The Commissioners for HMRC v The Prudential Assurance Company Limited

HMRC contend that Regulation 90 must first be applied to ascertain the time of supply of the Services. This includes for the purpose of deciding whether the supply was made at a time when the supplier and the recipient of the services were members of the same VAT group.

HMRC say that this approach is supported by binding House of Lords authority, namely Thorn Materials and Svenska. The FTT, they say, failed properly to understand and apply those authorities. Even if we find that they are not strictly binding on this point, Mr Mantle says that they are closely analogous and their reasoning on the mandatory application of the time of supply rules and their interaction with section 43(1) is highly persuasive and should be followed by this Tribunal. This approach also produces legal certainty and a consistent approach to section 43(1).

The FTT also erred in law, say HMRC, by determining the time of supply of the Services by reference to when they were “actually rendered”; this was the kind of “meta-rule” criticised by Lord Hoffmann.

Mr Mantle argues that the FTT further erred in law in concluding that it was bound to allow Prudential’s appeal by reason of the decision in BJ Rice. That case did not involve the issue in this appeal, being the interaction between Regulation 90 and section 43(1). BJ Rice can be distinguished on several grounds, and should, following judicial comment, be restricted to its facts.

Aside from these material errors of law, HMRC reject the FTT’s criticism that HMRC’s approach “mixes the real world with the VAT world to create a charge”. They say that that is a necessary corollary of the impact of time of supply rules.

Ms Yang said that the FTT reached the right result. It correctly concluded that even if, contrary to Prudential’s case, Regulation 90 could be applied to the supply of the Services, as a result of section 43(1) the resulting supplies could only have been made in the course or furtherance of a business carried on by Prudential, not SCL.

The FTT was also right, argued Ms Yang, to consider itself bound by BJ Rice, which remains good law. BJ Rice is directly applicable and is binding authority that the presence or absence of the four factors identified in that case as necessary for a VAT charge must be determined when the relevant real-world transaction is carried out.

Ms Yang also submitted the following additional reasons why HMRC’s appeal should be dismissed:

We begin by considering the relevance of the four key authorities to the construction of the legislation which we set out above, before we turn to Ms Yang’s alternative reasons for supporting the FTT’s conclusion.

As we have said, none of the authorities deals with the interaction of Regulation 90 and section 43(1).

The decision which clearly carried most weight in the FTT’s reasoning was BJ Rice. The FTT ultimately decided that it was “unable to see what feature distinguishes the Appellant’s case from that of the taxpayer in BJ Rice”, and that it could find no “point of distinction” between the two cases. The FTT did not consider that it mattered that BJ Rice was not concerned with the VAT grouping rules. Noting that the taxpayer in BJ Rice was not within the scope of VAT at all at the time of the “actual” supply, the FTT considered that “the same… must surely be the case for SCL”. The comments in Thorn Materials and RSA regarding BJ Rice were insufficient, said the FTT, to distinguish BJ Rice.

We consider that the FTT was in error in reaching these conclusions.

It was a clear point of distinction, in relation to the present case, that the taxpayer in BJ Rice was not a taxable person because he was not registered for VAT when he rendered the services and invoiced them. The issue of principle before the Court of Appeal was therefore whether a person entirely outside thescope of VAT could become liable to VAT at a later date by virtue of the time of supply rules. We consider that the FTT was wrong to say that the same must surely be the case for SCL. Section 43(1) sets out a specific but limited set of assumptions and disregards for supplies between members of a group, but they do not create a position where SCL is not a taxable person and is entirely outside the scope of VAT. As Lord Hoffmann explained in Thorn Materials, the grouping rule “does not say that everything which happens between group companies shall be disregarded”. Moreover, as he observed at 1117D:

So, what the Court of Appeal decided in BJ Rice, and the only issue which they had to decide, was that the time of supply rules did not fix the time for determining whether a person was a taxable person for VAT purposes. That is a different question to the question in this appeal. Mr Rice, unlike SCL, did not have to rely on any assumption or disregard to maintain his argument that he was not a taxable person at the time when he rendered the services. There was no interaction, or conflict to be resolved, between two competing statutory provisions.

