UK ruling clarifies ‘fixed establishment’ in VAT group cases

The recent decision by the First Tier Tribunal (FTT) means that merely having a branch or office in the UK is not enough for a foreign entity to benefit from the UK’s VAT grouping scheme. To be eligible for the scheme, which allows group companies to simplify their VAT accounting processes by functioning as one taxable entity and potentially reduce their VAT costs, non-UK companies need to show they have sufficient human and technical resources in their UK operations.

The case concerns an appeal by Barclays Service Corporation (BSC), a US-incorporated company with a UK branch, against a decision by HM Revenue and Customs (HMRC) to refuse its application to join the Barclays VAT group in the UK. The representative member of the VAT group is Barclays Execution Services Limited (BESL), which is a UK-incorporated company. They are both entities in the wider Barclays Bank corporate group.

The case centred around the question about what is considered as having a “fixed establishment”. It is one of the conditions companies must meet to be eligible for VAT group registration under the UK’s VAT law. Not having a UK fixed establishment is one of the two grounds on which HMRC rejected BSC’s application to join the Barclays VAT group.

The tribunal found BSC’s UK branch, which was registered in July 2017, had insufficient human and technical resources in the UK to make a meaningful contribution to the non-UK entity as at 1 December 2017. Therefore, HMRC had the right legal basis to reject its application to join the Barclays VAT group, and the appeal was dismissed.

In its ruling, the tribunal specified a few facts it had considered to reach the conclusion that the appellant did not have a fixed establishment in the UK. It said that, on the date of 1 December 2017, only one of the four staff had actually started working at the branch, and even though the staff member had started working, she was still mostly occupied with her previous role. In addition, it found that the UK branch did not have the required comparable level of control over her as her employer and it did not have any formal arrangements for office space at its disposal.

Bryn Reynolds, tax law expert at Pinsent Masons, said: “The tribunal declined to opine on the precise meaning of the terms ‘established’ and ‘fixed establishment’, but instead assessed the human and technical resources as at the date of the application and determined that these were insufficient adopting a ‘moment in time’ approach. Any taxpayers in a similar situation will need to carefully consider the relevant reporting lines of staff and formal agreements such as leases or equipment hire agreements in place for technical resources.”

He added that the tribunal’s approach has been taken in previous cases, such as the Upper Tribunal’s decision on preliminary issues in its 2022 HSBC Electronic Data Processing (Guangdong) Ltd v HMRC decision (39-page / 477KB PDF), which also concerned overseas members of a UK VAT group. The Upper Tribunal said in that case that the meaning of fixed establishment is “highly fact sensitive and better determined in the context of all the relevant circumstances in any given case”.

In the Barclays case, the tribunal also considered another important question: whether HMRC could reject the VAT group application by using its ‘protection of the revenue powers’ even if BSC had a fixed establishment in the UK. In its submission, HMRC argued that even if BSC did have a fixed establishment, it was “necessary for the protection of the revenue” to refuse the application. This was the second ground HMRC relied on to reject BSC’s UK VAT grouping application.

On this issue, the tribunal concluded that if it had found that BSC had a fixed establishment, then the VAT savings on its admission to the VAT group would be savings that fell within the normal consequences of VAT grouping. Therefore, HMRC could not reasonably have been satisfied that there were grounds for refusing the application on this ground.

According to Reynolds, while the tribunal’s opinion on the protection of the revenue issue was not a deciding factor for the outcome of the case, it will be of significant interest to other taxpayers.

“The impact of the decision is that any other cases are likely to be considered on the basis of the facts and whether a fixed establishment in fact existed at the time. It is particularly helpful that the tribunal has clarified that in considering the effect of refusing grouping, HMRC should look beyond simply the additional VAT accounting obligations but instead consider the impact on the way in which businesses organise themselves,” he said.