Overseas members in a UK VAT group

The Upper Tribunal (UT) has issued its decision on the preliminary issues raised in the appeals of HSBC Electronic Data Processing (Guangdong) Ltd (and Others) v HMRC [2022] UKUT 00041 (TCC). This case is relevant to all taxpayers in the financial services sector that have branches of foreign companies registered for VAT within their UK VAT groups. HMRC is embarked on a sector wide exercise seeking to degroup such entities on the basis of substance (by challenging whether the branches constitute ‘fixed establishments’ within s.43A Value Added Tax Act 1994 (VATA)) and using their ‘protection of the revenue’ anti-avoidance powers.

The decision is somewhat unusual in being the determination of preliminary issues directed by the First-tier tribunal (FTT) and referred up to the UT for determination. Whilst HSBC lost on 3.5 out of the 4 issues, these are preliminary issues on how to approach the legal tests and not final findings on the facts.

On the first issue, the meaning of fixed establishment within s.43A VATA (interpreted in light of Article 11 of the Principal VAT Directive (EU)), the UT rejected HSBC’s submission that when determining the question of fixed establishment regard should be had to the wider body of closely connected persons within the desired VAT group rather than judging whether an individual applicant/member itself has a fixed establishment in the country concerned. The UT has held that each prospective applicant to join the VAT group must both be closely connected with the representative member and have a fixed establishment in the country concerned.

The UT has adopted the position that the place of supply case law and rules are helpful in informing the position on fixed establishment but are not imported wholesale. In particular the UT has been clear that the definitions in the Implementing Regulation provide a helpful starting point, but are not determinative. This leaves open the issue of whether a branch must make supplies to be considered a fixed establishment, which HMRC is arguing, to be dealt with by the FTT in future cases. The UT has said that the meaning of fixed establishment is highly fact sensitive and better determined in the context of all the relevant circumstances in any given case.

Most significantly, the UT has essentially ignored HMRC’s attempts to limit the territorial application of VAT grouping to only disregard ‘in country’ supplies and not supplies by overseas companies on the basis of the Danske Bank A/S v Skatteverket C-812/19 EU:C:2021:196 (Danske Bank) case. HMRC had been denied permission to introduce a new issue on Danske Bank, but sought to argue the point as part of their case on fixed establishment. The UT considered it could deal with the fixed establishment issue without going into this point. It remains, however, likely to be a live issue in future FTT appeals.

HSBC had sought to argue that HMRC’s protection of the revenue powers, that allow HMRC to remove a member from the VAT group, should be limited to artificial Halifax ‘abuse’ cases. The UT rejected this argument and held that such powers can apply to a broad definition of tax avoidance.

Where HSBC did gain some success was support from the UT that, without expressing a view on the merits of the point, it is a permissible ground of appeal under s84(4D) VATA to argue that where HMRC has changed its policy in relation to fixed establishment and VAT grouping that it should not terminate membership from a date before that change in policy took effect. HSBC is arguing this point in respect of an alleged change in HMRC’s policy in 2014.

The case should now proceed back to the FTT to be heard on its facts. There are a number of cases proceeding to the FTT dealing with these issues. Please contact Nick Skerrett or Heather Rowlands if you wish to discuss further.