Former Group Company's Fees Subject to VAT

Supplies between companies in the same VAT group are disregarded for VAT purposes by virtue of Section 43(1)(a) of the Value Added Tax Act 1994. A case that recently reached the Court of Appeal concerned whether this disregard applies if the supplying company has left the VAT group by the time payment becomes due.

An investment management company, Silverfleet Capital Limited, managed funds for insurance company Prudential, and was part of Prudential's VAT group. Under an agreement made in 2002, Silverfleet would receive performance fees if the funds' performance exceeded a certain benchmark. Following a management buy-out in 2007, Silverfleet stopped providing its services and also ceased to be a member of the VAT group. In 2014 and 2015, the funds' performance exceeded the benchmark and Silverfleet subsequently raised invoices for more than £9.3 million in respect of performance fees.

Prudential argued that no VAT was due on the performance fees as Silverfleet's services had been supplied when the companies were in the same VAT group, and thus fell to be disregarded. However, HM Revenue & Customs (HMRC) took the view that the services represented a continuous supply of services. Under Section 90 of the Value Added Tax Regulations 1995, such services are treated as supplied when they are invoiced or paid for, whichever is earlier. As Silverfleet was no longer a member of the VAT group when that happened, HMRC contended that VAT was due. After Prudential's arguments prevailed before the First-tier Tribunal, HMRC successfully appealed to the Upper Tribunal (UT).

Ruling on Prudential's appeal against the UT's decision, the Court concluded, by a majority, that as Silverfleet was not a member of the VAT group when the services had been supplied under Section 90 of the Regulations, the disregard required by Section 43(1)(a) of the Act was not in point. A further argument – that Silverfleet could not be considered a 'taxable person', as under Section 43 of the Act its business was deemed to be carried on by Prudential itself, as the representative member of the VAT group – was also unsuccessful. Accordingly, the appeal was dismissed.