FTT Rejects Company’s Appeal to Join UK VAT Group Due to Failing Fixed Establishment Tests
United KingdomHMRC refused to allow the UK branch of Barclays Service Corporation (BSC) to be a part of the UK VAT group of Barclays Execution Services Limited (BESL), arguing BSC wasn’t sufficiently established in the UK. Even if it was, HMRC claimed refusal was necessary for the protection of the revenue. This decision was appealed, leading the FTT to consider:
- Whether the UK Branch met the fixed establishment test for VAT grouping.
- Whether UK VATA has a territorial limitation preventing a UK VAT Group from including an overseas entity (Danske Bank issue).
- Whether HMRC could in any event refuse the application on the ground that it was for the protection of the revenue.
The FTT ruled in favor of HMRC on point 1 but agreed with Barclays that the test for fixed establishment in the place of supply rules (sufficient human and technical resources to make supplies in question) may be different from the test for membership of a VAT group. On the facts, the lack of employees at the date of the application, and the lack of the right to occupy a permanent place of business, meant the branch could not make a meaningful commercial contribution, and so could not be a fixed establishment. Further, the tribunal briefly considered the Danske Bank and revenue protection arguments.
Interestingly, the FTT noted that if the UK Branch had succeeded on point 1, the VAT savings would be a normal consequence of VAT grouping, and HMRC’s rejection of the protection of the revenue would have failed.
On the Danske Bank issue, the FTT recognized that the UK consistently applies the whole establishment approach for VAT grouping. Changing this would have major practical impacts, and the FTT deemed it inappropriate to definitively rule on this matter within this decision.
Key takeaway
The decision highlights that fixed establishment may have different shades of meaning in different contexts, but paramount is the need for substantive human and technical resources, not only on paper, but as a matter of economic and commercial reality and a real commercial justification for the branch. HMRC's power to terminate VAT grouping for the protection of the revenue is more restricted than was thought following the HSBC case, if the Tribunal's opinion here is followed.
The case is expected to be appealed.
