Intra-group VAT services and the time of supply rules

How do you reconcile the application of two deeming provisions within the VAT legislation when there is no explicit order of priority? That is essentially the problem that faced the Supreme Court in Prudential Insurance Company Ltd v HMRC [2025] UKSC 34 when deciding if a performance fee from a taxpayer to the representative member of its VAT group was subject to VAT when payment was delayed until after it had left the VAT group. Transactions within a VAT group are deemed not to give rise to supplies, but on the other hand the time of supply rules deems the supply to be made when payment was made. Which takes priority?

The difficulty of reconciling this "chicken and egg" problem is demonstrated by the fact that the FTT held in favour of the taxpayer in deciding that the VAT grouping rules should be first applied to the "real supply", the UT reversed that decision and the Court of Appeal only upheld the decision of the UT by a majority of two to one. However, the Supreme Court has now unanimously approved the approach of the Court of Appeal.

Background

The appellant in this case was Prudential, the representative member of a VAT group. A member of its VAT group (SCL) during the period 2002 to 2007 provided supplies of investment management services to it at that time. The consideration for the services consisted of management fees but also a deferred performance fee, which was dependent on the funds achieving certain targets. No VAT was charged on the management fees as the supplies within the VAT group were ignored for VAT purposes.

However, in November 2007, a management buy-out of SCL was effected and, as a result, SCL ceased to be a member of the appellant's VAT group. During 2014 and 2015 the conditions for payment of the additional performance fee under the original investment management agreement with the appellant were met and SCL invoiced the appellant for performance fees totalling over £9m.

Prudential argued that the performance fees were consideration for the services that SCL rendered to the it at a time when they were members of a VAT group and, accordingly, no VAT should be charged in respect of them. HMRC argued that SCL's services represented a continuous supply of services under Regulation 90 of the VAT Regulations, which were supplied over a period of time, under terms that provided for consideration to be determined periodically, or from time to time. HMRC argued that, in the case of such services, the tax point, or time of supply, is when an invoice is issued or when the consideration is received by the supplier. Accordingly, the relevant tax point was when SCL invoiced Prudential, at which time they were not members of a VAT group. Accordingly, VAT was due on the performance fees.

The FTT held in favour of Prudential, relying heavily on the Court of Appeal decision in BJ Rice [1996] STC 581 where the taxpayer made supplies falling within the equivalent time of supply rules before it was registered for VAT, but did not get paid until after it was registered. In that case, the Court of Appeal considered that since, at the time the services were provided, they were not provided by a taxable person no tax charge arose, notwithstanding the time of supply rules which would otherwise have treated the supplies as made when the taxpayer had later registered for VAT. Whilst the decision in BJ Rice did not concern VAT grouping, the FTT considered that it should adopt the same approach.

The UT reversed that decision, holding that the approach in BJ Rice should be limited to circumstances where the taxpayer was not a taxable person at all at the time the services were actually provided and it was clear from later cases, such as Thorn Materials and Svenska that it should not be extended to VAT grouping scenarios. The Court of Appeal upheld the decision of the UT, albeit by a majority of two to one, that Regulation 90 should first be applied to determine the time of the supply and only if that was when the parties were part of a VAT group should the supply be disregarded.

Decision of the Supreme Court

The Supreme Court has now unanimously confirmed the decision of the Court of Appeal.

On the question of priority of the deeming provisions in the grouping rules (section 43) and the time of supply rules, the Court was clear that the time of supply must first be determined before deciding if the VAT grouping rules applied to that supply. This conclusion was clearly supported by the earlier House of Lords decisions in Thorn and Svenska.

The Court noted that section 43 is not a complete code and does not contain a rule for determining the time of supplies. Rather "section 6 of the VATA 1994 deals on its face with time of supply. There is nothing in either that Act or the 1995 VAT Regulations which indicates that section 6 or the regulations made under it are not to be applied when deciding whether companies were members of the same VAT group at the time of a supply. Further, there is no indication that "supply" as used in section 43 has a different meaning from "supply" as used in section 6 or in regulation 90 of the 1995 VAT Regulations".

What of the decision in BJ Rice, however? HMRC did not contend it was wrongly decided and the Court was content simply to observe that "the ratio of B J Rice, in so far as it extends beyond the position of someone who is not registered for VAT because their income falls below the threshold for registration, is undermined by the critical reasoning in the subsequent decisions of the House of Lords referred to above [Thorn and Svenska]. Put another way, its ratio must be confined to its own facts".

The taxpayer had, however, raised an additional objection before the Supreme Court. Essentially, this was that the provisions of the Principal VAT Directive (Articles 64 to 66) underlying regulation 90 only allowed Member States to change the time for accounting for VAT on continuous supplies and not the time of the actual chargeable event. In addition, Prudential argued that even if it were wrong on that point, this particular scenario was not one that could fall within the scope of those rules allowing the time of supply to be deferred as interpreted by the CJEU.

The Supreme Court has rejected these additional arguments. Whilst the Court considered that Article 66 only allowed Member States to change the time that VAT is accounted for, Article 64 allowed Member States to change the time of the taxable event itself where there were "successive payments". Prudential argued that this provision only applied where the supply of services was continuous and continuing, otherwise the provision could be applied to simple instalment payments and it was clear from CJEU jurisprudence that instalment payments could not delay the time of supply.

Whilst accepting that Article 64 needed to be construed more narrowly than appears on its face, HMRC argued that Article 64 applies not only where the performance of services is ongoing at the date of a successive payment but where, as in the present case, the parties to the contract do not know at the date when the services are performed (or when the continuous performance of services comes to an end) whether any further payment will ever become due or, in what amount. The Supreme Court agreed with this argument and that, therefore, Article 64 permitted the application of regulation 90 in the circumstances of this case (ie where it only became clear that the success fee was payable at a time long after the supplies were concluded).  

As a result, the Court has held that the time of the supply made as a result of the additional performance fee payable in 2014 and 2015 was at the time of the payment. It was, therefore, not at a time when Prudential and Silverfleet were VAT grouped and was subject to VAT.

Comment

This is yet another case which demonstrates the difficulties caused by the deeming provisions within the VAT regime, especially in relation to the VAT grouping rules. In fact, the case concerns the interaction of two separate sets of deeming provisions making it doubly difficult to disentangle the various VAT worlds and the real world in this case.

The issue essentially comes down to a question of prioritising the various fictitious VAT worlds in issue - and in this case the Supreme Court has held that, in most cases, it will be necessary to apply the statutory time of supply rules first in order to determine the relevance of other provisions, such as the VAT grouping rules. The decision leaves the the decision in BJ Rice as one which, if not overruled, should be treated with some caution and appears only to be relevant where both the taxpayer is not VAT registered when the services take place and also issues a VAT invoice prior to VAT registration.