This article, first published in Taxation, concerns an appeal brought by two Barclays entities against HMRC’s refusal to allow the UK branch of a US company to join the UK VAT group.

HMRC has sought to test the boundaries of what constitutes a fixed establishment for the purpose of VAT grouping, and has argued for a more restrictive EU law approach across a series of cases. In HSBC Electronic Data Processing (Guangdong) Ltd & others v HMRC [2022] UKUT 41 (TCC) (“HSBC”), the Upper Tribunal agreed that the concept should be informed by the case law of the Court of Justice of the European Union (“CJEU”) on what constitutes a fixed establishment for the purposes of determining the place of supply, but noted that the issue was highly fact sensitive.

The latest in this line of cases is Barclays Service Corporation & Barclays Execution Services Ltd v HMRC [2024] UKFTT 00785 (TC). Although HMRC prevailed in this instance, this article will show that the outlook for UK VAT grouping rules is not as bleak as it may appear.

Who is eligible to join a VAT group?

Article 11 of Council Directive 2006/112/EEC (the Principal VAT Directive or “PVD”) allows EU Member States to introduce provisions for VAT grouping, leaving it to Member States’ discretion to adopt “any measures needed to prevent tax evasion or avoidance through the use of this provision.”

Article 11 was implemented in the UK by sections 43, 43A and 43B of the Value Added Tax Act 1994 (“VATA 1994”). Section 43A(1) states that “[t]wo or more UK bodies corporate are eligible to be treated as members of a group” in certain circumstances, including that one person controls all the companies in the proposed group. Section 43A(6)(a) defines a “UK body corporate” as “a body corporate which is established or has a fixed establishment in the UK”.

Even if the eligibility conditions are met, HMRC may refuse an application under section 43B(5)(c) if it appears “in any case, that refusal of the application is necessary for the protection of the revenue”.

Taxpayers may appeal to the First-tier Tribunal (Tax Chamber) (“the FTT”) against HMRC’s refusal of a grouping application under section 83(1)(k). Section 84(4)(a) states that the FTT cannot allow an appeal against a refusal on the revenue protection ground unless it considers that HMRC “could not reasonably have been satisfied that there were grounds for refusing the application”.

Background to the case

The two appellants are members of the Barclays corporate group and are indirectly owned by Barclays PLC.

Barclays Service Corporation (“BSC”) is a US company that provides services to other members of the Barclays group. It has a UK branch that employs four people (all of whom were previously employed by other companies in the corporate group) and has an office in Cheshire. The UK branch was involved in monitoring and updating intragroup agreements between BSC and the Barclays entities to which BSC provided services, among other activities.

One of the companies that receives services from the UK branch of BSC is the second appellant, Barclays Execution Services Limited (“BESL”), a UK company. BESL is also the representative member of the UK VAT group.

On 1 December 2017, BESL made an application for the UK branch of BSC to join its VAT group. On 2 March 2018, HMRC refused that application for two reasons:

• BSC was not eligible to be treated as a member of the VAT group because it was not established and did not have a fixed establishment in the UK, and
• even if BSC did have a fixed establishment in the UK, HMRC had to refuse the application for the protection of the revenue.

BSC and BESL appealed to the FTT against HMRC’s decision, which considered three issues:

• Does the UK branch of BSC constitute a fixed establishment in the UK for the purposes of the grouping provisions in section 43A of VATA 1994?
• Can an establishment outside the UK be included in a UK VAT group, or does the wording of VATA 1994 contain a territorial limitation?
• If BSC does have a fixed establishment in the UK and there is no territorial limitation, is it right that HMRC could not reasonably have been satisfied that it was necessary to refuse the grouping application for the protection of the revenue (under section 43B(5)(c) of VATA 1994)?

The FTT dismissed the appeal overall as it held that the appellants’ fixed establishment ground failed, but found in favour of the appellants on the second and third issues and made findings that other taxpayers will find helpful.

Fixed establishment

Relying on HSBC, HMRC argued that the definition of a UK “body corporate” in section 43A(6) as established or having a fixed establishment in the UK is meant to implement the words “any persons established in the territory of that MS [Member State]” in Article 11 of the PVD. As a result, HMRC argued, the meaning of those words must be decided by reference to their meaning in the PVD.

