Barclays Services Corporation & Anor v The Commissioners For HMRC

As explained above, the UK VAT grouping rules have implemented Article 11 on a “whole establishment” or “whole entity” basis. This means that eligibility for grouping extends to a body corporate which is not resident in the UK but which has a fixed establishment in the UK.

In the context of this appeal, this means that if HMRC were to accept the application by BESL and BSC for BSC to join the VAT group of which BESL is the representative member, grouping would extend not only to transactions between VAT group members and the UK branch but also between VAT group members and BSC.

In Danske Bank, the CJEU indicated that there was a territorial limitation on Article 11. An issue before the CJEU was whether Article 11 must be interpreted as meaning that, for VAT purposes, the principal establishment of a company, situated in a Member State and forming part of a VAT group, and the branch of that company, established in another Member State, must be regarded as separate taxable persons where that principal establishment provides that branch with services and imputes the costs thereof to the branch. The Court concluded as follows, at [28]-[30]:

It was common ground between the parties in this appeal, as before the FTT, that the effect of Danske Bank is to impose a territorial limitation on Article 11 such that the single taxable person treatment which can be permitted is restricted to entities within the territory of that Member State. We have proceeded on this basis.

The issue which HMRC ask us to determine in this appeal is whether it is possible to give section 43 VATA a construction conforming with Article 11, so as to impose this territorial limitation. HMRC say that such a conforming construction is possible, while the Appellants say that it is not.

Before we turn to that question, it is somewhat strange, to put it mildly, that HMRC should be taking this position. That is not only because section 43 as it stands clearly imposes no such territorial limitation, but also because the UK had previously set out its stall on the international stage as having a relatively competitive VAT grouping regime partly because of its whole establishment approach.

Various Revenue and Customs Briefs in 2015 set out HMRC’s position following Skandia, and confirmed the UK’s whole establishment approach. In November 2025 HMRC published Revenue and Customs Brief 7 (2025), which again confirms that approach.

Against that background, we questioned Ms McCarthy on HMRC’s motivations for taking the position which they have adopted in this appeal. The Appellants had also raised concerns for their part that it was inappropriate, and a waste of the Upper Tribunal’s time, for HMRC to be raising this issue in light of HMRC’s clear, stated public policy.

However, Mr Hitchmough and Ms Yang clarified that the Appellants were not taking the position that HMRC should be prevented from seeking the Tribunal’s ruling on the question of conforming construction. Ultimately, it is for the parties to frame the issues in an appeal, and for the Tribunal to determine a question of statutory construction placed before it; the wider ramifications of any decision that a conforming interpretation is possible would be outside the remit of this appeal. Therefore, as requested by the parties, we set out below our decision on the issue of conforming construction.

The approach to be taken in applying a conforming interpretation was set out by Sir Andrew Morritt C in Vodafone 2 v Revenue and Customs Commissioners [2009] EWCA Civ 446 (“Vodafone 2”), at [37]-[38]. The relevant principles can be summarised as follows:

The FTT’s decision on this issue was, as it acknowledged, obiter: [169]. Having referred to Vodafone 2, the FTT’s conclusion was as follows:

The approach to a conforming construction set out in the above passage from Vodafone 2 has its origin in the decision of the CJEU in Marleasing v ComercialInternacional de Alimentacion (C-106/89) (“Marleasing”). It mandates a “highly muscular approach” to the construction of national legislation, in the words of Lord Sumption in FII Group Test Claimantsv RCC [2012] UKSC 19 at [176]. The only limitations on the approach were summarised in Vodafone 2 as follows:

We were referred by the parties to a number of other decisions, in addition to those cited in Vodafone 2, which discuss the application of a conforming construction, including various decisions of the FTT and the decisions of the Upper Tribunal in Trustees of the Panico Panayi Accumulation and Maintenance Settlements v HMRC [2024] UKUT 00319 (TCC) and Ampleaward Ltd v HMRC [2020] UKUT 0170 (TCC). Having considered those authorities, we consider that they do not materially modify or add to the summary of principles in Vodafone 2, which we have adopted in making our decision. We note that in Swift vRobertson [2014] UKSC 50, the Supreme Court described the relevant passages in Vodafone2 as “authoritatively” setting out the breadth and importance of the relevant principles (at [21]) (Footnote: ⁷).

Ms McCarthy referred us to the FTT decision in Baillie Gifford & Co v HMRC [2019] UKFTT 410 (TC). In that case, the FTT considered whether a conforming construction of section 43A VATA (as it then stood) could apply to extend the reference in section 43A to a “body corporate” to include a Scottish partnership (Footnote: ⁸). The FTT decided that such a construction was permissible and did not go against the grain of section 43A. We do not consider that this decision sheds any particular light on the Danske Bank Issue, because it concerns a different question, and the FTT did not have to consider the whole establishment question.

The critical issue which arises in determining whether a conforming construction of section 43A is permissible so as to restrict VAT grouping by reference to the Danske Bank territorial limitation is whether such a construction would go against the grain of the relevant legislation.