Perhaps the high water mark of Prudential’s case based on BJ Rice is this. The Court of Appeal in BJ Rice decided that (1) it was necessary to determine whether Mr Rice was a taxable person at the time when the supply was “actually made”, and (2) the time of supply rules were “obvious bookkeeping sections” which could alter the time of a supply but not whether it was made by a taxable person. If that basic approach were to be extended and carried across to the situation in the current appeal, then it would call into question the construction of the statutory provisions which we set out above.

So, the real question in this appeal is whether the approach of the majority of the Court of Appeal in BJ Rice should be extended and carried across in relation to a different legal situation and a different factual matrix, so as to look solely at when the supply of Services was “actually made”, and treat the time of supply rules as having no effect on the VAT position.

It is clear that it would not be appropriate or justified to do so, for three reasons.

First, the facts in BJ Rice were highly unusual, and, importantly, the majority went out of their way to express concerns about the many injustices which they considered would be caused to Mr Rice by HMRC’s position (which concerns Sir Ralph Gibson concluded in his dissenting judgment were “not…of such an order that the court should depart from…the plain meaning of the provisions”). We also note in passing (as did Arden LJ in RSA) that Mr Rice had even issued an invoice at the time when the services were rendered, albeit that it could not constitute a VAT invoice because he was not then a taxable person.

Second, in the decision of the House of Lords in Thorn Materials, Lord Hoffmann referred with evident disapproval to the use, as an alternative to the time of supply rules, of “some kind of meta-rules, derived from fairness, common sense and other such concepts lodged in the judicial bosom”. He stated that this was the technique apparently used by the majority of the Court of Appeal in BJ Rice. He said that such an approach “cannot be right”. In RSA, Arden LJ in the Court of Appeal referred with approval to Lord Hoffmann’s comments “in so far as [BJ Rice] is thought to establish any wider restriction on the time of supply rules” than that imposed in BJ Rice itself. That is a clear counsel to exercise caution in extending the application of the approach in BJ Rice.

Ms Yang points out that these were both dissenting judgments. That is so, but Lord Hoffmann was in fact at one with the majority in deciding that the time of supply rules must first be applied to determine when a supply takes place, his dissent being limited to the consequences of that approach for the VAT payable on delivery. In the House of Lords in RSA Lord Walker expressly approved the analysis and conclusion of Arden LJ. Ms Yang said that there is no indication in any of the judicial comments that BJ Rice was not binding. However, that is not the same question as whether the judicial comments indicate that the underlying approach in BJ Rice should be more widely applied. Lord Walker gave a similar steer to Lord Hoffmann and Arden LJ when he stated (emphasis added to original):

Ms Yang also pointed out that BJ Rice was cited to the House of Lords in Svenska but not referred to in the decision. We do not think that anything can be drawn from that for either party.

Third, and most importantly, extending the approach adopted in BJ Rice more generally would be in conflict with the majority decisions of the House of Lords in Thorn Materials and Svenska, to which we now turn.

In Thorn Materials, Lord Nolan accepted that the time of supply rules must be applied to determine “whether and if so when” a supply between members of a group took place. He described such an approach as “essential”, stating that unless a supply during the group relationship is identified, there is nothing on which section 43(1) can bite. Lord Hoffmann, although dissenting on the consequences of such treatment, agreed with this, stating that there was no way in which one could identify whether a supply has occurred while the parties were members of the same VAT group except by the application of the time of supply rules.

The FTT decided (at [70]) that on the basis of this approach the supplies in this appeal would not fall to be disregarded under section 43(1). However, it then continued by reaching the contrary conclusion, apparently on the bases that (i) the VAT treatment in what the FTT called “the VAT group world” precluded the operation of Regulation 90, (ii) none of the cases was direct authority for HMRC’s position, and (iii) the taxpayer’s position was on all fours with BJ Rice.

The FTT was correct to note that Thorn Materials is not direct binding authority in relation to the issue in this appeal. It was common ground in that case that on delivery of the goods a chargeable event occurred for VAT purposes, although the parties disagreed as to the consequences, whereas in this appeal Prudential’s case is that there was never any chargeable event in relation to the Services. However, it is very strong persuasive authority that the time of supply rules must first be applied in order to determine whether a supply falls within section 43(1). It therefore offers strong support for our construction of the statutory provisions.