There is no CJEU case law on this point, but the CJEU has considered the meaning of the phrases “has established his business” and “a fixed establishment” in the context of the place of supply rules in Article 43 of the PVD. Applying that case law to the VAT grouping rules, HMRC argued that, for a branch to be considered a fixed establishment, it must:

• have a real trading presence in the UK and supply goods or services in its own right, those goods or services being material to the business (rather than just preparatory or auxiliary);
• have sufficient permanent resources to be able to supply those goods and services; and
• have sufficient permanent resources to receive the supplies required to enable it to provide those goods and services.

In HSBC, the Upper Tribunal concluded that the interpretation of the wording in section 43A could be informed by the meaning of a fixed establishment in the context of the place of supply rules. However, importantly, it held that those concepts cannot be simply imported into the VAT grouping legislation. In any event, the Upper Tribunal in that case held that the precise meaning of the words is “highly fact sensitive, and better determined in the context of all the relevant circumstances in any given case”.

In the present case, BSC and BESL relied on the findings in HSBC to argue that, as the place of supply rules and the VAT grouping legislation serve different purposes and have a different focus, the applicable principles must be adapted accordingly. In the context of the grouping provisions, they argued that “the only question for the Tribunal was whether a person is established in a member state characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”. The need for human and technical resources went to the question of whether there is an establishment in the UK, and the need for a sufficient degree of permanence went to the question of whether any establishment that might exist was fixed. As such, the taxpayers argued, “nothing more is required provided the human and technical resources in the UK make a meaningful commercial contribution to the business of the non-UK company”.

The FTT took the same approach as the Upper Tribunal in Barclays and left “the precise meaning of the terms ‘established’ and ‘fixed establishment’ to be determined in a subsequent case”. The FTT went on to apply the test proposed by the taxpayers on the assumption that it was correct. In assessing what human and technical resources were available to the UK branch at the date of the VAT grouping application, the FTT pointed to the Advocate General’s Opinion in Welmory sp z oo v Dyrektor Izby Skarbowej w Gdańsku (Case C-605/12), in which the Advocate General pointed out that it is not necessary for the taxable person (here, the UK branch) to have at its disposal “human resources” it employs or “technical resources” it owns: it must simply have a “comparable level of control” to an owner.

Even applying the test proposed by the taxpayers and taking their case at its highest, the FTT found against the taxpayers as their case failed on the facts. At the date of the application (which the parties agreed was the date that the eligibility requirements were to be assessed), only two of the four employees had started working for the UK branch of BSC. Importantly, one of those, who was the head of the UK branch, still spent the “vast majority” of her time working for her previous employer (another company in the Barclays group) and reported to her previous line manager, who remained responsible for her day-to-day supervision. As a result, the UK branch of BSC had no “comparable level of control” over its human resources compared to an owner of such assets.

As regards the premises, there was no evidence of any formal arrangement by which the UK branch occupied the premises in Cheshire, so there was no “comparable level of control” over the technical resources either.

BSC and BESL tried to argue that the arrangements should be compared to a branch in its infancy, as the BSC UK branch was at the time, and invited the FTT to indicate when it considered the UK branch had sufficient resources. This would have been of assistance to Barclays in a future grouping application, as well as to other taxpayers in a similar position, but the FTT declined to give this indication.

Danske Bank issue

As part of the second issue, the FTT considered whether section 43A of VATA 1994 allows the entire eligible non-UK body corporate into the VAT group (widely known as the whole establishment construction), or whether only the UK-established part of the non-UK corporate body should be part of the VAT group.

The whole establishment construction flows from the wording of the UK legislation. Other Member States have taken a different approach. In Skandia America (USA) (Case C-7/130) (“Skandia”), the CJEU held that different establishments of the same company are considered to be separate taxable persons. However, in this case, HMRC argued that the whole establishment construction was brought into question by the decision of the CJEU in Danske Bank A/S and others v Skatteverket (Case C-812/19) (“Danske Bank”).

