Warning for companies as Supreme Court rules on VAT groups

The Supreme Court unanimously rejected the Prudential’s appeal over whether it was liable for VAT on performance fees, bringing to a close a long-running dispute between the insurance giant and His Majesty’s Revenue and Customs (HMRC) over whether VAT was due on performance fees it had to pay. 

The Court ruled that the success fee, which Prudential had claimed should not have been liable for VAT, was a successive payment relating to a continuous supply of services, with the event which triggered the fee coming after the investment manager had left the VAT group. 

Bryn Reynolds, a VAT expert with Pinsent Masons, said: “The Supreme Court has unanimously decided in HMRC’s favour, considering that the time of supply regulations take precedence in determining when a supply occurs and aren’t overruled in that instance by an alternative set of ‘real world’ or ‘meta’ rules.

“Once time of supply is established you then consider the liability including whether the VAT group disregard applies. This is subject to a rather peculiar exception in the case of pre-registration supplies where the Court hasn’t explicitly overruled a historic Court of Appeal case (BJ Rice) but confines that decision purely to its own facts. “

Prudential had previously argued it did not owe VAT on a success fee for services provided by Silverfleet - a company that had been part of Prudential’s VAT group - where the fee was not payable until several years after the company had left the VAT group.  

The insurance giant claimed that the fee related to services that had been provided when the company was still in the group and therefore no VAT was due, but HMRC argued that the services had been supplied on a continuous basis – meaning that the performance fee did trigger VAT based on the time of supply rules. 

Prudential originally succeeded at a first-tier tribunal appeal, but HMRC won at Upper Tribunal and last year’s Court of Appeal hearing - with one judge dissenting -, leading to yesterday’s decision by the Supreme Court.  

The Supreme Court confirmed that the time of supply rules turn continuously supplied services into separate and successive supplies – which require consideration of the VAT treatment at each point of payment.

The ruling should cause corporations to consider the impact on intra-group contracts and payments when companies enter and leave the VAT group and consider how to cover such eventualities, said Reynolds.

“Often intra-group contracts are silent on VAT when the company is currently within the VAT group,” he said.

“Groups should consider the tax points and VAT liability for services which terminate but have subsequent later payments. It needs to be considered whether those services are a continually supplied service or not.

Abigail McGregor, tax law expert at Pinsent Masons, commented “HMRC note that some services appear to be continually supplied but are actually separately supplied.  The VAT treatment in contracts for contingent fees, deferred payments and performance-based remuneration should also be reviewed in light of this decision.”