James Davies, VAT director at MHA, an accounting and advisory firm, offers these comments on the case of Prudential vs HMRC:
The Supreme Court has issued its decision in the case of Prudential Assurance Company Ltd (Prudential) vs HMRC. The dispute related to the VAT liability of supplies made to Prudential by Silverfleet Capital Limited (Silverfleet).
Silverfleet and Prudential previously formed part of the same VAT group. Silverfleet provided management services to Prudential, invoiced quarterly. These supplies were disregarded under s.43 VAT Act 1994 and VAT was not charged.
Silverfleet was also entitled to a ‘success fee’ based on the performance of funds it was involved in managing. Upon successful achievement of this success several years after it exited the VAT group, it raised invoices to Prudential, adding VAT. Prudential were unable to recover this VAT and disputed its addition and were consequently the appellant in this case.
In a detailed decision taking account of both UK VAT law and EU VAT directives, HMRC has successfully argued that Regulation 90 of the 1995 VAT Regulations applies to the success fee, as the chargeable event occurs when it is invoiced for or paid, rather than during the time which the entities formed part of a VAT group.
The case serves as a salient reminder of the importance of considering the VAT consequences of all payments when agreeing service contracts between VAT group members. VAT group membership changes regularly occur and understanding who should be liable for any VAT due once membership has ceased should be on the radar of all VAT group members. Contingent and milestone payments should be of particular focus.
It is also the perfect time to consider service agreements already in place to determine the effectiveness of these for current group members.
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