Imagine a scenario where two companies are in a VAT group and one supplies investment management services to the other. Consideration for the services comprises a quarterly management fee and success fees. The success fees depend on investment performance hitting particular hurdle rates over several years. Will there be any VAT on the success fees if, at the time the supplier invoices for them, the supplier is no longer part of the VAT group? 

This depends how you answer the following questions:

• Do VAT grouping rules mean that, as the services were actually performed while the parties were VAT grouped, the supplies should be disregarded (under section 43(1)(a) of the Value Added Tax Act 1994) so is no VAT is due even where some of the consideration is invoiced for and paid after the supplier leaves the VAT group? 
• Or do the time of supply rules for continuous services (in regulation 90 of the VAT Regulations, SI 1995/2518) mean that, regardless of when the services are performed, they are to be treated as supplied when the invoice is provided or payment made (which, in the scenario above, would be after the supplier left the VAT group and so VAT would be due)?

These are the questions that the judges, at all levels, have had to grapple with in the Prudential Assurance case. The issues raised have not been easy to resolve and have involved detailed consideration of case law, UK domestic and EU legislation. 

• The First-tier Tribunal determined that there was no VAT on the success fees because the VAT grouping rules trumped the time of supply rules. 
• The Upper Tribunal said the time of supply rules applied before the VAT grouping rules. 
• The majority of the Court of Appeal agreed with the Upper Tribunal, but the dissent from Nugee LJ must have given the taxpayer a glimmer of hope that an appeal to the Supreme Court might pay off. 

Unfortunately for the taxpayer, though, the Supreme Court agreed with HMRC that the time of the supply was when the invoices for the success fees were issued which was after the supplier left the VAT group and so VAT was due.

There's plenty of technical analysis for VAT experts to dig into in this case but I have picked below the bigger picture points that stood out to me.

The time of supply rules are relevant to the proper construction of the VAT grouping rules

The unanimous judgment by the Supreme Court in the Prudential Assurance case has provided welcome clarity on the interaction of the VAT grouping rules and the time of supply rules. It is now clear that the VAT grouping rules do not have separate, built-in time of supply rules looking at when services are actually performed but are governed by the time of supply rules just like the rest of the VAT regime. It is necessary to apply the time of supply rules to determine when the supplies should be treated as supplied and then to ask whether, at that time, the parties were VAT grouped. 

The effect of the time of supply rules is to change the timing of the chargeable event

A new argument was raised by the taxpayer that regulation 90 must be construed as only capable of modifying the time when VAT becomes chargeable and not the time when a chargeable event occurs, but the Supreme Court disagreed with this. Regulation 90 postpones the chargeable event from the time of performance of the services to the time of payment or invoice. The Supreme Court also considered arguments about whether regulation 90 is compatible with EU law (it is) and whether it correctly applies to the scenario in Prudential Assurance . 

The Supreme Court concluded that regulation 90 can apply where, as here, there is a “successive payment” for a supply of services where, at the time the services were performed, it was not certain that the payment would be made or how much the payment would be. The chargeable event which triggered the success fees was when the investments reached the agreed hurdle rate. The effect of the application of regulation 90 was that the services were treated as separately and successively supplied at the time that invoices for the success fees were issued. At those times, because the taxpayer and the supplier were no longer VAT grouped, the supply could not be disregarded.

Important takeaway

The implications of this case should be considered when breaking a VAT group. Before a supplier or recipient of continuous services leaves a VAT group, it would be good practice, where possible, to ensure outstanding amounts for services supplied whilst in the VAT group are invoiced and paid. In the case of performance fees spanning several years, such as in the Prudential Assurance case, it may not be possible to pay the performance fees before the supplier leaves the group in which case the additional VAT cost to the group should be borne in mind when making the commercial decision for the supplier to leave the group.