A recent case has highlighted the uneasy correlation between the rules applying to members of VAT groups and the rules regarding the time of a supply for VAT purposes. Members and former members of VAT groups should be wary of the potentially significant effects of this decision.
(For context, a VAT group is very broadly where two or more persons (usually companies under common control) form a group for VAT purposes in order to minimise VAT on supplies of goods and services to each other and to simplify the VAT process on supplies of goods and services to parties outside the group. The group is regarded as a single taxable person with one VAT registration number.)
In Prudential Assurance Company v HMRC [2024], a supplier provided investment management services to Prudential at a time when both parties were members of the same VAT group. Some years later, the supplier left this VAT group and the services ceased. Later still, a certain threshold relating to performance in the original agreement was met, which triggered a further payment from Prudential to the supplier (at a time when the parties were no longer VAT-grouped).
It is a fundamental principle of VAT groups that supplies of goods and services between members of the VAT group are ignored. Against that backdrop, there is also the rule that in relation to a continuous supply of a service or where there is a periodic payment, the time of supply rules for VAT regard the supply as taking place on the earlier of the raising of the VAT invoice or the supplier receiving the payment for it. The key issue in Prudential then was whether the additional fees payable by Prudential to the supplier after they had left the VAT group were liable to VAT. This required assessing when the supplies of services to Prudential occurred.
Prudential understandably didn’t want to have to pay more VAT on supplies which it regarded as taking place years earlier when the supplier was still part of its VAT group. It argued that the first question is to establish whether there was in fact a taxable supply. If the answer was yes, one must then consider when it took place for the purposes of VAT. On this analysis, Prudential argued that whilst there was in fact a taxable supply, the timing of the supply (and therefore the VAT point) was when Prudential and the supplier were members of the same VAT group. Hence the supply should be ignored.
HMRC’s view was that the time of supply rules should apply first: one must consider when the supply occurred for VAT (which here was when the invoice was raised some years after the service relationship had ended). On that analysis, the supply took place when the parties were not VAT grouped and therefore Prudential was liable to pay VAT.
In a 2:1 decision and having considered various prior cases, the Court of Appeal found in favour of HMRC. The thrust of its decision was that the time of supply rules were to be afforded more significance than simply denoting when a supply was made. The decision is a controversial one as a counterargument is that the time of supply rules should not operate to turn a previously non-taxable transaction into a chargeable one – ie the time of supply rules are only relevant to when a supply is made, as opposed to whether it was in fact made. It will be interesting to see whether the decision is appealed.
The case is potentially of great significance to parties where vatable supplies are made between members of a VAT group and the make-up of that group may change. In particular, the legislation and wider law relating to VAT and time of supply of services may well not reflect the intended commercial reality of transactions. Parties in particular may consider it sensible to ensure that regarding intra-group supplies (for example of management services), their actual provision as well as their payment and invoicing take place when the parties are still VAT-grouped. Joining and leaving VAT groups is a common commercial step (such as on company sales and purchases or commercial reorganisations) and the potentially far-reaching and expensive consequences of this should be borne in mind.
This article is for information purposes only and is not a substitute for legal advice, and should not be relied upon as such. Please contact our Anthony Reeves or Cathy Bryant at Michelmores LLP should you require advice concerning any of the above.