Ms McCarthy submitted that it would not go against the grain, because neither section 43 nor section 43A expressly provides that non-UK establishments can be included in UK VAT groups. She relied in this context on the following statement in IDT Card Services, at [90] (emphasis added to original):

In our opinion, this language is, and is intended to be, simply a restatement of the “grain” or “cardinal feature” restriction. That becomes apparent when one considers it not in isolation but in the context in which it is made. It follows a detailed analysis of the decision in Ghaidan, which includes the following statements:

The restriction that a conforming/Marleasing construction cannot involve a departure from a fundamental feature or cardinal principle of the legislation is not dependent on identifying some express language which would prevent the construction. That would be an unwarranted gloss. Rather, the test requires identification of the features of the relevant legislation which are fundamental or cardinal (the “grain” of the legislation) in the context of any particular case.

In this case, we consider it to be clear that a fundamental feature of the UK’s VAT grouping rules is that they apply to the entire body corporate which is grouped. This follows inexorably from a straightforward construction of the language used, taking into account the purposes of Article 11 described above.

Section 43(1) states that “(1) Where under sections 43A to 43D any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member” (emphasis added to original).

Section 43A states (emphasis added to original):

It is in our opinion clear from the emphasised wording that in the legislation in question eligibility is based on and defined by reference to each body corporate, or whole establishment. That is a fundamental or cardinal definitional element, to which the remaining requirements for common control, enacting the “close links” element of Article 11, are applied. It is two or more bodies corporate which are eligible under section 43A, and it is those bodies corporate which are treated as members by section 43. That is part of the grain or underlying thrust of the legislation.

While it is unnecessary to decide on precise draft wording in order to effect a conforming construction, HMRC submitted that a conforming construction of section 43A(1) could be achieved by construing it as including the additional words shown underlined below:

We consider that an amendment such as this, or substantially similar to this, would clearly go against the grain of the legislation and conflict with one of its fundamental features, as we have explained. Any amendment must be compatible with the underlying thrust of the legislation and not conflict with a fundamental feature of the legislation. This amendment is not so compatible and is inconsistent with a fundamental feature. As such it would, in the language used in Ghaidan, “cross the boundary between interpretation and amendment”.

The second constraint on a conforming construction established by the authorities is that it cannot result in a court or tribunal having to reach decisions in relation to the conformed legislation which are in substance matters of policy and therefore outside the judicial remit. Ms Yang submitted that in this case such decisions would indeed fall to be made. She gave a number of examples, such as the modifications which might be required to the provisions of section 43(1) dealing with the joint and several liability of VAT group members. Ms McCarthy submitted that such changes would not involve the tribunal in impermissible policy decisions, but were simply consequential amendments which followed logically from a conforming construction.

Although we acknowledge the force of the concern raised on this front by Ms Yang, in view of our conclusion that a conforming construction would clearly go against the grain of the legislation, we do not need to decide whether it would also fall foul of this separate constraint.

While we have not relied on this in reaching our decision, section 43(2A), introduced by Finance Act 1997, reinforces our conclusion as to the grain of the grouping legislation. This provision has the effect of disapplying the disregard of intra-group supplies in section 43(1) where, broadly, the relevant services are bought in from a third-party supplier by a non-UK member of the VAT group (without VAT arising) for onward supplies to a UK member of the VAT group. In such a situation, section 43(2A) applies to treat the supply by the overseas group member as a taxable supply in the UK, on which the representative member of the group must account for VAT under the “reverse charge” provisions.

Section 43(2A) indicates a recognition by Parliament of the consequences which may arise from the inclusion of the whole establishment of an overseas member in the VAT group. Its very purpose is to address certain of those consequences.

In reaching its conclusion that a conforming construction of section 43A to impose a territorial limitation was not permissible, the FTT relied on the fact that such a construction would result in a fundamentally different regime, referring to “its broad and far-reaching effect, together with the inevitable practical repercussions that would arise” as issues which it was not appropriate for the FTT to determine.

While we agree with the FTT that a conforming construction would result in a fundamentally different regime, with significant practical repercussions, we do not consider that this would, of itself, be a valid reason for not applying a conforming construction to section 43A. In our view, the reason why a conforming construction would be impermissible is that it would clearly be contrary to the underlying thrust of the legislation and its fundamental features.

So, albeit for different reasons to those given by the FTT, we conclude that section 43A cannot be construed in conformity with Article 11 in order to impose a territorial restriction in line with Danske Bank.

The remaining issues in the appeal are determined in light of this conclusion.

Before turning to those issues, it is helpful at this stage to summarise the FTT’s findings of fact.

We summarise below the FTT’s decisions on those issues. It is important to keep in mind that the FTT’s conclusions followed a thorough and extensive consideration of the evidence by the FTT, and resultant findings of fact, which formed the factual setting for the appeal against HMRC’s refusal decision.

References below to paragraphs in the form [x] are, unless indicated otherwise, to paragraphs of the Decision.

