VAT grouping and overseas entities

The Upper Tribunal has upheld the FTT decision 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 [2026] UKUT 211. The UT also agreed with the FTT that the effect of the UK's VAT grouping rules could not be limited to the specific UK branch, rather than the whole US entity. However, the UT considered that the FTT would have been wrong to overturn HMRC's decision to reject the VAT grouping application for the protection of the revenue had it been necessary to do so.

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, rejecting HMRC's efforts to restrict VAT grouping to a UK establishment only (contrary to all its previous published policy).

However, although its remarks on the protection of the revenue measures are only obiter, the UT would have allowed HMRC to deny grouping in the context of this case even if there had been the necessary fixed establishment, based on the comparable significance of the VAT saving and the UK activities and taking into account the taxpayer's motives.

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)).

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. 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 grouping purposes, even applying Barclay's lower threshold test of "sufficient human and technical resources".

Barclays appealed the FTT decision that it did not have the necessary UK establishment on 1 December 2017, whilst HMRC appealed the FTT decisions on the scope of the UK grouping rules and the application of its protection of the revenue powers.

Decision of the Upper Tribunal: Danske Bank

HMRC argued that it was clear that the EU VAT grouping rules do not provide for an overseas entity to be part of a domestic VAT group. In particular, the CJEU decision in Danske Bank (Case C-812/19) 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. However, HMRC has always  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. Nevertheless, HMRC sought to argue that the UK VAT grouping provisions should be read consistently with the EU position as not allowing "whole establishment" grouping, a position that the UT described as "somewhat strange, to put it mildly", given HMRC published position. The UT has, in any event, rejected HMRC's argument.

It was clear from a straightforward construction of the language of the UK VAT grouping rules that they apply to the entire body corporate which is grouped. Could this nevertheless be overridden by a conforming construction of the UK rules? The UT considered that this was not possible as the legislation clearly provides that eligibility is based on and defined by reference to each body corporate, or whole establishment. "That is a fundamental or cardinal definitional element, to which the remaining requirements for common control, enacting the "close links" element of Article 11, are applied. It is two or more bodies corporate which are eligible under section 43A, and it is those bodies corporate which are treated as members by section 43. That is part of the grain or underlying thrust of the legislation." As such, a conforming construction to limit its scope to only the UK establishment of an overseas entity was not possible in this context.

The UT also noted that its decision was reinforced by the introduction of section 43(2A) by Finance Act 1997. This provision has the effect of disapplying the disregard of intra-group supplies in section 43(1) where, broadly, the relevant services are bought in from a third-party supplier by a non-UK member of the VAT group (without VAT arising) for onward supplies to a UK member of the VAT group. In such a situation, section 43(2A) applies to treat the supply by the overseas group member as a taxable supply in the UK, on which the representative member of the group must account for VAT under the "reverse charge" provisions.

The UT noted that, in reaching its conclusion that a conforming construction of section 43A to impose a territorial limitation was not permissible, the FTT relied on the fact that such a construction would result in a fundamentally different regime, referring to "its broad and far-reaching effect, together with the inevitable practical repercussions that would arise" as issues which it was not appropriate for the FTT to determine. Whilst acknowledging that concern, the UT did not consider that this would, of itself, be a valid reason for not applying a conforming construction to section 43A. In the view of the UT, the reason why a conforming construction would be impermissible is that it would clearly be contrary to the underlying thrust of the legislation and its fundamental features.

Fixed establishment

The UT noted that the FTT had approached the question whether BSC had sufficient presence in the UK using the (less stringent) formulation put forward by Barclays and without definitively determining the meaning of establishment or fixed establishment in this context. BSC raised a number of criticisms of the FTT's findings in this context, but each of these have been dismissed as without merit by the UT, even when applying the less stringent test.

One criticism was that the FTT should have accepted that BSC was, effectively, an intending trader with a right to register as part of the VAT group, relying by analogy on Breitsohl, where the CJEU decided that an intending trader could register for and thereby recover VAT which it had incurred on the basis that it was entitled to be treated as a "taxable person". However, the UT rejected that analogy and held that there is no authority for the proposition that it is sufficient to give rise to a fixed establishment for the purposes of VAT grouping that, at a particular date, steps are being taken to set up a branch which will, in due course and once it is operational, have the necessary human and technical resources. The concepts of "taxable person" and "fixed establishment" are substantively different. 

On the correct interpretation of fixed establishment in the context of the VAT grouping rules, the UT offered the obiter opinion that the taxpayer's formulation was not correct. "It sets too low a bar, because it effectively leaves out of account the guidance on the meaning of fixed establishment in the place of supply rules and in other decisions such as Planzer. As HSBC makes clear, Parliament's intention in enacting section 43A was to reference the concept of fixed establishment in the place of supply rules, and CJEU case law in relation both to the place of supply rules and in other contexts is "relevant" to the meaning of the term in section 43A and "must be taken into account". In practice, this means that the factors identified as relevant, and the concepts applied, in the CJEU case law on the place of supply rules (and in cases such as Planzer) which consider whether a fixed establishment exists must be taken into account in the overall evaluation. They are not to be read across and applied wholesale, but nor are they to be ignored or treated as irrelevant."    

Protection of the revenue (POR)

HMRC argued that the VAT grouping rules essentially operate as an administrative simplification measure to remove complexity in VAT accounting whilst allowing a protection of the revenue override. BSC argued that the purpose of the rules was wider, including providing 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 essentially accepted BSC's argument as to the purpose of the rules and so held that 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 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.

The UT noted that the FTT's reasoning explicitly rested on its conclusion that "[one of 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 UT accepted that this is one of the objectives of the UK VAT grouping rules, however considered that the extent and limitations of that objective, and the circumstances in which that neutrality is intended to arise by virtue of grouping, remain unclear.

In considering whether to deny grouping under the POR provision, the UT noted that HMRC must reach a decision on the extent to which a particular grouping application gives rise to a risk of avoidance or abuse, by reference to the objectives of the UK VAT grouping rules. Their decision can and should take into account all relevant factors in relation to the particular application in question. An appeal to the tribunal against that decision can succeed if but only if HMRC could not reasonably have reached the decision to deny grouping under the POR.

On the facts, the UT considered that there were two particular aspects of the arrangements which strongly indicate that HMRC could reasonably have reached the decision in question: first, "while the anticipated annual VAT savings were very considerable, as at 1 December 2017 the resources of the branch were, putting it at its highest, skeletal. The branch had no employees; it did not have comparable control over any employees; it did not own or have comparable control over any premises or physical office resources, and it had no access to the group IT systems which would enable it to undertake its intended activities"; and second, the timing of the application for BSC to join the VAT group was "driven by the opportunity to generate an additional "1 time £21m tax benefit" if the VAT grouping could be achieved before the end of 2017, described by Barclays as a "financial imperative".

Since on an appeal against refusal of an application under the POR provision, the question for the tribunal is whether HMRC "could" reasonably have decided to refuse the application under the POR provision, the UT considered that in all the circumstances in this case, including the two aspects highlighted, HMRC could reasonably have reached that decision.

Comment

On the question of Danske Bank, both the FTT and UT have 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 (to say the least) 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.

It is understood that there are many other cases on overseas entity VAT grouping stood behind this case. As such, it may be necessary for another case to deal directly with the correct meaning of "fixed establishment" in this context and the scope of HMRC's protection of the revenue powers. Certainly, the acceptance by the UT that motive and scale may be relevant factors in determining whether HMRC may reasonably apply their protection of the revenue powers may introduce significant uncertainty for businesses which utilise overseas grouping arrangements.