HSBC Electronic Data Processing (Guangdong) Ltd and Others v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 February 2022 |
| Neutral Citation | [2022] UKUT 41 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 41 (TCC)
Mr Justice Zacaroli, Judge Thomas Scott
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Preliminary issues hearing – Removal of companies from VAT group – Eligibility for VAT grouping – Meaning of established and fixed establishment – Directive 2006/112/EC, art. 11 – VATA 1994, s. 43A – Relevance of failure to consult VAT committee – Measures permissible to prevent VAT evasion and avoidance – Relevance of VATA 1994, s. 84(4D).
The Upper Tribunal (UT) addressed four preliminary issues in an appeal against HMRC's decision to remove several companies (GSC's) from a VAT group, finding that the definitions in Reg. 282/2011, art. 10 and 11 provide a helpful starting point for the interpretation of both “established” and “fixed establishment”, and that member states were permitted to adopt measures to prevent tax avoidance that was not caused by an abusive practice. A failure to consult the VAT committee was not relevant in this case, but VATA 1994, s. 84(4D) was, and it was for the FTT to consider what circumstances were relevant in concluding whether HMRC could reasonably have been satisfied that it was appropriate to specify the date contained in the relevant notice.
In HSBC Electronic Data Processing (Guangdong) Ltd v R & C Commrs [2022] BVC 501, the Upper Tribunal (UT) addressed four preliminary issues ordered by Judge Sinfield in HSBC Electronic Data Processing (Guangdong) Ltd [2020] TC 07879 as follows:
- How was the concept of two or more bodies corporate being established or having a fixed establishment in VATA 1994, s. 43A to be interpreted?
- Was the question of whether the UK discharged its obligation to consult the VAT Committee relevant? If it was relevant what would be the consequences of any breach of the obligation to consult?
- Were the measures which a Member State might adopt under the second subparagraph of Directive 2006/112, art. 11 to prevent tax evasion or avoidance limited to those needed to prevent tax evasion and avoidance caused by an abusive practice under Halifax principles.
- Was VATA 1994, s. 84(4D) engaged in relation to these appeals and, if so, what are the factors that the Tribunal must take into account in considering whether or not HMRC decided on an appropriate date?
HSBC had contended there was only one substantive condition within Directive 2006/112/EC, art. 11, that persons seeking to be included in a VAT group should be closely bound to one another by financial, economic, and organisational links. There was no additional requirement each person within the group was “established in” the UK and therefore, to the extent that it imposes such a condition, VATA 1994, s. 43A was ultra vires.
Alternatively, a fixed establishment, for these purposes, meant no more than the physical presence of a body corporate through its branch, for which registration under the Companies Act was sufficient. HMRC argued the meaning of “established” in art. 11 incorporated the concepts of “established in” and “fixed establishment” under the place of supply rules.
The UT found that Parliament's intention, in enacting s. 43A, was to reference the concepts of “established in” and “fixed establishment” in the place of supply rules. They should, therefore, inform any interpretation of s. 43A but they were not, simply, imported into it. In other words, the definitions in the Implementing Regulation, Reg. 282/2011, art. 10 and 11 were not directly applicable to Directive 2006/112, art. 11, as HMRC had suggested. They provided a helpful starting point, when read in the light of ECJ case law, in interpreting “established” and “fixed establishment” in s. 43A.
The UT did not think it was appropriate, when dealing only with preliminary issues, to go further than this. The precise meaning of the terms “established” and “fixed establishment” in any given case was highly fact sensitive, and better determined in the context of all the relevant circumstances.
Directive 2006/112, art. 11 permitted member states to implement measures for VAT grouping “after consulting the VAT committee”. HSBC contended the tribunal must therefore interpret the national provisions to ensure HMRC is only permitted to exclude VAT group members on grounds which have been properly notified to the VAT committee.
Following the decision in Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham; Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (Joined Cases C-108/14 and C-109/14) [2015] BVC 33, which had considered the consequences of a member state's failure to consult in the context of a right that was not of direct effect, the UT concluded that any failure to consult the VAT Committee would not be relevant to these appeals.