In addition to extensive documentary evidence, the FTT heard oral evidence from a number of witnesses. These included Ms Eleni Hadjikakou, the head of BSC’s UK branch. The FTT found that “although essentially a helpful witness…Ms Hadjikakou became somewhat reticent when cross-examined about the creation and purpose of the UK branch”, and noted that she declined to comment on the significance of VAT to the formation of the branch: [5].

The FTT set out at [9] a Statement of Agreed Facts produced by the parties, as follows:

The FTT made extensive further findings of fact, at [13]-[139]. These included the following:

The FTT dismissed the Appellants’ appeal against HMRC’s decision that the UK branch of BSC did not constitute a “fixed establishment in the United Kingdom” for the purposes of section 43 VATA at the relevant date. It explicitly did so on the assumption that the correct test of whether there was a fixed establishment was that proposed by Mr Hitchmough: [156].

The FTT recognised that its decision on this issue was sufficient to dispose of the appeal: [169]. For the same reason, it is also the most significant ground in this appeal.

Following its extensive findings of fact, the FTT’s decision on this issue was at [145]-[169].

The FTT began by discussing and setting out the statements on the meaning of “fixed establishment” in HSBC. One of the central issues dealt with in HSBC was the degree to which case law in relation to the meaning of a fixed establishment in the VAT rules regarding the place of supply could and should be read across to the context of VAT grouping. The FTT set out the arguments made by Mr Hitchmough, to the effect that it would be wrong to apply the restrictive approach taken in the place of supply context to VAT grouping. Those arguments led Mr Hitchmough to the following submission, at [155]:

Crucially, the FTT chose to carry out its analysis on the basis put forward by Mr Hitchmough. It stated as follows, at [156]:

Importantly, HMRC argued for a materially narrower approach to the existence of a fixed establishment.

Having summarised the arguments of the parties as to the application of this test to the facts, the FTT considered the resources available to the branch as at 1 December 2017 in terms of the human and technical resources available. In doing so, it accepted Mr Hitchmough’s approach of considering whether the branch had either actual control or “comparable control” over such assets, meaning control comparable to that of an owner of the relevant asset.

The FTT concluded that the necessary control or comparable control did not exist in the branch as at 1 December 2017, stating “it must follow that it does not, as a matter of fact, satisfy the criteria necessary to be a fixed establishment of BSC”: [166].

The FTT stated that in reaching this conclusion it rejected Mr Hitchmough’s comparison between the position of the branch at that date and a branch in its infancy or an intending trader: [167].

The FTT granted the Appellants permission to appeal against its decision on the following three grounds:

We refer to these as Grounds 1, 2 and 3.

In relation to the meaning of fixed establishment in the VAT grouping rules, the FTT referred to the relevant passages in HSBC on this issue, and also to HMRC’s formulation of the test. However, its entire reasoning and conclusions were then predicated on the assumed correctness of the formulation proposed by Mr Hitchmough.

As a consequence of this approach, the FTT declined to determine the correct meaning of fixed establishment in this context.

It is clear from [156] (set out above) that this approach was rooted in pragmatism. The decision in HSBC was, of course, binding on the FTT, but that decision had left the precise meaning of the term to be determined in a subsequent case by reference to the facts in that case. It was plain that HMRC’s approach was more stringent and more difficult to satisfy than that of the Appellants. The FTT decided to determine the issue on the basis of Mr Hitchmough’s approach because this avoided the need to decide whether, as a matter of law, a more stringent approach was required. If the Appellants failed to prove on the balance of probabilities that there was a fixed establishment in existence as 1 December 2017 on the basis of Mr Hitchmough’s approach (as the FTT decided they did), then they would necessarily fail any more stringent test.

In this appeal, the FTT’s approach presented us with a choice. We could in principle (1) determine whether the FTT erred in law in reaching its decision, assuming for this purpose, like the FTT, that the correct test was Mr Hitchmough’s test, or (2) first determine what the correct test in law was, and then determine whether there was a fixed establishment on that basis, by reference to the facts found by the FTT.

Each approach has its advantages and disadvantages, but we decided to proceed initially on the basis of approach (1). Unlike the Tribunal in HSBC, we are not being asked to decide the meaning of fixed establishment as a preliminary issue. This Tribunal has before it an appeal against the decision of the FTT, and that decision was explicitly reached on a predicated basis. If we conclude that the FTT did not err in law in reaching its decision, on that basis, then that would be sufficient to dispose of Ground 1. If we conclude that the FTT did err in law in reaching its decision, on that basis, then we would necessarily need to go on to decide the correct test in law, and whether the Appellants did or did not satisfy that test.

The FTT assumed the correctness of Mr Hitchmough’s test, namely whether, as at 1 December 2017, the UK branch had actual or “comparable” control over sufficient human and technical resources in the UK to make a meaningful commercial contribution to the non-UK company (BSC).

The concept of a branch having “comparable” control over a resource refers to the approach described by Advocate General Kokott in Welmory sp z oo v Dyrektor Izby Skarbowej w Gdansku (Case C-605/12) (“Welmory”). In her Opinion she explained as follows:

So, Advocate General Kokott’s approach entails establishing (1) the human and technical resources owned by the branch, and (2) the human and technical resources which it does not own but which are at the disposal of the branch as if they were owned by the branch, under arrangements which “cannot be terminated at short notice”. Both are taken into account in assessing whether the branch is a fixed establishment.