Ms Yang sought to draw support for Prudential’s position from Thorn Materials. She pointed to the FTT’s observations at [46] regarding Lord Nolan’s comments (at 1112C-E) in respect of the position where there is a prepayment for goods followed by a transfer of ownership of those goods within a VAT group, when any VAT paid would fall to be refunded. The FTT considered (at [46]) that this “appears to be a close analogy to the Appellant’s situation”. The FTT continued:

We do not agree. We consider that the FTT was wrong simply to read across Lord Nolan’s example to a supply of continuous services, because the very question at issue in the appeal was whether the time of supply rules operated to shift the time of supply away from the time of the “real world” supply, as the FTT called it. The conclusion which the FTT sought to read across was also inconsistent with the clear statements of Lord Nolan, which we set out at paragraph 50 above, regarding the necessity of first applying the time of supply rules to determine whether a supply was a group supply. The FTT failed to refer to or consider this key passage in the Decision. It thereby fell into error in determining the relevance and importance of the judgments in Thorn Materials to the issue in the appeal. That lay not in what might be extrapolated from Lord Nolan’s example, but in the pronouncements regarding the application of the time of supply rules in the context of section 43(1) and in Lord Hoffman’s criticisms of the approach adopted by the Court of Appeal in BJ Rice.

Turning to Svenska, as noted in the passages set out above, the issue was different to that in Thorn Materials, because the dispute was not about the effect of what was agreed to be a supply, but rather whether “actual supplies” were supplies for the purposes of reclaiming input tax when they fell within (the predecessor to) section 43. Svenska sought to argue that the grouping rule did not operate to prevent the court from finding that Svenska had made “actual supplies” to its London subsidiary prior to 1 August 1991, even though prior to that date no payment had been received or invoice issued. As set out at paragraph 56 above, Lord Hutton rejected that submission.

Ms Yang points out, in seeking to distinguish Svenska, that (1) it was common ground in Svenska that the effect of the time of supply rules was to fix the date of supply of services rendered prior to 1 August 1991 as being the time in 1992 when an invoice was issued for those services and (2) the extent of the application of the time of supply rules was common ground. The latter point is in our view misleading; the extent of their application was very much in dispute, as is clear from Lord Hutton’s judgment. In any event, while Svenska is, as we have said, not binding authority on the issue in this appeal, the differences between Svenska and this appeal do not mean that the reasons given by Lord Hutton for his conclusions do not support HMRC’s position, and our construction of the legislation. Those reasons also provide no support for following the approach taken in BJ Rice of looking at the time of “actual supplies” as being determinative (although we accept that that decision was not mentioned by the House of Lords). Indeed, if Lord Hutton’s reasoning is applied in the present case, it would produce the result that the supply of the Services must, for all relevant purposes, be treated as occurring when the Services were invoiced, in 2015/16. That reasoning is not consistent with Ms Yang’s arguments either as to the effect of the Disregard or as to the effect of the Assumption.

The FTT described Svenska and set out extracts from it, but the only specific reference to Svenska in its reasoning was at [73], when it stated that Svenska and RSA “concern the rules governing entitlement to input tax credit, which can raise different considerations”. That is correct so far as it goes, but misses the point. In the absence of direct binding authority, the relevant question for the FTT was whether what was said by their Lordships in Svenska as to the operation and effect of the time of supply rules, albeit in the context of a different issue, supported one party’s construction of section 43(1) and Regulation 90 or the other’s. There is no doubt that what was said supported HMRC’s construction, although not so explicitly as the statements we have discussed in Thorn Materials. The fact that input tax credits “can raise different considerations” is not of itself a good reason for discounting or ignoring the comments made by their lordships, in the absence of an indication from the House of Lords that those comments were explicitly or implicitly restricted to a situation where the time of supply question was relevant to an input tax credit recovery.

RSA also concerned a different VAT question to that in this appeal, and, as we have said, its relevance lies in the steer which it gives that the approach in BJ Rice should not be extended to other factual situations where the time of supply is in issue. Ms Yang argued that Arden LJ’s criticisms of Park J’s reliance on BJ Rice were limited to the relevance of BJ Rice to the specific issue of whether a single supply of a lease could be converted into a series of successive supplies. She further argued that Lord Walker “gives no indication that, in his view, BJ Rice remains anything but good law”. As explained above, we do not agree. The criticisms and caveats of Lord Hoffmann and Arden LJ were expressed in general terms, and when the House of Lords says that a controversial decision of an inferior court was not “necessarily” wrongly decided as it concerned different facts, that is a clear note of caution.

