Companies advised to take note as Supreme Court decides on Value-Added Tax (VAT) group matters

Companies advised to take note as Supreme Court decides on Value-Added Tax (VAT) group matters

In a landmark decision, the Supreme Court has ruled on a long-standing dispute between Prudential and HMRC over Value Added Tax (VAT) on performance fees. The case, which started at a first-tier tribunal appeal, has now been decided, bringing clarity to the taxation of intra-group contracts and payments.

Bryn Reynolds, a VAT expert with Pinsent Masons, commented on the ruling, stating that corporations should consider the impact on intra-group contracts and payments when companies enter and leave the VAT group. Abigail McGregor, another tax law expert at Pinsent Masons, added that the VAT treatment in contracts for contingent fees, deferred payments, and performance-based remuneration should be reviewed in light of this decision.

At the heart of the dispute was a success fee, payable several years after the investment manager had left the VAT group. Prudential had argued that it did not owe VAT on this fee, claiming it was not liable for VAT on successive payments relating to a continuous supply of services. However, the Supreme Court confirmed that continuously supplied services are considered separate and successive supplies, requiring VAT treatment at each point of payment.

Reynolds also suggested that groups should consider the tax points and VAT liability for services which terminate but have subsequent later payments. He added that often intra-group contracts are silent on VAT when the company is currently within the VAT group, making it crucial for companies to review their arrangements to ensure they are covering eventualities when companies enter and leave the VAT group.

The ruling may have implications for the VAT treatment in contracts for contingent fees, deferred payments, and performance-based remuneration. McGregor noted that some services appear to be continually supplied but are actually separately supplied, emphasising the need for careful consideration of these arrangements.

The Supreme Court ruling establishes that time of supply regulations determine when a supply occurs. There is a peculiar exception in the case of pre-registration supplies, where the Court did not explicitly overrule a historic Court of Appeal case (BJ Rice). However, the ruling should cause corporations to review their intra-group contracts and payments to ensure they are in compliance with the latest tax regulations.

The Court of Appeal hearing in the Prudential case, which had one judge dissenting, led to yesterday's decision by the Supreme Court. The unanimous rejection of Prudential's appeal marks the end of the dispute between Prudential and HMRC over VAT on performance fees.

In conclusion, the Supreme Court ruling provides much-needed clarity on the VAT treatment of intra-group contracts and payments, particularly in relation to the entry and exit of entities from a VAT group. Companies are encouraged to review their arrangements to ensure they are compliant with the latest tax regulations.

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