Ground 1 asserts that the FTT made two errors of law in applying this test. First, the FTT erred in concluding that the branch did not have a comparable level of control over Ms Hadjikakou, because she was a resource who was owned directly by BSC, and comparable control was therefore irrelevant. Second, in relation to the resources which were not owned by BSC, the FTT erred in concluding that comparable control over those assets did not exist, because that concept only requires that the branch have immediate and constant access to such resources, which it did.

In relation to the human resources of the branch as at 1 December 2017, the FTT’s conclusions were as follows, at [162]-[164]:

The FTT’s analysis of the position of Ms Hadjikakou at [163] clearly proceeds on the basis that she was not a direct employee of the branch at that date, as it considers various facts (which are themselves the subject of challenge under Ground 2) relevant to whether the branch had a comparable level of control over her, as that term is defined in Welmory.

Mr Hitchmough submits that the FTT was wrong to take this approach, because Ms Hadjikakou was in fact an employee of BSC, and as such a resource directly owned by BSC. Mr Hitchmough said that the FTT found as a fact that she was an employee of the branch. That finding was correct, he said, because Ms Hadjikakou had formally ceased to be employed by BTCI (a Barclays group company incorporated and resident in India) on 1 December 2017, and had started working for BSC on that date.

We reject Mr Hitchmough’s arguments, for the reasons which follow.

First, the FTT did not find as a fact that Ms Hadjikakou was employed by the branch on 1 December 2017. Mr Hitchmough supported his assertion by stating that “in the Decision at [163] and [164], the FTT distinguishes Ms Hadjikakou from the other UK branch employees whose employment had started later than 1 December 2017, and it describes the UK Branch as Ms Hadjikakou’s “employer” on that date” (Footnote: ⁹). The most that can be drawn from [163]-[164] is that Ms Hadjikakou performed some functions for the branch on 1 December 2017. There is nothing to indicate a finding that she was an employee of the branch. The reference to the UK branch “as her employer” at the end of [164] is simply describing the relevant legal test for comparable control, which was failed on the facts.

Second, Ms Hadjikakou was actually employed by BESL at 1 December 2017. The FTT made findings of fact in relation to the individuals who were to work for the branch at [86]-[99]. As set out at paragraph 72 above, as the proposal progressed, it was identified that in addition to the annual VAT savings, a “one-off” tax benefit of £21 million could be realised if the branch could be operational by the end of 2017: [81]-[82]. It also became apparent in late 2017 that if the branch was to be operational by 1 December 2017, it would not be practicable for those individuals to have employment contracts with BSC/the branch by that date. Instead, they would have to be employed initially by BESL. The FTT made the following findings in this respect, at [97]-[99], with “the financial imperative” referring to the potential one-off saving of £21 million:

Third, although the employment contract with BSC which Ms Hadjikakou signed on 8 January 2018 was stated to have a “start date” of 1 December 2017, that could not have retrospective effect in law to make her an employee of the BSC from that earlier date.

When we questioned Mr Hitchmough on this issue during his oral submissions, he argued that it was necessary to take a substantive rather than formalistic view of whether Ms Hadjikakou was an employee of the branch at 1 December 2017, and the fact that she had “started work” for the branch on that day showed that in substance she was its employee. We reject this argument. Whatever is meant by “in substance” in this context, ownership in the context of the human resources of a fixed establishment must refer to a legal relationship of employer and employee, and on 1 December 2017 that relationship existed between Ms Hadjikakou and BESL, not BSC.

Therefore, the FTT did not err in law by considering whether the branch had comparable control over Ms Hadjikakou.

The Appellants argue that in relation to the other resources which the branch did not own, the FTT erred in law in finding that the branch did not have comparable control over those resources.

As regards Ms Hadjikakou, this argument is the subject of Ground 2. The issue under Ground 1 relates to the other assets of the branch.

The FTT’s conclusion as to other assets was set out at [165]:

Mr Hitchmough said that the relevant test of comparable control required nothing more than that the branch had “immediate and constant access” to the asset in question. The FTT had failed to apply that test. The correct test was satisfied in view of the FTT’s finding at [165] that “Ms Hadjikakou would not have been denied access to Radbroke Hall, her desk, computer and telephone”. In addition, he argued, the FTT erred by relying on the absence of a written lease, because if such a lease had existed there would have been no need to consider comparable control in the first place. The FTT had also failed to apply an approach of considering substance rather than form.