We now consider Ms Yang’s alternative reasons for supporting the FTT’s conclusions.

Ms Yang said that binding authority establishes that the purposes of section 43 include (1) ignoring intra-group transactions (2) disregarding intra-group supplies in relation to liability for VAT, and (3) treating the representative member as if it were carrying on all of the businesses of the other members as well as its own: Taylor Clark. Thus, she argued, the provision of investment management services between SCL and Prudential during the group period must be disregarded or ignored consistently with those purposes.

Ms Yang also relied on the judgment of Rose LJ (as she then was) in Lloyds Banking. The issue in that case was which company was entitled to claim a refund in respect of VAT which had been overpaid by the representative member of a VAT group that had been dissolved. Ms Yang referred to statements by Rose LJ relating to the effect of VAT grouping as established by EU authorities, including that “a VAT group’s internal transactions do not exist for VAT purposes”. Rose LJ stated that the principle of legal certainty militated against a regime whereby a supply originally treated as made by the single taxable person could be affected by a later event such as a change in group membership or the group being dissolved. Ms Yang said that HMRC’s position clearly ran contrary to the principles identified in Rose LJ’s judgment by imposing a VAT charge on a “real-world supplier” leaving the VAT group.

We do not consider that this argument does anything to advance Prudential’s case. The statements to which we were referred in Taylor Clark and Lloyds Banking all describe, in uncontroversial terms, the consequences of VAT grouping. However, the issue in this appeal is whether the relevant supply of Services was a group supply in the first place. We have concluded that it was not, because it was treated as taking place by Regulation 90 at a date long after group membership had ceased. So, while Rose LJ does refer to departure from a VAT group not “unwinding” a supply originally treated as made within the group, that entirely begs the question of when, and therefore whether, there was a group supply in the first place. The place of supply rules do not retrospectively replace or “unwind” one VAT point with another in relation to continuous services as defined. Rather, they fix the time of supply as the date of payment or issue of an invoice. If that date so fixed takes place at a time when the companies are in the same VAT group, then section 43(1) would apply, with the consequences described by Rose LJ. However, that was not the situation in this appeal.

Ms Yang renewed the argument made before the FTT that HMRC’s position breached the EU law principle of fiscal neutrality. In her oral submissions, Ms Yang referred variously to the principles of fiscal neutrality and legal certainty.

The principle of fiscal neutrality precludes treating similar goods and similar economic transactions, which are thus in competition with each other, differently for VAT purposes.

Ms Yang’s argument is that, on HMRC’s case, the Services were liable to VAT, but “no VAT liability could arise where one division of a company provides investment management services to another division of the same company that sells insurance and, following a demerger, two successor companies emerge where one benefits from returns on the investments in return for making proportionate payments to the other”. Thus, Ms Yang says, the principle of fiscal neutrality is undermined on HMRC’s case by imposing negative consequences in terms of VAT liability for a group rather than a single-entity structure.

We have no hesitation in rejecting this argument. The comparator “similar economic transaction” on which Ms Yang relies is wholly inapt. There is a fundamental difference, in legal, tax and economic terms, between a company with single legal personality which has divisions and two companies with separate legal personality (Footnote: ⁶). Nor is there any breach of the principle of fiscal neutrality if, in compliance with Article 11, a Member State permits two entities to be members of the same VAT group and to cease to be so. It was not argued by either party that section 43(1) or Regulation 90 are not complaint with the PVD. Ms Yang’s real argument is that section 43(1) should be given the statutory construction for which Prudential contend, but there is nothing in the principle of fiscal neutrality which supports that argument. Article 11 is permissive rather than prescriptive, and Member States have chosen to implement it in a myriad of ways and subject to various conditions. Nor is it the case that HMRC’s construction imposes negative consequences in terms of VAT for a group rather than a single entity structure; two entities may benefit from section 43(1) in respect of supplies taking place while they are members of the group, and as regards supplies taking place after the supplier has left the group, the supplier will be treated in the same way as other suppliers in relation to Regulation 90.

