The UK Supreme Court has issued its decision in Prudential Assurance Co Ltd v HM Revenue and Customs – a case with potentially wide ranging implications for VAT, corporate reorganisations and service contracts across VAT groups.
Key Legal Question on VAT Group Exits
- Prudential Assurance contracted with Silverfleet Capital Ltd to provide investment management services. Some of those services were continuous in nature and included a performance fee payable once a certain threshold had been exceeded on the value of funds.
- At the time Silverfleet was providing the services, it was a member of the same VAT Group as Prudential. At some point in the future Silverfleet exited the VAT Group, and some invoices / payments for performance fees were made after that exit.
- Question at be determined: Does section 43 of the VAT Act 1994 – which says that intra‑group supplies are “disregarded” (i.e. no VAT between members) so long as both supplier and recipient are in the VAT group – still protect such transactions even when payment (or invoicing) happens after the supplier has left the group? Or, put another way, does the time of supply (determining when VAT becomes chargeable) being after exiting mean VAT is due notwithstanding that the services were rendered while both were in the group?
Supreme Court’s Holding (high‑level)
- The Court held that section 43 VATA 1994 does not disregard all payments for continuous services simply because they were earned while both parties were in the same VAT group. If the time of supply falls after the supplier has left the group, VAT can be chargeable. (Essentially, the timing of invoicing/payment under the regulations matters, not only when the underlying service was rendered.)
- The provisions about the time of supply under the VAT Regulations (especially Regulation 90 and related rules for continuous supplies) are decisive: invoicing/payment after exit triggers the VAT chargeability even if the work was done earlier when still in group.
Implications for VAT and Continuous Services
- VAT and Continuous Services: Companies that provide or receive continuous services (e.g. investment management, consulting etc) where vendor or supplier might exit a VAT group must be alert to when invoices or payments are made. Contracts and accounting systems may need to be reviewed to manage risk of unexpected VAT liabilities.
- Corporate Reorganisation Risk: In M&A, restructurings or management buy‑outs where companies leave a VAT group, performance fees or other deferred payments could become taxable if time of payment/invoice falls after exit. Structuring of these deferred or contingent payments will need to be carefully managed.
- Contract drafting and timing: More attention will be required in service contracts to define when performance payments are “due”, when invoices will be raised, and ensuring parties anticipate VAT exposure.
- Potential Tax Cost: Entities might now face VAT bills in situations they did not previously expect, particularly in cases where payments lag substantially behind service delivery.
- Administrative and Compliance Burdens: VAT planning, forecasting cash flows, invoicing practices, managing group membership status – all these will likely need more rigour.
What businesses should do next if impacted
- Review existing contracts for continuous services to identify deferred / performance fees, payments/invoice dates, and whether supplier left a VAT group.
- Ensure VAT‑group status changes are tracked carefully and communicated internally and externally: when a supplier exits, what is the consequence for payments/invoice timing?
- Ensure accounting systems can capture and report time of supply correctly, and that invoice issuance / payments are aligned so as not to trigger unexpected VAT.
This is a significant judgment that underscores how timing (invoice, payment, group membership) can turn what seems like a “safe” intra‑group transaction into a VAT risk. Happy to discuss more, especially if your organisation has investment management or similar deferred/continuous service arrangements.
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