As to the last of these criticisms, we find no indication in the Decision that the FTT did not consider the substance of the position. Indeed, the FTT correctly directed itself to the need to take this approach at [157]:

Far from being any error of law, the reference by the FTT to the absence of any “lease contract” in relation to the occupation by the branch of Radbroke Hall was a direct application of the guidance given by Advocate General Kokott in Welmory. She stated (at [51]) that “the taxable person must nevertheless…have comparable control over the human and technical resources. Therefore employment and lease contracts are required in particular in relation to the human and technical resources which put the latter at the taxable person’s disposal as if they were his own and which therefore also cannot be terminated at short notice” (emphasis added to original). So, the Advocate General considered that, in the absence of direct employment or outright property title in relation to premises, other contractual arrangements would be required in order to give rise to comparable control. Those were absent on the facts found in this case.

We reject Mr Hitchmough’s submission that it followed from the FTT’s acceptance that “Ms Hadjikakou would not have been denied access to Radbroke Hall, her desk, computer and telephone” that the only conclusion reasonably available to the FTT was that the branch had comparable control over the premises, desk, computer and telephone. It is scarcely surprising that, as an employee of the Barclays group, Ms Hadjikakou would not, in practice, have been denied such access, particularly since she had been based in Radbroke Hall when employed by BTCI prior to working for the branch: [87]. We do not consider that this finding amounted to a finding that (in the language used by Advocate General Kokott) those resources were at the disposal of the branch as if it owned them, nor that any arrangement could not be terminated at short notice. Nor was there any evidence that such access as existed was based on any contractual arrangements, as referred to by the Advocate General. Finally, the FTT’s finding that access would not be denied was only one part of the evidence available to the FTT in reaching its evaluative conclusion.

Mr Hitchmough suggested that the Advocate General had stated that the test of comparable control was satisfied if a branch had “immediate and constant access” to a resource. This is based on her statement at [52] that “a taxable person cannot as such constitute a fixed establishment of a different taxable person. This does not, however, exclude the possibility of a taxable person having immediate and constant access to the human and technical resources of a different taxable person who, in a different respect, can at the same time be a service provider for the fixed establishment thereby constituted”. There is no indication that the Advocate General was in this passage replacing, and materially diluting, the more detailed formulation of comparable control set out in the preceding paragraph. Comparable control means control which is like ownership; access is a necessary element of that but cannot sensibly be said to be sufficient. It is necessary to keep in mind that Welmory was a place of supply case, in which one of the issues was whether one taxable person could constitute a fixed establishment of another taxable person for place of supply purposes. That is the question which is being dealt with at [52].

The appeal under Ground 1 is dismissed.

Ground 2 asserts that the FTT made three errors of law in its findings and inferences in relation to whether the branch had comparable control over Ms Hadjikakou. These were as follows:

Ground 2 is that if the FTT had not made these errors, it would inevitably have concluded that the branch had comparable control over Ms Hadjikakou on 1 December 2017.

Ground 2 comprises three challenges to findings of fact by the FTT. The jurisdiction of the Upper Tribunal is limited by statute to errors of law: section 11 Tribunals, Courts and Enforcement Act 2007. Findings of fact can give rise to an error of law only on the basis set out in Edwardsv Bairstow [1956] AC 14. In that case, Viscount Simonds referred to making a finding without any evidence or upon a view of the facts which could not be reasonably entertained, and Lord Radcliffe described as errors of law cases where there was no evidence to support a finding, or where the evidence contradicted the finding or where the only reasonable conclusion contradicted the finding. Lord Diplock has described this ground of challenge as “irrationality” (Footnote: ¹⁰).

Any party seeking to make an Edwards v Bairstow challenge should adopt the approach authoritatively described by Evans LJ in Georgiou (trading as Marios Chippery) v Customs & Excise Commissioners [1996] STC 463, p. 476:

The proper approach in this Tribunal is clearly set out in HMRC v Marlborough DPLimited [2024] UKUT 00098 (TCC) at [177]-[181].

Unfortunately, the Appellants did not comply with this approach, or initially identify the challenges as Edwards v Bairstow challenges. That has caused unnecessary time and effort on the part of both HMRC and this Tribunal.

At [163], the FTT stated in relation to Ms Hadjikakou that “she continued to undertake work for BTCI during December 2017 which, she said, took up the “vast majority” of her time”. The Appellants say that on the basis of the relevant evidence this finding was not one which the FTT was reasonably entitled to make. They argue that the relevant evidence is that given by Ms Hadjikakou in cross-examination, during which she stated that on 1 December 2017 there were “some discrete actions that needed to be closed out” as regards her work at BTCI, and that her involvement in BTCI work at that date was limited and involved “email correspondence facilitating the closure of outstanding actions”.

At [90], the FTT made the following findings of fact:

This argument is without merit. Even before one begins to consider other evidence available to the FTT, and the reservations expressed by the FTT as to Ms Hadjikakou’s evidence (at [5]), the argument falls at the very first hurdle, because the transcript of Ms Hadjikakou’s cross-examination includes the following exchange (emphasis added to original) (Footnote: ¹¹):

Mr Hitchmough asserted that Ms Hadjikakou’s response related only to the period before she joined the BSC branch on 1 December 2017. That is plainly wrong. The question covers December 2017, and the use of the word “certainly” shows that the response was not so limited.

