Supreme Court Rules VAT Payable on Former Group Company's Fees

The Supreme Court has ruled that VAT was payable on success fees charged by a company that had left a VAT group by the time payment became due. The decision clarifies the application of Section 43(1)(a) of the Value Added Tax Act 1994, which disregards supplies between members of the same VAT group, and highlights the importance of determining when a supply is made for VAT purposes.

Case Background

Investment management firm Silverfleet Capital Limited had previously managed funds for Prudential, both companies having been part of the same VAT group. In 2007, following a management buy-out, Silverfleet ceased to manage the funds and left the VAT group.

In 2014 and 2015, the value of the funds exceeded a pre-agreed performance threshold, triggering success fees totalling more than £9.3 million. Silverfleet raised invoices for these success fees, which Prudential argued should be disregarded for VAT purposes because the management services had been supplied when both entities were in the same VAT group.

The Dispute

HM Revenue & Customs (HMRC) took a different view. It contended that the services were a continuous supply under Regulation 90 of the Value Added Tax Regulations 1995, meaning the supply was deemed to take place when the invoices were issued or payment was received. Because Silverfleet had already left the VAT group by that time, HMRC argued that VAT was chargeable.

After mixed outcomes before the lower tribunals, the matter reached the Supreme Court.

The Supreme Court’s Decision

The Court agreed with the Court of Appeal, confirming that Regulation 90 applied. The relevant time of supply was when the invoices for the success fees were raised, at which point Silverfleet was no longer a member of Prudential’s VAT group. As a result, the VAT group disregard in Section 43(1)(a) did not apply, and VAT was therefore payable.

The Court accepted Prudential’s argument that Article 66 of the EU Principal VAT Directive (PVD) allows a member state to modify the time of collection but not the chargeable event itself. However, it concluded that under Article 64(1) PVD, a chargeable event occurred when the funds reached the benchmark triggering payment by which time Silverfleet had already left the VAT group.

Accordingly, the Supreme Court dismissed Prudential’s appeal.

Key Takeaway

This ruling provides valuable guidance for businesses involved in VAT group structures, particularly where long-term or success-based fees are involved. It confirms that the timing of a supply, rather than when the underlying work was performed, determines whether the VAT group disregard applies.

Q&A Section

Q: What is a VAT group?
A VAT group allows two or more corporate entities under common control to be treated as a single taxable person for VAT purposes. This means supplies between them are generally disregarded for VAT.

Q: Why did VAT become payable in this case?
Although the services were performed while both companies were in the VAT group, the supply was deemed to occur when the invoices were issued. Because Silverfleet had left the group by that time, VAT applied to the success fees.

Q: What is Regulation 90 of the VAT Regulations 1995?
Regulation 90 states that for continuous supplies of services, the supply is treated as made when payment is due or an invoice is issued, whichever comes first.

Q: What does this mean for businesses in VAT groups?
Companies should carefully review the timing of their invoicing and performance-based payments. If services extend beyond the period of group membership, VAT may still become payable even if the work was originally performed while part of the group.

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