Prudential challenged VAT on success fees paid to Silverfleet for fund management services performed when both were in the same VAT group, but invoiced years after Silverfleet left the group. The Supreme Court held VAT was payable because the time of supply rules and Article 64 of the PVD treated the contingent success fees as successive payments completing the supply after the group relationship ended.
Background
Silverfleet Capital Limited provided investment fund management services to The Prudential Assurance Company Ltd pursuant to two consecutive agreements effective between 1 January 2002 and 8 November 2007. During this entire period, both companies were members of the same VAT group, with Prudential as the representative member. The consideration for Silverfleet’s services comprised two elements: quarterly management fees (calculated by reference to amounts invested and accruing daily) and success fees payable if the performance of certain sub-funds exceeded a set benchmark rate of return.
On 8 November 2007, following a management buy-out, Silverfleet left Prudential’s VAT group and ceased providing investment management services. During 2014 and 2015, the contractual hurdle rate was passed, triggering success fees. Silverfleet invoiced Prudential between January 2015 and July 2016 for success fees totalling £9,330,805.92, adding VAT at 20 per cent. Prudential challenged the addition of VAT, contending that the supply of services took place entirely within the VAT group period and should therefore be disregarded under section 43(1)(a) of the Value Added Tax Act 1994.
The First-tier Tribunal allowed Prudential’s appeal. The Upper Tribunal reversed that decision, and the Court of Appeal, by a majority, dismissed Prudential’s further appeal. Prudential appealed to the Supreme Court, where a panel of seven Justices heard the case.
The Issues
The appeal raised three principal issues:
Issue 1: Do the Time of Supply Rules apply to section 43(1)(a)?
Whether the time of supply rules (TOSR) in regulation 90 of the VAT Regulations 1995 apply to determine when a supply takes place for the purposes of the VAT Group Disregard in section 43(1)(a) of VATA 1994, or whether ‘supply’ in that provision refers to the real-world performance of services irrespective of when invoices are issued or payments made.
Issue 2: The effect of B J Rice
Whether the Court of Appeal decision in B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 established that a non-taxable supply at the time of actual performance cannot be rendered taxable by later changes in VAT status.
Issue 3: Scope and application of regulation 90 and compatibility with the PVD
Whether regulation 90, as applied to these facts, permissibly implements Article 64 (or Article 66) of the Principal VAT Directive (PVD), Council Directive 2006/112/EC, and whether the distinction between the ‘chargeable event’ and the ‘chargeability’ of VAT affects the outcome.
The Parties’ Arguments
Prudential’s case
Prudential advanced three arguments. First, on a straightforward construction of section 43(1)(a), the VAT Group Disregard applied because all services were actually performed within the group period; regulation 90 had no application. Secondly, B J Rice was authority for the proposition that services non-taxable when performed cannot be rendered taxable by subsequent events. Thirdly, and as a new argument not raised below, regulation 90 could only modify the time when VAT becomes chargeable (chargeability) and not the time of the chargeable event itself, since it was enacted to implement Article 66 of the PVD, which permits only the former modification. Since all chargeable events occurred during the group period, the success fees were outside the scope of VAT.
HMRC’s case
HMRC contended that the TOSR in regulation 90 must apply to section 43(1)(a) to identify the relevant supply and its timing. On a literal reading of domestic law, regulation 90 modifies both the time when VAT becomes chargeable and when the supply is treated as taking place. HMRC argued regulation 90 implements not only Article 66 but also Article 64(1) of the PVD, which expressly permits modification of the chargeable event where supplies give rise to successive payments. The success fees were successive payments for services whose consideration was determined from time to time, and since they were invoiced and paid after Silverfleet left the VAT group, VAT was due.
The Court’s Reasoning
Issue 1: TOSR apply to section 43(1)(a)
The Supreme Court unanimously held that the TOSR in regulation 90 apply to determine when a supply takes place for the purposes of the VAT Group Disregard. Lady Rose and Lady Simler, delivering the joint judgment with which all other Justices agreed, stated:
Section 43 is not a complete code and nor is article 11 of the PVD. Neither contains a rule for determining the time of supplies.
The Court found no basis in the ‘single taxable person’ concept or the objectives of Article 11 of the PVD for inferring a separate, built-in time of supply rule. This conclusion was clearly supported by the House of Lords’ reasoning in Thorn Materials Supply Ltd [1998] 1 WLR 1106 and Svenska International plc [1999] 1 WLR 769. As Lord Nolan stated in Thorn:
It is essential to apply the time of supply rules in order to determine whether the supply took place while the group relationship still existed. Unless a supply during the period of the relationship is identified as having taken place there is nothing upon which section [43(1)(a)] can bite. One can hardly disregard something which did not happen.