So far as legal certainty is concerned, being the requirement that the law is clear and unambiguous and its implications foreseeable, HMRC’s construction of the time of supply rules satisfies that principle. A company providing continuous services would, if properly advised, be aware that if those services were rendered while within a group but invoiced after the company had left the group, the law would clearly have the result that VAT would be due. We suspect that Ms Yang’s underlying argument is really an echo of the concerns expressed by the Court of Appeal in BJ Rice that the time of supply rules could impose VAT retrospectively. However, the UK’s time of supply rules are not argued by Prudential to be incompatible or inconsistent with the PVD (Footnote: ⁷), and their operation in this case in fact postponed VAT until long after the investment management services were rendered.

Ms Yang referred to various EU authorities regarding the purpose and effect of Article 11. She argued that Prudential’s position, unlike that of HMRC, was firmly aligned with the aim of Article 11, which she described in oral submissions as being that “arrangements that have happened within a VAT group have no consequence”.

The objectives of Article 11 were identified by the CJEU in European Commission vIreland (Case C-85/11) in the following terms:

We see nothing in these objectives which supports the position of either party in relation to the issue in this appeal. Insofar as Ms Yang referred to EU authorities regarding the effect of Article 11, as we have said above, the issue in this appeal is not the consequences of section 43(1) where it applies but whether section 43(1) applies to the supply of Services in the first place. Article 11 is permissive in nature, and creates no directly enforceable rights in the United Kingdom: Beteiligungsgellschaft Larentia + Minerva mbH & Co. KG v Finanzamt Nordenham (C-108/14 and C-109/14) (“Larentia”). It is for Member States to specify in their domestic legislation precisely what “close links” are necessary between two persons in order for them to be treated as a single taxable person: Larentia at [50]. In our opinion Article 11 sheds no particular light on the issue in this appeal.

We can deal with this point briefly. Ms Yang argued that the rules which deem there to be or not be a supply must logically precede any rules that deem the supply to have been made at a particular time. In a footnote to her skeleton argument, which she touched on in oral submissions, Ms Yang referred to section 47 VATA 1994, which deals with certain supplies regarding agents, and asserted that where supplies are made through an agent section 47 must be applied first to determine whether there is a deemed supply before any time of supply rules are considered.

We express no view on that assertion. The issue in this appeal is not whether time of supply rules must always be applied before any other provisions of the VAT legislation. Section 47 is not relevant to the issue in this appeal, which is the interaction between section 43(1) and Regulation 90.

Approaching the issue as a matter of the statutory construction of section 43(1), we have set out above our reasons for concluding that the supply of Services took place at a time when the parties were no longer members of the same VAT group. We have considered the extent to which the key authorities, none of which deals with the precise issue in this appeal, are consistent or inconsistent with that construction. As explained above, the statements made by the House of Lords in Thorn Materials and Svenska strongly support our conclusion on the construction of the legislation that the time of supply rules must first be applied to determine whether a particular supply falls within section 43(1). If the approach of the Court of Appeal in BJ Rice to a materially different issue (whether the time of supply rules could operate to make a person entirely outside the scope of VAT liable to VAT at a later date) were to be extended to the situation in this appeal, then that would call our construction into question. However, for the reasons we have given we are clear that it would not be appropriate or correct so to extend BJ Rice.

We have explained why we do not accept any of Ms Yang’s alternative reasons for upholding the FTT’s decision.

Returning to that decision, the FTT’s essential reasoning is at [70]-[76], set out at paragraph 65 above, and can be summarised as follows:

In reaching its decision we conclude that the FTT made the following errors of law:

The FTT made errors of law which were clearly material, because they caused it to allow Prudential’s appeal. We therefore set aside the Decision.

Having set the Decision aside, we may either re-make it or remit it to the FTT: section 12(2)(b) Tribunals, Courts and Enforcement Act 2007. There is no dispute as to the facts and no reason to remit the appeal to the FTT. We therefore re-make the Decision and dismiss Prudential’s original appeal to the FTT against HMRC’s decision that VAT is chargeable on the provision of the Services.

HMRC’s appeal is allowed.

In accordance with the usual practice, we circulated our decision, in draft form, for the parties to have the opportunity to suggest typographical corrections. On Prudential’s side the corrections were provided by Prudential’s solicitors, who included with their corrections a series of assertions that we had failed accurately to record the submissions of Ms Yang in a number of paragraphs of our draft decision.

