating to the supplies.
The disregard
HMRC had argued that as the invoices were raised and payments were made after SCL had left the group then the contested supplies had been made for VAT purposes after it had left the group. The group disregard could therefore not apply.
Prudential had argued that the disregard had already applied at the time the services were performed and as such there could be no supply to which reg. 90 could attach to at a later date.
The UTT upheld HMRC’s view concluding that the legislation was clear in respect of the disregard:
“it applies, and only applies, ‘where…any bodies corporate are treated as members of a group’, and in that situation to ‘any supply of goods or services by a member of the group to another member of the group’. This wording is effectively imposing a temporal limitation. If one or both parties are not members of the relevant VAT group at the time of the supply of goods or services, then the Disregard does not and cannot apply. It is therefore critical to establish when the relevant supply took place. Having answered that question, did it take place at a time when both parties to the supply were members of the same VAT group?”
In respect of the timing of the supply the UTT commented:
“ … the legislature has intervened. In the PVD and in the VATA 1994 neither the word “supply” nor the time of supply are abstract or undefined expressions… It is common ground that the Services fell within the category of services identified in Regulation 90. It follows that the supply of the Services was treated as taking place on each occasion when SCL rendered a VAT invoice to Prudential in respect of such of the services as fell within Regulation 90. The invoices for such services were rendered in 2015 and 2016. As such, those supplies were treated as taking place at a time when SCL was no longer a member of the Group.”
The FTT had reached a similar conclusion.
The assumption
Prudential had also argued that, as the effect of s. 43(1) was that it was assumed that any business carried on by a member of the VAT group was treated as carried on by the representative member (in this case, Prudential), then as a result SCL carried on no business and had made no supplies for VAT purposes at the time of the relevant transaction. There were therefore no supplies that could subsequently be subject to reg. 60. The FTT had accepted this argument citing case law to support its conclusion.
The UT refuted this argument stating:
“ … that provision is dealing with supplies made by or to members of a VAT group to or by a person outside the VAT group at the time of the supply. As we have set out in relation to the Disregard argument, the supply of the Services by SCL was not a supply by or to a member of the group at all.”
The FTT judgment
With regards to the earlier FTT judgment that had relied on both the legislation and analyses of earlier cases (none of which dealt specifically with the interaction of reg. 60 and s. 43) the UT concluded that the FTT had made a number of errors of law:
“(1) The FTT correctly concluded that the Services fell to be treated as supplied when invoiced, and that as SCL was not a member of the Group at that time, the supply was not subject to the Disregard. It erred in law in not applying the same analysis and conclusion in respect of the Assumption. The Services were not assumed by virtue of section 43(1) to be supplied by Prudential because they were supplies which took place in 2015/16.
(2) The FTT expressed concern at mixing the “real world” with the “VAT world” to create a tax charge, but its own approach mixed the real world and the VAT world in order to avoid a VAT charge. It took services which in the real world were rendered by SCL in the course of its business and applied to them a “VAT world” treatment in which SCL’s business was assumed to be carried on by Prudential.
(3) It was a material error of law to regard the position of SCL as being indistinguishable from that of Mr Rice [B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“BJ Rice”)]. SCL was not entirely outside the scope of VAT when the Services were rendered, but rather it was subject to a specific set of assumptions and disregards. The FTT therefore erred in regarding itself as bound by BJ Rice to allow Prudential’s appeal.
(4) Since none of the decided cases provided direct authority for the issue in the appeal, the FTT should have given weight to the comments of Lord Hoffmann, Arden LJ and Lord Walker in deciding whether to extend the approach adopted by the Court of Appeal in BJ Rice.”
Conclusion
The UT concluded:
“The FTT made errors of law which were clearly material, because they caused it to allow Prudential’s appeal. We therefore set aside the Decision.”
https://www.bailii.org/uk/cases/UKUT/TCC/2023/54.html
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