UK VAT group ruling ‘troubling’ for businesses, says expert

Bryn Reynolds of Pinsent Masons was commenting after the upper tribunal (UT) rejected an appeal by Barclays Service Corporation (BSC), a US-incorporated company with a UK branch that sought to join a UK VAT group within the Barclays corporate group. The UK VAT group in question is represented by UK-incorporated company Barclays Execution Services Limited (BESL), which joined BSC in the appeal.

The UK’s Value Added Tax Act 1994 provides scope for group companies to be considered part of a UK VAT group. The scheme enables groups to simplify their VAT accounting processes by functioning as one taxable entity, meaning that supplies made between members of the VAT group do not attract VAT. This can potentially reduce the VAT costs of the group. Conditions are set out in the legislation specifying when group companies can be considered part of a UK VAT group.

In this case, HM Revenue and Customs (HMRC) determined that BSC was ineligible to join the UK VAT group of which BESL was the representative member. The companies appealed that decision to the first-tier tax tribunal (FTT), which ruled against them in 2024.

At the centre of the case was the question of whether BSC could be said to have a ‘fixed establishment’ in the UK, in relation to its business. It is one of the conditions companies must meet to be eligible for VAT group registration under the UK’s VAT law. HMRC considered that BSC’s UK branch did not fulfil the ‘fixed establishment’ requirement.

In its decision, the FTT backed HMRC’s view on this point. It considered that BSC lacked sufficient human and technical resources in its operations to be considered as having a fixed establishment in the UK.

In dealing with the appeal against the FTT’s decision, the UT first considered whether a conforming construction of the UK VAT grouping rules to restrict their territorial ambit is possible.

The UK’s VAT grouping rules implement EU legislation predating Brexit. The EU rules provide for member states to consider any persons established in their territory, while legally independent, to be considered as “a single taxable person” where they are “closely bound to one another by financial, economic and organisational links”. The breadth of this wording has allowed different states to implement VAT grouping in different ways.

The wording of the UK’s implementation of VAT grouping follows a “whole establishment” principle, meaning that if any part of an entity has a fixed establishment in the UK and is in the VAT group, the whole of that establishment, and all of its supplies, are treated as within the UK VAT group for the purposes of its UK VAT treatment.

Other states in the EU have implemented these VAT grouping rules in different ways, including on an “establishment only” basis, which means that the fixed establishment of a foreign entity can be joined to the VAT group, but that the fixed establishment and the parent or principal establishment are treated as separate taxable persons for VAT purposes.

HMRC sought to argue in this case that a conforming construction could be applied to the UK’s VAT grouping rules in order to give effect to the principles established in one of those cases, which involved Danske Bank. The effect of the conforming construction would be to impose a territorial limitation on an “establishment only” approach.

In a 2021 ruling, the Court of Justice of the EU (CJEU) ruled in the Danske Bank case that supplies made by the Danish VAT group to the Swedish branch of an entity that was in the VAT group were to be treated as taxable supplies made from the VAT group to the Swedish branch, i.e. that it was correct that the principal establishment and the branch be treated as separate taxable persons.

According to the UT, however, it was not possible to apply the conforming construction to UK VAT law because this would be to go against the “grain” of the UK legislation. The UT considered that the fundamental feature of the UK’s VAT grouping legislation is that it applies to the entire body corporate that is grouped, not just the UK fixed establishment of foreign entities.

Reynolds said: “As a matter of policy, it is worrying that HMRC has continued to seek to argue that the Danske Bank case law could impose a territorial limitation on UK VAT grouping. HMRC’s clearly stated policy is that they will not seek to apply the case law from either the earlier Skandia case or from Danske Bank. Where HMRC has clearly considered and decided to adopt a particular policy position, taxpayers will lose faith in its ability to apply policy consistently across different taxpayers when it takes a diametrically opposed position to its publicly stated position when convenient in proceedings.”

The UT went on to consider arguments from BSC and BESL as to why BSC ought to be considered as having a fixed establishment in the UK. It rejected them all.

According to the UT, the FTT had applied the correct test in considering the employment of the head of BSC’s UK branch. She was not employed by the UK branch of BSC, but by another company, and so the UT confirmed that what mattered, for the purposes of assessing whether her employment should be factored into the assessment of whether BSC had a fixed establishment in the UK, was whether the UK branch had “comparable control” over her. The FTT had not erred in how it applied that test, the UT ruled.

The test the FTT applied in determining that BSC’s UK branch did not have comparable control over other resources, such as access to office space, was also applied correctly, the UT ruled. In that context, the concept of comparable control “means control which is like ownership” and the requirement is not met by merely having “immediate and constant access” to a resource, it said.

Other arguments raised around the FTTs’ findings of fact, including that they had been found without sufficient evidence or that evidence was available that contradicted the finding, were not made out and were dismissed.

On that basis, the UT dismissed the appeal. However, it went on to make ‘obiter’ remarks in relation to other issues – these being remarks not considered to form part of the formal decision.

In this part of the decision, the UT rejected any argument that a branch in its infancy should be treated in the same way as an “intending trader”, which can become a taxable person and therefore recover its input VAT. The UT rejected this on the basis that a taxable person and a fixed establishment are different concepts and there is not a directly effective right to be admitted to a VAT group.

In this case, the FTT had decided to proceed on the assumption that BSC and BESL were correct in how ‘fixed establishment’ is to be defined. The practical impact of the companies’ position was to impose a lower threshold for satisfying the ‘fixed establishment’ condition than what HMRC had argued. The assumption was made on a pragmatic basis – as it was considered that a failure to satisfy the lower threshold would automatically mean the higher threshold HMRC argued for would also be said not to be met.

The UT proceeded on the same basis. However, it suggested, it did not agree with the definition BSC and BESL proposed, offering limited comments that it set too low a bar and failed to take into account any of the concepts of fixed establishment in the place of supply rules.

In initially refusing BSC’s application to join the BESL-led UK VAT group, HMRC had considered that even if the company had satisfied the ‘fixed establishment’ condition, it would have refused the application on the basis that it was necessary for the protection of revenue. However, the FTT disagreed with HMRC on this point and said that had the fixed establishment requirement been met, HMRC could not reasonably refuse the application on a protection of revenue basis. The FTT said this was because the VAT saving sought by admission of the entity to the VAT group arose from the “normal consequences of grouping”. This part of the case was also addressed by the UT in obiter remarks.

The UT said that the FTT was wrong. It considered that while one of the objectives of the VAT grouping is to provide freedom to structure a group, the limitations of that objective remain unclear. It further considered that an appeal against a ‘protection of revenue’ decision can only succeed if HMRC could not reasonably have reached the decision. The lack of activities and resources in the branch and the timing of the admission to the group obtaining an additional tax saving were also considered by the UT to weigh against the FTT’s view.

Abigail McGregor, tax lawyer at Pinsent Masons, said some of the obiter comments made by the UT will concern businesses.

“The protection of revenue obiter comments are potentially significant, as they seem to imply that even standard VAT grouping arrangements could potentially be challenged or blocked simply because they result in significant tax savings,” McGregor said. “The suggestion that there might be a test weighing substance against the amount of savings is especially concerning, as it introduces a level of uncertainty that will no doubt impact the entire industry.”