Judgment summary
This appeal concerned an application by Barclays Execution Services Limited (BESL), representative member of a Barclays VAT group, for Barclays Services Corporation (BSC), a Delaware corporation with a UK branch, to join that VAT group. HMRC refused the application, first on the ground that BSC was not established, and did not have a fixed establishment, in the UK for the purposes of section 43A(1) VATA, and alternatively on the ground that refusal was necessary for the protection of the revenue under section 43B(5)(c) VATA (1)-(2).
The First-tier Tribunal (FTT) dismissed the appellants' appeal, holding that BSC did not have a fixed establishment in the UK as at 1 December 2017, the date of the application (3)-(4). The FTT also held, obiter, that if BSC had had a fixed establishment, HMRC could not reasonably have refused the application for the protection of the revenue (5), and that the UK VAT grouping rules could not be given a conforming construction to impose a territorial limitation in line with the CJEU decision in Danske Bank A/S, Danmark, Sverige Filial v Skatteverket (Case C-812/19) (6).
HMRC appealed the protection of the revenue and Danske Bank conclusions; the appellants appealed the fixed establishment conclusion.
The Upper Tribunal dismissed the appellants' appeal on the fixed establishment issue, agreed with the FTT (albeit for different reasons) that a conforming construction imposing a territorial limitation was not possible, and disagreed with the FTT on the protection of the revenue issue, concluding that HMRC could reasonably have refused the application on that ground had the fixed establishment issue been decided differently (177).
Background
BESL is a UK-incorporated private limited company and the representative member of a Barclays VAT group (9). BSC is a Delaware corporation operating primarily in the United States, with a UK branch registered with Companies House from 26 July 2017 (71).
On 1 December 2017, BESL and BSC applied for BSC to be treated as a member of the VAT group, on the basis that BSC's UK branch constituted a fixed establishment (71). On 2 March 2018, HMRC refused the application on the two grounds described above, and upheld that refusal on review on 5 September 2018 (71).
The UK implemented Article 11 of the Principal VAT Directive (PVD) via section 43 VATA on a 'whole establishment' basis, meaning a body corporate not resident in the UK but with a UK fixed establishment can be grouped, unlike most Member States which adopt an 'establishment only' approach (11)-(12). HMRC's evidence was that this approach can produce material VAT savings for financial services groups by avoiding 'sticking' VAT charges under the reverse charge rules (13)-(14).
The FTT made extensive findings of fact, including that potential VAT savings, including a one-off tax benefit of £21 million if the branch was operational by the end of 2017, were identified early in the planning process for the branch (72). The FTT found that as at 1 December 2017 the branch had no employees, since the intended staff, including Ms Eleni Hadjikakou, were formally employed by BESL rather than BSC, with contracts signed in January 2018 backdated to December 2017 (71), (93)-(99).
Core dispute
Three issues arose. First, the Fixed Establishment Issue: whether BSC had a fixed establishment in the UK, for the purposes of section 43A(1) VATA, as at 1 December 2017, the date of the application.
Second, the Protection of the Revenue Issue: whether, if BSC did have a fixed establishment, HMRC could reasonably have refused the application as necessary for the protection of the revenue within the meaning of section 43B(5)(c) VATA.
Third, the Danske Bank Issue: whether section 43 VATA could be given a construction conforming with Article 11 PVD so as to impose a territorial limitation on VAT grouping, in line with the CJEU's decision in Danske Bank, restricting single taxable person treatment to entities within UK territory (33)-(39).
The appellants argued that the FTT erred in its application of the 'comparable control' test for fixed establishment, in rejecting the analogy with an intending trader, and in finding no fixed establishment existed (82). HMRC argued that the FTT erred in its view of the purposes of VAT grouping and in concluding that HMRC could not reasonably have refused the application on protection of the revenue grounds (168). HMRC also invited the Tribunal to find that a territorial limitation could be read into section 43A, while the appellants argued this was not possible (39).
Court findings
On the Danske Bank Issue, the Upper Tribunal held that a conforming construction of section 43A VATA to impose a territorial limitation was not possible, though for different reasons from the FTT. The Tribunal found that eligibility under section 43A is defined by reference to the whole body corporate, which is a fundamental or cardinal feature of the legislation; introducing a territorial restriction (such as adding 'and to the extent that' before 'each is established or has a fixed establishment') would cross the boundary between interpretation and amendment and go against the grain of the legislation (53)-(65).
On the Fixed Establishment Issue, the Upper Tribunal proceeded, as the FTT had, on the basis of the test proposed by the appellants, namely whether the branch had actual or 'comparable' control over sufficient human and technical resources in the UK to make a meaningful commercial contribution to BSC (77), (89). The Tribunal rejected all three grounds of appeal: it held the FTT did not err in finding that Ms Hadjikakou was not an employee of the branch on 1 December 2017 (as she was in fact employed by BESL) and that the branch lacked comparable control over other resources such as premises (93)-(110); it rejected challenges to specific findings of fact under the Edwards v Bairstow standard (111)-(140); and it upheld the FTT's rejection of the 'intending trader' analogy drawn from Finanzamt Goslar v Breitsohl (141)-(155). The Tribunal also offered obiter views that the test for fixed establishment proposed by the appellants set too low a bar, since it failed to take into account CJEU case law on fixed establishment in the place of supply context and in cases such as Planzer, as required by HSBC (156)-(160).
On the Protection of the Revenue Issue, which was academic given the outcome on the Fixed Establishment Issue, the Upper Tribunal disagreed with the FTT. It found that, given the skeletal nature of the branch's resources as at 1 December 2017 and the fact that the timing of the application was driven by an anticipated one-off £21 million tax benefit described internally as a 'financial imperative', HMRC could reasonably have refused the application on protection of the revenue grounds (172)-(176).
Outcome
The appellants' appeal on the Fixed Establishment Issue was dismissed. The Upper Tribunal held that the FTT reached the correct conclusion on the Danske Bank Issue, albeit for different reasons, and that the FTT had reached the wrong conclusion on the Protection of the Revenue Issue, although that issue was academic in light of the outcome on the Fixed Establishment Issue (177).
Major issues / areas of contention
- Whether Barclays Services Corporation (BSC) had a fixed establishment in the UK, for the purposes of section 43A(1) VATA, as at 1 December 2017, applying the test of actual or 'comparable control' over human and technical resources sufficient to make a meaningful commercial contribution to BSC.
- Whether, if BSC did have a fixed establishment, HMRC could reasonably have refused the application to join the VAT group as necessary for the protection of the revenue under section 43B(5)(c) VATA.
- Whether section 43 VATA could be given a conforming construction, in line with the CJEU decision in Danske Bank, so as to impose a territorial limitation restricting UK VAT grouping to entities within the UK.
- Whether the FTT erred in law in its application of the 'comparable control' test from Welmory, including in relation to the employment status of Ms Hadjikakou and access to premises and equipment.
- Whether the FTT erred in rejecting an analogy between the nascent UK branch and an 'intending trader' under Finanzamt Goslar v Breitsohl.