Clashes between deeming provisions in a complex tax code inevitably give rise to tricky technical questions and, quite often, litigation. The recent case of The Prudential Assurance Company Limited presented the First-Tier Tribunal with such a conundrum in the context of the UK VAT rules regarding groups and the time of supplies.
To state the facts simply: the taxpayer had received investment management services from SCL, a company that was (when it actually performed those services) a member of the taxpayer's VAT group. SCL subsequently left the group and ceased performing those services, but it had not yet been fully paid for them - part of the consideration comprised a performance fee that was only determined and paid several years thereafter. Was SCL required to charge VAT on the invoice for that performance fee?
The taxpayer argued that is was not. The fee was consideration for supplies that had been made solely whilst SCL was a member of the VAT group and which therefore fell to be disregarded under the UK grouping rules implementing Article 11 of the Principal VAT Directive. HMRC contended otherwise; the supplies were of a continuous and recurring nature and were, therefore, treated as being supplied not when actually delivered or performed, but when invoiced or paid (whichever was earlier), as per the UK time of supply rules implementing Article 64 of the Principal VAT Directive.
Should the deemed supply post-degrouping trump the deemed non-supply at the earlier date whilst both companies were grouped, or vice versa? Is it right that a rule having the purpose of fixing the time of a supply is able to create (or rather "un-disregard") the supply itself?
The tribunal judge agreed with HMRC that there was indeed a supply made upon the subsequent invoicing that could not be disregarded for VAT purposes. The legislation left little room for doubt that the deeming rule should apply to have that effect.
However, that was not the end of the story. Drawing on earlier UK VAT case law in this area, the judge noted that merely having a supply was not enough to create a liability to VAT; other elements are necessary, such as the supply being made by a taxable person in the course of a business carried on by them. Whilst the two companies were VAT-grouped, the business carried on in the real world by SCL was deemed instead to be carried on by the representative member of the VAT group (which happened to be the taxpayer itself). Accordingly, there was (in the deemed world) no business carried on by SCL itself in the course of which those (deemed world) supplies could be said to be made. In other words, both deeming provisions would apply, with the net result of combining them breaking in the taxpayer's favour - in this case.
It remains to be seen whether HMRC will appeal; it seems counterintuitive that those supplies should be regarded as being made, but not made in the course of SCL's business. That being said, the exercise of resolving conflicts between such provisions is apt to take one to odd places...