The FTT did not even go so far as to make a finding that on 1 December 2017 continuing work for BTCI did take up the vast majority of her time. It recorded that that is what she said, and that was plainly right.

The FTT clearly made no error in the respect alleged.

At [163], the FTT stated that “as at 1 December 2017, [Ms Hadjikakou] reported to her line manager, Mr McCabe of BTCI. It was Mr McCabe, rather than anyone at BSC, that was responsible for her day to day supervision”.

The Appellants say that the FTT erred by wrongly inferring that Ms Hadjikakou was not in fact working as an employee of BSC, and ignored the fact that she had two line managers, the other being Mr Westwood, the CEO of BSC. The evidence was that Mr Westwood was happy for her also to report to Mr McCabe. The FTT further failed to take into account that it was fairly common practice in the group to have more than one reporting line.

In view of our dismissal of Ground 1, the argument that Ms Hadjikakou was an employee of the branch at 1 December 2017 falls away. We therefore consider this ground by reference to the disputed inference in the context of comparable control.

At [89], the FTT made the following findings of fact:

In his oral submissions, Mr Hitchmough took us to passages from the transcript of Ms Hadjikakou’s cross-examination before the FTT which, he said, showed that her evidence was that her overall supervision rested with Mr Westwood, and that Mr McCabe’s supervision of her was at the behest of or on behalf of BSC, through Mr Westwood. Further, he said, her evidence showed that she regarded Mr Westwood as her “indirect” line manager.

On examination, Ms Hadjikakou’s evidence was less clear-cut than this. For example, she stated that “…line management in terms of managing performance of the team and having somebody in location to refer to and offer guidance to the team, that would be Peter McCabe. In terms of the services delivered from BSC and relevance of what we were doing for [BSC], that would be kind of that dotted line into Jai Westwood” (Footnote: ¹²).

The passage to which the Appellants object in [163] is clearly correct, and amply justified by the evidence before the FTT. In her Witness Statement, Ms Hadjikakou explicitly stated (at paragraph 19) that “between December 2017 and September 2019 I was line-managed locally in the UK by Mr McCabe”. As the FTT stated, at 1 December 2017, it was Mr McCabe of BTCI who was Ms Hadjikakou’s line manager and responsible for her day-to-day supervision.

Mr Hitchmough’s real complaint is that the FTT should also have referred to and explained the position in relation to Mr Westwood. However, the FTT had already accurately done this, at [89]. They were under no obligation to repeat each and every piece of evidence in a paragraph summarising the principal reasons why the FTT did not accept that the branch had comparable control over Ms Hadjikakou.

Nor did the FTT, as Mr Hitchmough asserted, conclude that Ms Hadjikakou “reported to Mr McCabe rather than anyone at BSC”. The passage at [163] states that she reported to Mr McCabe, who was her line manager. That was factually correct. The reference to Mr McCabe “rather than anyone at BSC” is made only in relation to responsibility for her day-to-day supervision. Again, that was factually correct.

The FTT clearly made no error in the respect alleged.

At [163], the FTT stated that:

The complaint here is not that the FTT was not entitled to make this finding, or that it drew an incorrect inference from it, but that it erred in law by taking into account an irrelevant factor.

The Appellants argue that this fact “is irrelevant to the question of whether BSC had human and technical resources available to it in the UK in any relevant sense” (Footnote: ¹⁴). If anything, they say, it shows that BSC did have comparable control over Ms Hadjikakou, because the email was sent on behalf of BSC. Mr Hitchmough argued that, in any event, its relevance was not to whether comparable control existed, but only to the separate question of whether the resource in question was sufficient to make a meaningful contribution to the business of the branch.

We do not accept that the fact in question was irrelevant. The FTT explicitly carried out its evaluation on the basis of Mr Hitchmough’s formulation. This was that on 1 December 2017 the branch had “sufficient human and technical resources in the UK to make a meaningful commercial contribution to the non-UK company, ie BSC”: [156]. We see no justification for segregating this test into a decision regarding available resources and then a separate decision as to whether those resources were sufficient to make a meaningful contribution. Each element of this single test should be assessed in conjunction with the other: put another way, resources are only relevant if they go toward establishing the sufficiency to make a meaningful contribution.

So, the fact that the only employee over whom the branch might arguably have comparable control had no prior knowledge of, and had not been asked to participate in, a call regarding one of the primary areas of responsibility of the branch, namely the UK branch IGAs, was clearly relevant to the contribution which Ms Hadjikakou had been able to make some three days earlier, on 1 December 2017. The weight to be afforded to that fact was entirely a matter for the FTT, but in our view its relevance cannot be disputed.

The FTT clearly made no error in the respect alleged.