We do not regard any of these assertions as well-founded but, for the sake of completeness, we will, as briefly as the assertions allow, deal with these assertions. For the avoidance of doubt the paragraphs of our draft decision which were the subject of these assertions have not changed in this final version of our decision.

In relation of paragraph 30 of our draft decision it was asserted that we had not recorded Ms Yang’s submission that “supply” in Section 43(1)(a) of VATA 1994 should be read as a “transaction”. We were referred to paragraphs 17, 42, 46, 47, 84 and 87 of Prudential’s skeleton argument. The assertion concluded in the following terms (we have added the underlining):

We have some difficulty in understanding this assertion. In paragraph 30 of our decision we are commenting on the fact that Ms Yang, in her oral submissions, used the word “transaction”, when referring to the supply of the Services. Section 43(1)(a) refers to a “supply” of goods or services, not to a transaction. Describing a supply of services in the context of Section 43(1)(a) as a transaction seeks to re-write the statute, which is the point we are making in paragraph 30 of our decision. We are therefore commenting on the language used in Ms Yang’s oral submissions. We are not dealing with an invitation by Ms Yang to rewrite the statute. Not surprisingly, Ms Yang made no such submission. Our point was that Ms Yang’s reference to transaction, in her oral submissions, had the effect of seeking to rewrite the statute.

Turning to the specified paragraphs of Ms Yang’s skeleton argument, those paragraphs make reference to various legal materials relied upon by Ms Yang in support of her submissions. We have dealt with these legal materials, and the submissions based upon them, in our decision. The specified paragraphs have nothing to do with the point we are making in paragraph 30 of our decision. Beyond this, it was not Ms Yang’s written or oral submission that “supply” in Section 43(1)(a) means “transaction”. The relevant submission of Ms Yang, which for various reasons we have rejected, was that on the facts of this case and on the construction of the relevant statutory provisions for which she contended, there was no supply of the Services by SCL, upon which Regulation 90 could operate.

In reality, it seems to us that this assertion is seeking to re-argue the relevant parts of Prudential’s case, by fixing on paragraph 30 of our decision which, as we have explained, was concerned with a different point. This is borne out by the conclusion to the assertion which we have quoted above. As the underlined sections of the conclusion make clear, we are being asked to revisit submissions of Ms Yang which we have already rejected.

In relation to paragraphs 31, 32 and 34 of our draft decision, Prudential’s solicitors have asserted that we have failed accurately to record Ms Yang’s submissions. We do not agree. These paragraphs, so far as they are recording submissions made by Ms Yang, record what those submissions were. This is confirmed by a reading of paragraphs 27 and 28 of Ms Yang’s skeleton argument, which are said by Prudential’s solicitors to set out some different submission. In reality, it seems to us that what is now asserted by Prudential’s solicitors in relation to these parts of our decision constitutes an attempt to re-argue the relevant submissions of Ms Yang, dressed up in a different way.

The only point we would add to this is that Ms Yang’s submissions were not confined to her skeleton argument. They included her oral submissions at the hearing itself. In arriving at our decision, we have of course taken careful account of all of Ms Yang’s submissions, both written and oral.

Finally, it is asserted that it was no part of Prudential’s case to rely upon Section 43(1)(b). It is asserted that this was made clear in paragraph 42 of Prudential’s skeleton argument. Paragraph 42 of Ms Yang’s skeleton argument endeavoured to bring out the following alleged inconsistency of effect:

We find it somewhat difficult to understand how Section 43(1)(b) can be said not to have been relied upon, in circumstances where the relevant paragraph of the skeleton argument sought to rely on Section 43(1)(b) to draw out what was said to be “a legitimate and necessary inconsistency in the intended effects” of the two paragraphs of Section 43(1). It may be that the point comes down to an arid debate over what is meant by the concept of reliance.

In any event, this is largely beside the point. In paragraph 34 of our decision we are addressing the argument (forming the basis of the FTT’s decision) that if the Disregard did not apply, the supply of the Services would nevertheless be treated under the Assumption as made by Prudential. As we point out, section 43(1)(b) is not relevant in the present case because there was no supply by or to a member of the group to or from a person outside the group. The argument in paragraph 42 of Ms Yang’s skeleton argument is dealt with elsewhere in our decision, specifically at paragraphs 98-100.