Appeal against Prudential VAT group ruling that VAT due if payment made after member leaves UK VAT Group
The UK Supreme Court is to permit Prudential to appeal the March 2024 Court of Appeal ruling that VAT is due on payments once a party has left a UK VAT Group. This is key with reorganisations of companies such as mergers and acquisitions.
The case examined the time of supply rules for continuous supplies, and how payment date is judged if made post VAT Group reorganisation for services consumed pre-reorganisation. The UK’s HMRC won its Court of Appeal hearing that payment date set the time of supply timing, and so VAT was now due.
Arguably, the Appeal ruling failed to properly distinguish between the chargeable event and the time when VAT becomes chargeable. Only the latter is determined by payment, while the former is triggered once the service terminates – thus here within the VAT group disregard. As the distinction between the two events was confirmed by the recent European Court of Justice judgment C-696/22, which clarified VAT due when services are invoiced or when performed on continuous services.
And the fact that the supplier had stopped providing the service when it left the VAT group – so not a continuous supply.
VAT Group time of supply on continuous supply of services
The Court of Appeal case The Prudential Assurance Company Ltd v. HMRC [2024] EWCA Civ 300 delves into the principle that transactions between members of a VAT group are typically disregarded for VAT purposes. However, the case posed the challenging question of whether VAT should apply when an invoice is issued, or payment is made after one party has exited the VAT group. The court’s decision, which was split in favor of HMRC, explored the implications of the time of supply rules and their impact on transactions between former VAT group members.
The case revolved around a situation where Silverfleet Capital Ltd, a member of a VAT group, provided investment management services to Prudential, another group member. After Silverfleet ceased providing these services and left the VAT group, it became eligible for a performance fee based on investment returns. The central legal issue was whether VAT should be charged on this performance fee, given that Silverfleet was no longer part of the VAT group when the fee became payable.
HMRC argues payment date sways time of supply rules
HMRC argued that under the time of supply rules, the services were provided continuously, and the supply for VAT purposes occurred after Silverfleet’s departure from the VAT group, thus making the performance fee subject to VAT. Prudential contended that no VAT was due since the services were provided during the period when both parties were in the same VAT group, and therefore, there was no ‘supply’ to trigger VAT.
The Court of Appeal sided with HMRC, emphasizing that the time of supply rules are crucial in determining when VAT is chargeable. The court concluded that if the ‘chargeable event,’ such as payment or invoicing, occurs after the parties have left the VAT group, the transaction is subject to VAT, irrespective of when the underlying services were performed.
A significant part of the court’s analysis was whether the precedent set in B J Rice & Associates v. C&E Commrs [1996] STC 581 (BJ Rice) was binding. In BJ Rice, it was held that the time of supply rules determined when VAT should be charged but not whether it should be charged. Prudential relied on this case, arguing that if a transaction occurred when the supplier was not a taxable person, no VAT should be charged, even if payment was received later when the supplier was taxable.
However, the majority in the Court of Appeal distinguished Prudential’s case from BJ Rice, noting that Silverfleet, unlike BJ Rice, was part of a VAT group rather than being below the VAT registration threshold. The court also referenced other key cases such as Svenska International plc v C&E Commrs [1999] 1 WLR 769 (Svenska) and Royal & Sun Alliance Insurance Group plc v C&E Commrs [2003] UKHL 29 (RSA), which reinforced that the time of supply rules influence both the timing and the nature of VAT supply, thereby undermining BJ Rice as a binding authority in this context.
EU VAT law on VAT Groupings
The judgment also touched on the broader issue of VAT groupings under EU law, specifically article 11 of Council Directive 2006/112/EC, which treats VAT group members as a single taxable person. The court was asked to apply the Marleasing principle, which would disregard intra-group transactions for VAT purposes. However, the court was not persuaded to apply this principle in Prudential’s favor.
The Prudential case serves as a reminder of the intricate interplay between VAT group rules and the time of supply, urging businesses and their advisors to diligently assess the risks associated with VAT group transactions, especially in scenarios involving delayed payments or invoices.
