In a recent decision, the Court of Appeal attempted to clarify and distil the interaction between the VAT grouping rules and the time of supply rules to answer the not so straight forward question of when does a taxable supply occur where the actual performance of the services is in a different time period to the invoicing and payment? 

It may seem straight forward at first, but the legal complexities of the VAT scheme make this anything but. 

The answer to this question is important as supplies between VAT group members are essentially ignored for VAT purposes and are therefore not subject to VAT.   Whereas if a supply is made at a time when a company is not a member of the VAT group the normal VAT rules will apply and VAT will be chargeable.

It will therefore be critical for companies leaving, or joining VAT groups, to consider what supplies are being made between group members, or former members, and when.

Often companies may perform services and invoice and receive payment for these at separate points in time.  Outside the context of VAT grouping, usually this is a relatively innocuous question that may impact cash flows but does not otherwise influence a company's supply of goods and services in any other material way. In the case of Prudential Assurance Company v HMRC [2024] EWCA Civ 300, it went beyond mere timing, to a more critical question of if the time of supply rules in fact determine if there even is a taxable supply in the first place (where it may otherwise be deemed not to be). 

Here investment management services were provided to Prudential by the supplier who was a member of the same VAT group at the time. Years later, the supplier exited the VAT group and ceased to continue supplying its investment management services to Prudential. Approximately a further 7 years after the exit from the VAT group, the supplier raised an invoice to Prudential on the basis that the financial thresholds of fund performance in the original agreements were met, which now triggered additional consideration to the supplier under the original services agreement.

The question at hand was if these fees should be subject to VAT? which must be answered by determining when the services were supplied and whether they were supplied at a time when the supplier was a member of the Prudential VAT group. 

The relevant sections in the current Value Added Tax Act 1994 are:

• section 43 (referred to as the Grouping Rules) that allows services between entities that are part of the same VAT group to be disregarded for VAT purposes; and 
• section 6, alongside Regulation 90 of the Value Added Tax Regulations 1995 (collectively referred to as the ToS Rules), that in summary state that where there is a periodic payment or continuous supply of services, time of supply for VAT purposes shall be deemed to be the earlier of when the invoice is raised or payment is received. 

In a nuanced and thorough judgement, the court conceded that on first glance it appears that they are attempting to determine what came first, the chicken or the egg?

The Court of Appeal Decision

Prudential (as the Appellant) argued that in accordance with the Court of Appeal judgement in B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (BJ Rice), you must determine if there was a taxable supply first, before then moving to consider when it occurred.   The consequence of this would be that as the supply to Prudential was actually made (ignoring any ToS rules) when the supplier was a member of Prudential’s VAT group the supply would be disregarded for VAT purposes and no VAT would be payable on the fees.

HMRC argued that instead, you must first determine when the supply took place under the ToS rules, before then overlaying the consequences of the Grouping Rules.  On this interpretation, the Grouping Rules would only be relevant at the time of a taxable supply in accordance with the ToS Rules and as such VAT would be payable.

In coming to their decision the court gave particular consideration to the case of B J Rice. In this case the supplier was not registered for VAT at the time of performance but was VAT registered at the time the invoice was raised and payment was received four years later.  The Court of Appeal determined that no VAT was payable as the ToS rules could not be used to determine if a chargeable supply was made for VAT purposes, they could only determine the timing of a chargeable supply. 

The leading judgement then went on to consider several later cases which appeared to reach a different conclusion and therefore cast doubt on whether BJ Rice was in fact binding authority in the current situation.

Having considered the various historical cases the Court of Appeal ultimately found favour in the argument presented by HMRC. They stated that applying the ToS Rules first created more stability and that it was clear from the previous case law that, although they prima facie concern timing, the consequences of the Tos Rules go beyond merely fixing the time of supply. 

This is a potentially controversial decision, highlighted by the dissenting judgement in the Court of Appeal (the decision was reached on a 2 to 1 majority) and the fact that the First Tier Tribunal initially ruled in favour of Prudential but then the Upper Tier Tribunal determined that the services should in fact rightly be subject to VAT. 

Time of supply or Nature of supply rules?

Taxpayers need to pay careful attention to the implications of these complex and specific VAT rules in any long-term contracts they enter into or where it provides for payments triggered on future events. There may be a clear distinction between when supplies occur in the real world and when they occur for the purposes of charging for VAT.

This is particularly relevant where the agreements are between entities within a VAT group or where there could be a possibility of a change in an entity's membership in the VAT group.  The ToS Rules should not be dismissed as only being relevant when taxpayers are certain there is a taxable supply and it would appear they can indeed have far further reaching consequences. 

As a practical matter it would be prudent, wherever possible, to ensure both the actual supply and the payment for the supply, take place at a time when companies are members of the VAT group.

Clearly the history of how this case worked up through the courts and the dissenting judgement by Nugee LJ shows that there are various perspectives on the interpretation of how these particular VAT rules should interact and it is therefore not clear if this position will stay settled for long. 

Co-authored with Arunali Ranasinghe , Solicitor, Burges Salmon