Danske Bank had its head office in Denmark and a branch in Sweden. It applied for the Swedish branch to join the Danish VAT group. The CJEU held that, due to the territorial limitations inherent in Article 11 of the PVD and following Skandia, the Swedish branch could not be part of the Danish VAT group.

HMRC argued that section 43A of VATA 1994 should be interpreted similarly to Article 11 to impose the territorial limitation in that article, as per Danske Bank. The FTT disagreed. It held that departing from the whole establishment construction would have significant practical repercussions for UK VAT grouping. The FTT therefore held that it was not “equipped” and, in any event, it would not be “possible” or “proper” for it to give a conforming interpretation to section 43A. The whole establishment construction is therefore safe for now.

Protection of the revenue

It may be tempting to think the wording of section 84(4)(a) of VATA 1994 suggests HMRC’s decision could be challenged on public law grounds and the FTT can assess the reasonableness of HMRC’s decision. However, in HSBC Electronic Data Processing (Guangdong) Ltd & others v HMRC [2022] UKUT 41, the Upper Tribunal clarified that the relevant question is whether HMRC could reasonably have decided to refuse the grouping application, not whether they had reasonably done so in the specific case.

The appellants relied on the case law, particularly on the decision in Lloyds Banking Group plc & others v HMRC [2019] EWCA Civ 485, to argue that the aim of the grouping provisions is administrative simplification, which does not mean simplification only in terms of VAT accounting but also in how undertakings organise themselves. The FTT agreed.

The FTT adopted the finding of the VAT and Duties Tribunal in National Westminster Bank plc (VAT Decision 15514) that the protection of the revenue test “involves a balancing exercise in which the Commissioners must weigh the effect on the Appellant of refusal of grouping [removal of administrative simplification resulting from grouping] against the loss of revenue likely to result from grouping”. The taxpayer’s interest is, therefore, an important consideration in this balancing exercise.

In conducting this balancing exercise, the FTT held that it had to consider whether there was any loss to the revenue that went beyond the normal consequences of grouping. In this context, it held that there was no such loss. The FTT therefore found in favour of the taxpayer on the basis that “it would not have been possible for HMRC to reasonably have been satisfied that there were grounds for refusing” the grouping application on the revenue protection ground.

What should taxpayers know?

The decision’s conclusion on fixed establishment is somewhat unsatisfactory: the FTT refused to look at the meaning of “established” and “fixed establishment” in the context of the grouping provisions. This in itself does suggest those words potentially have a different meaning than in other parts of the legislation, such as in the place of supply rules. In trying to avoid setting down a “fixed establishment” test, the FTT assumed the taxpayers’ argument in relation to the human and technical resources test was correct and found that, even taken at its highest, the taxpayers failed to meet the test they had put forward, at least on the date of the grouping application.

This part of the decision is entirely fact-dependent and other groups may find themselves in a better position. In particular, the decision confirms that for VAT grouping applications the facts must be assessed on the date of application. To maximise their chances of a successful application, taxpayers will wish to carefully consider the timing of their application and only submit it once they have employed sufficient staff, leased an office and arranged access to the resources they need to run their UK branch.

It is reassuring that the whole establishment construction of section 43A was preserved. The Treasury held a call for evidence in 2020 (“VAT Grouping – Establishment, Eligibility and Registration Call for Evidence”) which included a question on whether EU-style “establishment only” provisions should be adopted in the UK, but decided not to take any action as a result of that. Although this indicates that the government accepts any changes in this area would require careful consideration and should be effected by amending the statute, we wait to see if this point is raised on appeal.

The FTT’s findings on the protection of the revenue issue are encouraging, as they recognise the taxpayer’s interest in establishing its VAT group and put that in the balance against HMRC’s interest in preventing a loss of revenue.

BSC and BESL have now appealed to the Upper Tribunal. It remains to be seen whether HMRC will cross-appeal on the Danske Bank and protection of the revenue issues. Many cases are stayed behind this appeal, all of which will depend on their facts. It is possible that some may seek to distinguish themselves and potentially press on with their appeals if they have a better case for grouping.