Issue 2: B J Rice confined to its facts
The Court held that the ratio of B J Rice, insofar as it extended beyond the position of an unregistered trader below the VAT threshold, was undermined by the subsequent House of Lords authorities in Thorn, Svenska, and Royal & Sun Alliance [2003] UKHL 29. Its reasoning had to be narrowly confined to its own particular facts.
Issue 3: Regulation 90 and compatibility with the PVD
This was the determinative issue. The Court’s analysis proceeded in several stages:
(a) Regulation 90 on its domestic reading
Read as a matter of pure domestic law, regulation 90(1) applied to Silverfleet’s services. The services were supplied for a period, and the success fees constituted consideration determined ‘from time to time’. The regulation treated the services as separately and successively supplied at the time of each invoice or payment. The Court stated:
Read as a matter of pure domestic law, regulation 90(1) applies to determine whether a supply was made when the supplier and the recipient were both members of the same VAT group. Applied here it leads to the conclusion that the relevant supplies to which the success fees relate were made when Silverfleet was no longer a member of the VAT group.
(b) Article 66 cannot change the chargeable event
The Court accepted Prudential’s argument that Article 66 of the PVD only permits Member States to postpone the time at which VAT can be collected (chargeability), not the time of the chargeable event itself. Since the VAT Group Disregard is overridden only if the chargeable event occurred after Silverfleet left the group, Article 66 alone was insufficient for HMRC’s case.
(c) Article 64 does change the chargeable event and applies here
The Court held that Article 64(1) of the PVD does modify the timing of the chargeable event, and that it applied to the present facts. The Court accepted that the CJEU’s jurisprudence in Finanzamt B v X-Beteiligungsgesellschaft mbH (Case C-324/20) had narrowed Article 64(1) so that it does not apply to a one-off supply merely paid in instalments. However, the Court held the narrowing did not exclude the present situation. Drawing heavily on the CJEU’s decision in Finanzamt Goslar v baumgarten sports & more GmbH (Case C-548/17), the Court reasoned that Article 64 applies not only where there is ambiguity about the completion of services but also where the contractual remuneration is uncertain or contingent at the time services are completed. The Court stated:
The CJEU was not ruling out that there may be other circumstances in which the nature of the supply also justifies the making of successive payments. One such circumstance is where the value of the supply is uncertain at the time of performance because an additional amount of consideration may or may not become payable on the occurrence of a later event.
The Court found a strong analogy between baumgarten — where a football agent’s conditional commission payments over several years were held to fall within Article 64(1) — and the present case, where success fees were contingent on the fund exceeding a hurdle rate years after services ended.
Application to VAT group context
The chargeable event giving rise to the success fees occurred when the Funds Fund reached the hurdle rate, which was after Silverfleet had left the VAT group. Regulation 90 was therefore compatible with Article 64 in modifying the chargeable event. The supply to which the success fees related was treated as taking place after Silverfleet left the group, and consequently the VAT Group Disregard did not apply to the success fees.
Practical Significance
This decision has significant implications for VAT group members with contractual arrangements involving contingent or deferred consideration. The judgment establishes that where consideration for intra-group services is uncertain or contingent at the time the services are performed within a VAT group, and payment is triggered only after the supplier has left the group, VAT will be chargeable on that consideration. The time of supply rules in regulation 90 apply to the VAT Group Disregard in section 43(1)(a), and Article 64(1) of the PVD permits the chargeable event to be postponed to the time of a successive payment where the nature of the supply justifies such payment — including where the consideration is conditional or contingent. The decision clarifies that the CJEU’s narrowing of Article 64(1) does not preclude its application in cases of genuinely uncertain or conditional remuneration, as distinct from artificially structured instalment payments for a fixed sum. The case also confirms that B J Rice is confined to its particular facts and does not establish a general principle that services non-taxable at the time of performance are immune from VAT by reason of subsequent changes in the supplier’s status.
Verdict: The Supreme Court unanimously dismissed Prudential’s appeal. VAT was payable on the success fees invoiced by Silverfleet after it had left Prudential’s VAT group. Regulation 90 of the VAT Regulations 1995 applied to treat the services as separately and successively supplied at the time the success fee invoices were issued, when the companies were no longer in the same VAT group. The supply therefore did not fall to be disregarded under section 43(1)(a) of the Value Added Tax Act 1994.