In light of our conclusions on Ground 2, we do not need to consider whether, if any or all of the errors asserted by Ground 2 had been established, they would, in any event, have been material. An error of law is material if it might (not would) have affected the outcome: see Henderson LJ in Degorce v HMRC [2017] EWCA Civ 1427 at [95]. In this appeal, the Appellants would need to have established that any errors of law in the FTT’s findings regarding the comparable control of the branch over Ms Hadjikakou might have made a difference to the FTT’s conclusion that Mr Hitchmough’s test of a fixed establishment was not met at 1 December 2017. It would have been necessary as part of that exercise to consider whether such resources as the branch did have comparable control over were sufficient to make a meaningful commercial contribution to the business of BSC. It would also have been necessary to evaluate the weight to be afforded to the FTT’s separate findings of fact, including those regarding the lack of access in the branch at 1 December 2017 to the various IT systems and information within the group necessary for the branch to carry out its designated functions.

The appeal under Ground 2 is dismissed.

At [167], having reached its conclusion that the branch did not amount to a fixed establishment on 1 December 2017, the FTT said this:

Ground 3 is that this was an error of law by the FTT. The Appellants say that the analogy between the branch and an intending trader is entirely apt, and that the decision in Breitsohl should be applied in this respect. They say that if an intending trader is eligible to join a VAT group, then surely a UK branch in a similar position should also be eligible. Further, argued Mr Hitchmough, the concept of a “meaningful commercial contribution” must be sufficiently broad to cover a nascent branch. He drew an analogy with a research and development activity carried out in a branch. He argued that the tasks undertaken in establishing the branch must make a meaningful commercial contribution to the business of the overseas company from the outset, and such contribution cannot be confined to the functions that the branch will ultimately perform. There was an intention to use the resources as at 1 December 2017 to perform a crucial monitoring and oversight function for BSC, for which a specific charge was to be made.

Mr Hitchmough said that the FTT was wrong to place reliance in this context on Planzer, because the passage relied on related only to ongoing activity of a business. Additionally, Planzer was a place of supply case, which could not be read across to the VAT grouping rules.

Finally, he said, on the evidence the activity of the branch at 1 December 2017 was not, in any event, merely preparatory or auxiliary.

In view of our decisions to reject Grounds 1 and 2, this ground is academic.

That is because the definition of a fixed establishment proposed by Mr Hitchmough and adopted by the FTT requires that as at 1 December 2017 the branch owns/has comparable control over human and technical resources which are sufficient to make a meaningful contribution to the business of BSC. While we have rejected Mr Hitchmough’s attempt to split this into two separate tests, it nevertheless follows that if, as matter of fact, no resources are in the ownership or comparable control of the branch, then the issue of whether they are sufficient to make a meaningful contribution does not arise. That is the situation here. The FTT found that on 1 December 2017 the branch had no actual or comparable control over any employees or any technical resources. We have upheld that decision. The intending trader analogy, as Mr Hitchmough accepted, addresses whether the branch was making a meaningful contribution, and, in particular, whether the process of setting up and establishing the branch made a meaningful contribution from “day one”. Here, we have found that the FTT did not err in law in finding that the branch had no ownership of or comparable control over any resources at 1 December 2017, so the issue of meaningful contribution at that date does not arise.

However, since we heard argument on the issue, we will set out our views.

There is no authority for the proposition that it is sufficient to give rise to a fixed establishment for the purposes of VAT grouping that, at a particular date, steps are being taken to set up a branch which will, in due course and once it is operational, own the necessary resources to make a meaningful contribution to the business of the company setting up the fixed establishment.

The interpretation of the term fixed establishment in section 43A is dealt with by HSBC. In that case, the Upper Tribunal stated as follows, at [50]-[51]:

Mr Hitchmough’s attempt to widen the meaning of fixed establishment in section 43A finds no support in this passage. On the contrary, HSBC lends support to the FTT’s reference to Planzer in regarding the activities at 1 December 2017 as insufficient because they were merely preparatory or auxiliary, in that it refers to the relevance of Planzer in determining the meaning of fixed establishment in section 43A.

In the absence of authority, Mr Hitchmough relies on an analogy with Breitsohl. In that case, the CJEU decided that an intending trader could register for and thereby recover VAT which it had incurred on the basis that it was entitled to be treated as a “taxable person”. He says that it would be illogical and an “odd result” if the position was different in relation to an “intending” fixed establishment.

We do not agree. The concepts of “taxable person” and “fixed establishment” are substantively different. In addition, an intending trader has a directly effective right under EU law to reclaim VAT, whereas there is no directly effective right to be admitted to a VAT group.

We did not find that a comparison with a nascent R&D facility shed any useful light on the issue.

In our opinion, the FTT was entitled to reach the conclusion which it did at [167].

The appeal under Ground 3 is dismissed.

The FTT chose to proceed on the assumption that Mr Hitchmough’s test of what fixed establishment means in section 43A is correct. Since we have dismissed the Appellants’ appeal, and since the Appellants would have failed any more rigorous test, we do not need to determine whether that test is correct in law. Nevertheless, we wish to offer some obiter dicta.

The meaning of fixed establishment in the VAT grouping provisions was discussed in HSBC. The most important passages are as follows (emphasis added to original):

It follows from the highlighted passages that Mr Hitchmough’s formulation is not correct. It sets too low a bar, because it effectively leaves out of account the guidance on the meaning of fixed establishment in the place of supply rules and in other decisions such as Planzer. As HSBC makes clear, Parliament’s intention in enacting section 43A was to reference the concept of fixed establishment in the place of supply rules, and CJEU case law in relation both to the place of supply rules and in other contexts is “relevant” to the meaning of the term in section 43A and “must be taken into account”.

