VAT grouping and overseas entities

The FTT has held that, on the facts, the UK branch of a US company did not have sufficient human and technical resources to support an application for VAT grouping: Barclays Service Corporation v HMRC [2024] UKFTT 785. However, the FTT rejected HMRC's alternative arguments that the effect of VAT grouping would have been limited to the specific UK branch, rather than the whole US entity (the Danske Bank argument) or that HMRC was entitled to reject the VAT grouping application for the protection of the revenue.

Accordingly, whilst the taxpayer lost on the facts, the decision broadly supports the ability of overseas entities to use VAT grouping to prevent VAT arising on the provision of services from an overseas entity that is VAT grouped via a UK fixed establishment. However, disappointingly, the FTT declined the opportunity to provide further guidance on the meaning of “fixed establishment” for the purposes of these rules, having decided that it was clear on the facts that the particular arrangements did not meet the test for available “human and technical resources” on the application date.

Background

Barclays Service Corporation (BSC) was a US based company in the Barclays group which provided intra-group services to both the retail, consumer part of the Barclays banking group and also the commercial and investment banking arm. BSC provided a variety of services, including IT, HR, strategy and operational services, to entities within the Barclays UK VAT group.

BSC made an application to join the UK VAT group with effect from 1 December 2017. HMRC rejected that application both on the basis that BSC did not have a fixed establishment in the UK at that time and also on the basis that the application should be rejected for the protection of the revenue (VATA 1994 s.43B(5)(c)).

FTT decision

VATA s.43A requires an entity to be established or have a fixed establishment in the UK to qualify for VAT grouping. HMRC and BSC differed as to the meaning of fixed establishment in the context of the UK VAT grouping rules. HMRC contended that the terminology took the same meaning as those concepts used in relation to the place of supply rules, whilst BSC argued that the concept in the VAT grouping rules should not be construed so restrictively. In particular, it was only necessary to show that a UK branch has sufficient human and technical resources and a sufficient degree of permanency to make a meaningful contribution to the business of the company to qualify. In particular, the reference to the need for resources sufficient to make or receive supplies was unnecessary in this context.

On the evidence presented to the FTT, the FTT decided that BSC did not have a fixed establishment with the necessary minimum human and technical resources on 1 December 2017 at the date of the application. As such, it was not necessary to decide on the precise meaning of the terminology in this case or give an indication as to whether the UK branch in fact had sufficient resources from a later date.

BSC had employed four employees in the UK to manage and monitor the provision of services to its UK recipients and to ensure that service delivery standards were met locally. However, it was clear that although these employees had signed contracts of employment dating their start dates to 1 December 2017, in practice most of them did not start working for BSC until later in December. All were previously employed in the Barclays group. One manager had started on 1 December and there was evidence that she had carried out some tasks, but it was clear that the vast majority of her work at the time was in her earlier Barclays role. She did not report to any BSC manager on 1 December 2017 and there was no evidence that her workplace was at the disposal of BSC at that time. As such, the FTT decided that, because of the lack of human and technical resources available to BSC on 1 December 2017, the UK branch could not have been a fixed establishment of BSC on that date for VAT purposes.

Having decided the point against BSC, it was not strictly necessary for the tribunal to go on to consider the arguments on Danske Bank and protection of the revenue, but it did so briefly.

Danske Bank issue

HMRC have also adopted a "whole establishment" approach to VAT grouping. That is, once an entity is VAT grouped via the existence of a qualifying UK establishment or fixed establishment, then the correct approach is to treat the whole entity as UK VAT grouped. That approach was called into question by the CJEU decision in Danske Bank (Case C-812/19) which held that where part of an entity is locally VAT grouped, that part only should be treated as part of the local VAT group, essentially bifurcating the entity into two separate taxable persons.

Playing devil's advocate, HMRC argued that this decision imported a territorial restriction into the VAT grouping rules, such that only the part of the non-UK corporate body established in the UK was eligible for VAT grouping. The FTT has rejected the argument that the UK rules should be read in a way that conforms their interpretation with the Danske Bank decision. It was common ground that the UK had always adopted a whole establishment construction of the rules, any change to that approach would have far-reaching consequences and as such the FTT should not adopt such a construction.

Protection of the revenue

HMRC argued that the VAT grouping rules operate as an administrative simplification measure to remove complexity in VAT accounting. BSC argued that the purpose of the rules was wider, to provide a business facilitation measure allowing a business choice over its corporate structuring, enabling complex international groups to be taxed in the same way a single company organised in divisions.

The FTT agreed with the taxpayer based on jurisprudence in Lloyds Banking Group v HMRC [2019] STC 1134 and Commission v Ireland (Case C-85/11) and statements by the Exchequer Secretary to the Treasury in 1997 on the purpose of VAT grouping.

The protection of the revenue measures could be used “against any loss of revenue which is not de minimis whether or not it follows from the normal operation of grouping” for which there must be “something present other than a completely “straightforward” application of the grouping rules before the Commissioners can act to protect the revenue”. Having concluded that the normal aims and consequences of VAT grouping is to provide a freedom to structure a business in a way that best meets its commercial needs while ensuring it is taxed in the same way as a single company organised on a divisional basis, the FTT concluded that (if the UK branch had the necessary human and technical resources to be a fixed establishment of BSC), the VAT savings on its admission to the VAT group would have fallen within the normal consequences of VAT grouping. Accordingly, it would not have been possible for HMRC to reasonably have been satisfied that there were grounds for refusing the application for the protection of the
revenue.

Comment

It is understood that there are many other cases on overseas entity VAT grouping stood behind this case. As such, it is disappointing that the FTT declined the opportunity to provide its view on the correct test for the existence of a fixed establishment for the purposes of the VAT grouping rules. As such, it is unlikely to provide much clarity for many of the cases waiting on this judgment.

However, on the question of protection of the revenue and Danske Bank, the FTT has firmly rejected HMRC's arguments. Indeed, it is notable that HMRC carried out a review of the UK VAT grouping rules post-Danske Bank and decided to continue with the whole entity approach. In such circumstances, it is surprising that it chose to play devil's advocate and argue that the UK rules were, in essence, not compliant with EU law and should be read consistently with Danske Bank to limit the effect of VAT grouping to the fixed establishment only.