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In the The Prudential Assurance Company Limited (Pru) Court of Appeal (CoA) case the issues were the “difficult” questions in respect of the relationship between the VAT grouping rules and the time of supply (tax point) legislation. Is VAT is applicable on a continuous supply of services where these services were supplied while the companies were VAT grouped, but invoices were issued after the supplier left the VAT group?

Background

Pru was at the relevant time carrying on with-profits life and insurance business. Silverfleet Capital Limited (Silverfleet) provided Pru with investment management services. Under an agreement dated 30 August 2002, the consideration which Silverfleet received for its services comprised a management fee calculated by reference to the amount of investments made during the period in which services were provided and performance fees, payable in the event that the performance of certain funds exceeded a set benchmark rate of return.

When Silverfleet was rendering its investment management services, Pru was the representative member of a VAT group of which Silverfleet was also a member. However, in 2007 a management buy-out was effected, as a result of which Silverfleet ceased to be a member of Pru’s VAT group. It also ceased to provide management services to Pru.

During 2014 and 2015, the hurdle rate set under the 2002 agreement was passed. Silverfleet accordingly invoiced Prudential at various dates between 2015 and 2016 for fees totalling £9,330,805.92 (“the Performance Fees”) plus VAT at 20%.

The Issues

The CoA considered whether the Performance Fees are subject to VAT.

The First-tier Tribunal (FTT) decided the point in favour of Pru. However, HMRC succeeded in an appeal to the Upper Tribunal (UT). In a decision that decision, the UT concluded that VAT was chargeable on the Performance Fees.

In its decision, the FTT queried whether regulation 90 of the VAT Regulations went so far as to direct that Silverfleet’s services had not been provided within a VAT group and had been “supplied in the course or furtherance of a business that in the VAT group world was not being carried on”. Further, the FTT was “unable to see what feature distinguishes [Prudential’s] case from that of the taxpayer in [B J Rice & Associates v Customs and Excise Commissioners]”.

In contrast, the UT considered that, pursuant to regulation 90 of the VAT Regulations, Silverfleet’s services were to be treated as having been supplied when invoiced and, hence, at a time when Silverfleet and Prudential were no longer members of the same VAT group. That being so, section 43 of VATA 1994 was not, in the UT’s view, in point. The UT also considered that the FTT had erred in regarding itself as bound by B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“B J Rice”) to allow the appeal. Unlike Mr Rice, the UT said in its decision, Silverfleet “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”.

Pru contended that Silverfleet should not be considered to have made the supply in the course or furtherance of any business carried on by it. The business will instead be assumed to have been carried on by Pru. This was important because if VAT was applicable to the services Pru would not be in a position to recover it (in full at least) due to partial exemption which represented a large VAT cost.

Unsurprisingly, HMRC considered that output tax was due because at the tax point, Silverfleet as no longer part of the VAT group. 

Legislation

The VAT Act 1994, section 43 lays down the rules in respect of VAT groups, and The VAT Regulations 1995, regulation 90 makes provision with respect to the time at which continuous supplies of services are to be treated as supplied for VAT purposes.

Section 43 explains that any supply by one member of a VAT group to another is to be “disregarded” and that “any business carried on by a member of the group shall be treated as carried on by the representative member”. Does this mean that no VAT is chargeable on an intra-group supply regardless of whether the supplier has left the group by the time consideration for the supply is the subject of a VAT invoice and paid? Or is section 43 inapplicable in respect of continuous supplies insofar as the consideration is invoiced and received only after the supplier is no longer a member of the VAT group because regulation 90 provides for the services to be treated as supplied at the time of the invoice or payment?

Decision

The appeal was dismissed and HMTC’s assessment was upheld. It was not possible to disregard the supply as intra-group and the tax point rules for the continuous supply of services meant that it was a taxable supply. The decision was not unanimous, with the decision by the judges being a 2:1 majority.

Commentary

This was a close decision and highlights the necessity of considering the interaction between VAT groups and tax points and the implications of timings. The case makes interesting reading in full (well, for VAT people anyway!) for the technical discussions and the disagreement between the judges.