In practice, this means that the factors identified as relevant, and the concepts applied, in the CJEU case law on the place of supply rules (and in cases such as Planzer) which consider whether a fixed establishment exists must be taken into account in the overall evaluation. They are not to be read across and applied wholesale, but nor are they to be ignored or treated as irrelevant.

Since our comments on this issue are obiter we do not regard it as appropriate to offer any further guidance than this.

HMRC refused the application for BSC to join the group on the alternative basis that if BSC did have a fixed establishment in the UK, it was nevertheless necessary to refuse the Application for the protection of the revenue, within the meaning of section 43B(5)(c) (the “POR provision”).

Where an application is made for a body corporate to join a group, the POR provision provides as follows:

Where an appeal is made against a decision to refuse an application under the POR provision, section 84(4A) applies as follows:

In relation to a substantially similar provision (Footnote: ¹⁵), it was held in HSBC that the effect of the word “could” in section 84(4A)(a) is as follows:

The POR provision is derived from Article 11 of the PVD (set out at paragraph 9 above), the second paragraph of which states as follows:

In view of the FTT’s decision on the Fixed Establishment Issue, the Protection of the Revenue Issue was academic, but the FTT did consider it and indicated what its decision would have been had it found that a fixed establishment did exist at 1 December 2017.

The FTT dealt with the issue at [176]-[193]. It began by considering the objectives of VAT grouping, reaching a conclusion which we discuss further below. It then set out what would have been its decision as follows:

HMRC argued that the FTT made various errors of law, for the following reasons:

Mr Hitchmough argued that the question of whether an arrangement or structure gives rise to “avoidance” in this context depends on the aims and objectives of the VAT grouping legislation: was the VAT reduction in a given case one which the legislation did or did not intend? In this case, the FTT got it right, because the inclusion of BSC in the VAT group would have promoted fiscal neutrality, by ensuring that the same amount of VAT was payable as would have been the case had BSC been a division of Barclays in the United States. This is an example of precisely the sort of administrative simplification at which VAT grouping is aimed. Parliament cannot have intended that the POR power should be exercisable by HMRC where the ordinary consequences of VAT grouping are, in HMRC’s view, too expensive.

In view of our decision to dismiss the Appellants’ appeal on the Fixed Establishment Issue, this issue is academic. Nevertheless, since we heard argument on it, we will give our view on the FTT’s indicative decision.

The FTT’s reasoning explicitly rested on its conclusion that “[one of the] normal aims and consequences of VAT grouping is to provide a freedom to structure a business in a way that best meets its commercial needs while ensuring it is taxed in the same way as a single company organised on a divisional basis”. As we discuss at paragraphs 29 to 31 above, while we accept that this is one of the objectives of the UK VAT grouping rules, the extent and limitations of that objective, and the circumstances in which that neutrality is intended to arise by virtue of grouping, remain unclear. In considering whether to deny grouping under the POR provision, HMRC must reach a decision on the extent to which a particular grouping application gives rise to a risk of Direct Cosmetics avoidance or Halifax abuse, by reference to the objectives of the UK VAT grouping rules (Footnote: ¹⁶). Their decision can and should take into account all relevant factors in relation to the particular application in question. An appeal to the tribunal against that decision can succeed if but only if HMRC could not reasonably have reached the decision to deny grouping under the POR provision.

On the facts in this appeal, we consider that there are two particular aspects of the arrangements which strongly indicate that HMRC could reasonably have reached the decision in question.

First, while the anticipated annual VAT savings were very considerable, as at 1 December 2017 the resources of the branch were, putting it at its highest, skeletal. The branch had no employees; it did not have comparable control over any employees; it did not own or have comparable control over any premises or physical office resources, and it had no access to the group IT systems which would enable it to undertake its intended activities in relation to IGAs and regular service reviews.

Second, in addition to the annual VAT savings which were anticipated to arise, the timing of the application for BSC to join the VAT group was driven by the opportunity to generate an additional “1 time £21mm tax benefit” ([81]) if the VAT grouping could be achieved before the end of 2017, described by Barclays as a “financial imperative”: [97].

As we have explained, on an appeal against refusal of an application under the POR provision, the question for the Tribunal under the legislation is whether HMRC “could” reasonably have decided to refuse the application under the POR provision, not whether it had reasonably done so in the given case. In all the circumstances in this appeal, including the two aspects we have highlighted, we consider that HMRC could reasonably have reached that decision.

Therefore, in disagreement with the FTT, if it had been necessary for us to decide this issue, we would have reached a contrary conclusion to that reached by the FTT.

The Appellants’ appeal on the Fixed Establishment Issue is dismissed. The FTT reached the correct conclusion on the Danske Bank Issue, but reached the wrong conclusion on the Protection of the Revenue Issue.