The Supreme Court heard an appeal regarding the relationship between Section 43 of the Value Added Tax Act (VATA) 1994, which lays down rules in respect of VAT groups, and time of supply rules (TOSR).
Facts:
Silverfleet had performed investment fund management services for the appellant, Prudential, until 2007, while they were both members of the same VAT group. There is no dispute that, at the time the services were actually performed and when Prudential paid the quarterly management fees to Silverfleet, the supplies were disregarded for VAT purposes pursuant to Section 43 of VATA 1994.
However, some years after (2014–2015) Silverfleet had stopped managing the funds for Prudential and had left the VAT group, a success fee totalling £9,330,805.92 had become due because the value of the funds exceeded a threshold fixed in the services contract between Silverfleet and Prudential.
The central question in the appeal was whether VAT was correctly charged on these fees, given that the services were performed while the companies were in the same VAT group, although the invoice and payment occurred after Silverfleet had left.
The First-tier Tribunal (FTT) allowed Prudential’s appeal against HMRC’s assessment and held that no VAT was payable. The Upper Tribunal (UT) and CoA held the opposite view, deciding that VAT was payable.
Decision:
The Supreme Court unanimously dismissed the appeal, ruling that VAT was payable on the success fee. The Court rejected the argument that Section 43 of the VATA 1994 stands alone. It emphasised that the purpose of a VAT group is to promote fiscal neutrality. Therefore, Section 43 must be read in conjunction with the general VAT rules, particularly TOSR, which govern when a supply is considered to have been made for VAT purposes.
The Court found that the success fee payment was a "successive payment" as defined by Article 64 of the Principal VAT Directive. This was a critical point. The Court reasoned that Article 64 applies to payments that are uncertain or contingent at the time the main services are performed. Since the success fee was only triggered years later when a performance benchmark was met, the legal "supply" for that specific fee was deemed to have occurred at that time and not when the services themselves were originally provided.
The Court accepted Prudential's argument that the case hinged on the timing of the "chargeable event" (i.e., the event that creates the liability to pay VAT). However, because the success fee was a "successive payment," the Court ruled that the chargeable event occurred when the fee was invoiced and paid. As this happened after Silverfleet had left the VAT group, the supply was no longer between members of the same group and therefore was not "disregarded". The Supreme Court's decision essentially affirms that the legal reality of the supply was tied to the payment, not the performance, of the contingent fee
Implications:
The Supreme Court's decision makes it clear that being a member of a VAT group is not a "get out of jail free" card for future tax liabilities. Even if services are performed while companies are in the same VAT group, the VAT status of a payment is determined by when the chargeable event occurs. This means that companies must carefully consider how contingent payments, such as success fees or milestone payments, are structured in their contracts. If there is a risk that a company might leave the VAT group before such a payment is triggered, the contract should explicitly address the potential VAT liability and determine which party is responsible for it.
The case highlights the need for precise language in service agreements, especially those with long-term or contingent payment clauses.