The third preliminary issue required the UT to determine whether, as HMRC argued, art. 11(2) permitted Member States to adopt measures to prevent tax avoidance where there is no intention to avoid tax or whether, as HSBC claimed, it only permitted measures to prevent tax avoidance or evasion caused by an abusive practice as defined in Halifax plc v C & E Commrs (Case C-255/02) [2006] BVC 377.
The UT concluded that the measures permitted to prevent tax evasion or avoidance are not limited to those needed to prevent tax evasion and avoidance caused by an abusive practice under Halifax principles and extend to the concept of avoidance arising from Direct Cosmetics Ltd v C & E Commrs (Case Nos 138/86 and 139/86) (1988) 3 BVC 354.
The UT judged that a ground of appeal which related to the 2014 policy change, and argued that an effective date earlier than that change was not permissible, was a ground of appeal that did relate to the date specified in the notice, within s. 84(4D).
HSBC contended this required the FTT to have regard to whether HMRC:
- acted in a way in which no reasonable Commissioners could have acted, whether in breach of a legitimate expectation on the part of the taxpayer or otherwise;
- took into account irrelevant factors;
- disregarded a factor to which they should have given weight or
- erred on a point of law in choosing the date.
HMRC broadly agreed with this analysis but added that the test should focus exclusively on the reasonableness of the decision reached.
The UT agreed with both: the question was whether HMRC “could” reasonably have decided upon the date specified in the notice, not whether it had reasonably done so in the given case.
The FTT, they determined, should be free to have regard to all the circumstances it considered were relevant in concluding whether HMRC could reasonably have been satisfied that it was appropriate to specify the date contained in the notice, including any legitimate expectation that could be established by the taxpayer.
This case highlights several important issues concerning the scope of VATA 1994, s. 43A and 43C and will be of general interest. What must also be of interest was the failed attempt by HMRC, outlined at para. 6, to introduce a further preliminary issue as to whether VATA 1994 contained a territorial limitation such that a UK VAT group did not include establishments outside the UK, citing the ECJ decision in Danske Bank A/S, Danmark, Sverige Filial v Skatteverket (Case C-812/19) [2021] BVC 6.
HMRC had suggested in the summary of responses published in July 2021, following a call for evidence on VAT grouping, that a change to “establishment only” provisions from the current “whole establishment” provisions was not being contemplated. It would be good to know this potential inclusion does not indicate otherwise.
Melanie Hall QC and Christopher Leigh, instructed by KPMG LLP, appeared for the appellants
Hui Ling McCarthy QC, Katherine Apps, Michael Ripley and Edward Waldegrave, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
[1] This is the hearing of four preliminary issues ordered by Judge Greg Sinfield, President of the First-tier Tax Tribunal (“FTT”), by a decision dated 12 October 2020. The trial of the preliminary issues was transferred to be heard by the Upper Tribunal by order of Judge Sinfield with the agreement of the President of the Upper Tribunal.
[2] The preliminary issues arise in the context of an appeal by HSBC Bank Plc and five entities within the HSBC group carrying out global services for the group (the five entities together will be referred to as the “GSCs” and, together with HSBC Bank Plc as “HSBC”). The appeals are against HMRC's decisions dated 22 December 2017 that removed the GCSs from the HSBC VAT Group with effect from 1 October 2013 or, alternatively, with effect from 1 January 2018.
[3] HMRC's primary case is that the GSCs have not been established or had a fixed establishment in the UK since at least 1 October 2013 and accordingly ceased to be eligible to be members of the HSBC VAT Group from that date. HMRC's alternative case is that HMRC had made decisions to remove the GSCs from the HSBC VAT Group with effect from January 2018 in exercise of their powers for the protection of the revenue under section 43C(1) of the Value Added Tax Act 1994 (“VATA”).
[4] The issues raised by HSBC's appeals include, in summary, the following:
- Are the GSCs, or any of them, established or do they have a fixed establishment in the UK within the meaning of those expressions in section 43A VATA?
- Are sections 43C(1) and (2) of VATA ultra vires?
- Were HMRC entitled to remove the GSCs from the HSBC VAT Group on the grounds that this was necessary for the protection of the revenue?
[5] The terms of the preliminary issues that have been ordered to be determined were agreed between the parties and are as follows:
- How is the concept of two or more bodies corporate being established or having a fixed establishment in section 43A of VATA, which it is common ground purports to implement the...
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