In Barclays Service Corporation and another v HMRC,1 the First Tier Tribunal (the "FTT") has held that the UK branch of an overseas company did not qualify as a member of a value added tax ("VAT") group in the UK.
Background
Being treated as a member of a UK VAT group conveys a number of advantages. Section 43 of the Value Added Tax Act 1994 ("VATA") allows group companies to function as one taxable entity and potentially reduce their VAT costs as "any supply of goods or services by a member of the group to another member of the group shall be disregarded."2
Barclays Service Corporation ("BSC") is a US incorporated company and an indirect subsidiary of Barclays Bank PLC. A proposal was made by the Barclays group for BSC to establish a branch in the UK ("BSC UK"). There were a number of commercial reasons for BSC UK to be established, including to "ensure BSC provides its services as efficiently as possible to the [Barclays Group] UK businesses".3
The FTT's decision features a detailed description of the discussions surrounding the creation of BSC UK. It was stated in the FTT's published judgment that if BSC UK was added to the UK VAT group, supplies made by BSC to other members of the UK VAT group would have been disregarded for the purposes of calculating the UK VAT group's liability, and there would be "a saving of c. £15m-20m of otherwise irrecoverable VAT per annum for the Barclays group."4
An application was made to HMRC for BSC to be treated as a member of the Barclays VAT group in accordance with section 43B(2) VATA on the basis that: (i) BSC was a member of the Barclays corporate group headed by Barclays PLC; and (ii) BSC had a fixed establishment in the UK through its UK branch.5
HMRC refused the grouping application on two grounds. First, in HMRC's view BSC was not eligible to be treated as a member of the VAT group in accordance with section 43A(1) VATA because it was neither established nor had a fixed establishment in the UK. Secondly, even if BSC did have a fixed establishment in the UK, it was nevertheless necessary to refuse the application for the protection of the revenue within the meaning of section 43B(5)(c) VATA.6 The FTT considered each of these issues.
Fixed Establishment
Under section 43A(1) VATA, two or more bodies corporate are eligible to be treated as members of a group if each is established or has a fixed establishment in the UK.
The FTT followed the approach taken by the Upper Tribunal in HSBC Electronic Data Processing ("HSBC"),7 which established that a fixed establishment is "characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources."8 The Upper Tribunal in HSBC added that "the precise meaning" of the terms "established" and "fixed establishment" was "highly fact sensitive and better determined in the context of all the relevant circumstances in any given case."9
Accordingly, the FTT considered what human and technical resources were available to BSC UK on 1 December 2017, the date on which the application was made for BSC UK to join the Barclays VAT group. HMRC submitted that on the evidence provided at the date of the application, BSC UK "had no human and no technical resources" available and therefore could not, "as a matter of fact, have been a fixed establishment of BSC."10 The FTT determined that only one of the four BSC UK staff had commenced working for the branch at the date of the application. Additionally, there "was no evidence of any employment or lease contracts" to show any formal arrangements for BSC UK to occupy office space at its UK location. There was no evidence of BSC UK having "comparable control" to an owner over the office assets.11 The FTT concluded that in the absence of such comparable control over the human and technical control resources by BSC UK, the requirements were not satisfied for BSC UK to have created a fixed establishment in the UK. BSC UK therefore would not be permitted to join the Barclays VAT group.
Protection of the Revenue
Although those findings of fact was sufficient to deny BSC UK membership of the Barclays VAT group, the FTT also considered, in obiter dicta, whether HMRC could have refused BSC UK's application for VAT group membership on the basis that the refusal was "necessary for the protection of the revenue" (under section 43B(5)(c) VATA). The FTT noted that the normal aims and consequences of VAT grouping were to provide a freedom to structure a business in a way that best met its commercial needs while ensuring that the grouped entities were taxed like a single company organised on a divisional basis.12 The FTT found that the VAT savings from grouping "fell within the normal consequences of VAT grouping".13 Accordingly, it would not have been possible for HMRC to reasonably have been satisfied that there were grounds for refusing the application to protect the revenue.
Summary
The impact of the FTT decision clarifies the considerations taken into determining what is a "fixed establishment" for VAT grouping purposes. The decision emphasised that HMRC were correct in placing emphasis on the evidence which demonstrated "human and technical resources" of BSC UK at the date of the VAT grouping application. Therefore, non-UK groups will need to carefully review whether relevant employment contracts and other formal agreements such as leases or equipment hire agreements are in place at the time of any application to join a UK VAT group.
The FTT's opinion on the protection of the revenue will also be of interest to taxpayers. The detailed consideration by the FTT on the (sometimes day-by-day) decision making process behind the establishment of BSC UK is illuminating. VAT mitigation was clearly a consideration behind the establishment of the UK branch, but the theme which is most evident from the details set out by the FTT is that the tax considerations were ancillary to Barclays' overall commercial objectives, regulatory framework and group dynamics.14
Finally, there was no decisive consideration by the FTT of the issues in the Danske Bank15 case, concerning whether section 43A VATA allows the entire eligible non-UK body corporate into a UK VAT group, or only that part of the non-UK body corporate which is established in the UK. It is possible that the issues relating to those competing approaches might arise in the event of any appeal in BSC v HMRC.
Footnotes
1 Barclays Service Corporation and another v HMRC [2024] UKFTT 00785(TC) ("Barclays").
2 Section 43(1)(a) VATA.
3 Barclays, paragraph 42.
4 Barclays, paragraph 58.
5 Barclays, paragraph 18.
6 Barclays, paragraph 2.
7 HSBC Data Processing (Guangdong) Ltd v HMRC [2022] STC 367.
8 Barclays, paragraph 149.
9 Barclays, paragraph 149.
10 Barclays, paragraph 160.
11 Barclays, paragraph 165.
12 Barclays, paragraph 192.
13 Barclays, paragraph 192.
14 Barclays, paragraphs 39-85 and 126.
15 Danske Bank A/S v Skatteverket (C-812/19) [2021] STC 68.
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