Ruling on UK VAT groups may impact multinationals' structures

The UK First-Tier Tribunal (FTT) decision in a VAT case has potential significant implications for multinational enterprises with UK operations. These businesses will welcome the fact that the case confirms that, in principle, it’s possible for branches of overseas companies to have a fixed establishment and be members of a UK VAT group.

The case’s impact will extend beyond the UK given the similarities with the UK VAT system and those operated by EU member countries. All multinational enterprises with branches in different EU countries may need to reassess their VAT group structures to ensure that any local country requirements are met.

The decision

Barclays Bank Plc had applied to the UK tax authority, HMRC, to add the UK branch of Barclays Service Corporation to the Barclays Execution Services Limited VAT Group. HMRC rejected the application because: 

• the UK branch didn’t have a fixed establishment in the UK 
• even if the UK branch was established in the UK, the application should be refused for the “protection of the revenue”.

Barclays Bank Plc appealed. The tribunal reviewed the position at the effective date of the application, 1 December 2017, and concluded that the UK branch didn’t have the required resources to substantiate a fixed establishment in the UK. The tribunal dismissed the appeal in its 29 August 2024 judgment.

UK legislation doesn’t define the resources required, but it has been considered by the courts. One of the leading cases is Gunter Berkholz v. Finanzamt Hamburg-Mitte-Altstadt, which considered this point in connection with the operation of gaming machines on a ship. The court held that the establishment needed to have both human resources and technical resources permanently present, and that these resources must be necessary for provision of the business’ services.

The Berkholz case is still referred to today when considering what constitutes a VAT-fixed establishment.

What are the implications?

Companies must ensure their branches have both adequate human and technical resources for a fixed establishment to exist, and these must be present on a permanent basis.

The branch must be able to both receive and make supplies. A UK establishment is a requirement to qualify for VAT grouping. The test of “human and technical” resources remains fact-specific and to be assessed at each “moment in time.”

Companies must also consider the chosen date for a VAT group application. It’s important that the required human and technical resources are present at that date (and remain eligible after that date) with the evidence to support this.

Where the substance required for a fixed establishment isn’t in place, businesses can expect HMRC to raise challenges and/or deny VAT grouping requests.

Why would you set up a VAT group?

There are advantages and disadvantages to forming a VAT group. On one hand, supplies between group members are generally disregarded for UK VAT purposes, alleviating the need for VAT to be charged and VAT invoices raised. And only one VAT return is required, lessening the administrative burden.

On the other hand, it can be challenging to manage the reporting requirements and ensure VAT returns are submitted on time. Members are also jointly and severally liable for VAT debts. And all thresholds, including VAT registration and accounting plans, apply to the group in aggregate rather than as individual businesses. This also includes HMRC’s error correction thresholds.

There may therefore be additional reporting and accounting requirements as a VAT group as opposed to individual VAT registrations.

Companies will need to weigh up the potential disadvantages of VAT grouping against the advantages. The latter typically win out as supplies between members of a VAT group aren’t subject to UK VAT. This can create considerable savings.

Protection of the revenue

If Barclays Bank Plc had met the conditions for a fixed establishment in the UK and so been eligible to be a member of a UK VAT group with other Barclays entities, the tribunal felt that HMRC wouldn’t have had the grounds to use its “protection of the revenue” powers to deny VAT grouping. This was because the tribunal considered that the VAT savings fell within the normal consequences of VAT grouping.

UK legislation has always contained powers giving HMRC the ability to refuse certain VAT grouping applications on the basis that it’s “necessary for the protection of the revenue.” The tribunal definition following from the case National Westminster Bank Plc and The Commissioners of Customs & Excise confirmed that HMRC can use these powers where there is “significant revenue loss.” However, HMRC must weigh the loss of revenue resulting from the VAT grouping against the effect on the entities seeking to set up a VAT group.

Going forward

In a climate where tax mitigation strategies are becoming increasingly unpopular, the potential tax savings and administrative efficiencies that can be obtained through VAT grouping are significant.

Although this case is only a FTT case and the decision is not binding on other parties, there are other cases standing behind this one. It remains to be seen whether there will be further litigation on this matter.

The case is Barclays Service Corporation & Anor v. Revenue and Customs, UKFTT 785 (TC), Aug. 29, 2024.

If you would like to discuss this further, please contact Robert Marchant, or your usual Crowe contact.

This article was first published on Bloomberg on 1 November 2024.