Prudential Assurance Company Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 February 2021 |
| Neutral Citation | [2021] UKFTT 50 (TC) |
| Date | 26 February 2021 |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 50 (TC)
Judge Malcolm Gammie Cbe QC
Zizhen Yang, counsel, instructed by Baker & McKenzie LLP appeared for the appellant
Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs , appeared for the respondents.
Value added tax – Investment management services – Supplier and recipient members of VAT group when services provided – VATA 1994, s. 43(1) – Performance fee attributable to services provided – Invoice issued after supplier had left VAT group – Continuous supply of services – VATA 1994, s. 6(14) – SI 1995/2518, reg. 90(1) – Whether liable to VAT – No – Appeal allowed.
The First-tier Tribunal (FTT) allowed an appeal against HMRC's decision that VAT was chargeable on certain investment management services provided to the appellant while it was a member of the same VAT group as the supplier, but invoiced after the supplier had left the VAT group.
The appellant was a regulated life assurance company. It carried on with-profits and non-profit life and pensions insurance business, outsourcing the management of its investments to a number of authorised management companies including Silverfleet Capital Limited (SCL). SCL provided investment management services to the Appellant and, in particular, the with-profits fund known as “the Funds Fund”.
Under an investment management agreement, the consideration that SCL received for its services comprised two elements;
- A management fee calculated by reference to the amount of investments made in the Funds Fund and accruing on a daily basis over the period during which the Funds Fund services were provided.
- Performance fees, payable in respect of Sub-Funds 1 and 2 in the event that the performance of these sub-funds exceeded a set benchmark rate of return.
At the time SCL provided its investment management services, the appellant was the representative member of a VAT group and SCL was a member of the appellant's VAT group. However, following a management buy-out, SCL left the VAT group. At that time SCL also ceased to provide investment management services to the appellant's Funds Fund.
A variation agreement provided that SCL would not be entitled to receive management fees in respect of the Funds Fund for any period after the buy-out but would continue to be entitled to performance fees in respect of the Funds Fund.
Given the time required to create value from the Funds Fund investments, the performance fees in respect of SCL's Funds Fund investment management services only became payable more than 10 years after the fund investments were made and after SCL had left the appellant's VAT group.
The appellant contended the performance fees were consideration for the services SCL provided at a time when they were members of a VAT group. VATA 1994, s. 43(1)(a) required transactions taking place during the time they were both members of the same VAT group to be disregarded. The effect of disregarding them was that there was no “supply” or “chargeable event” that could give rise to a VAT liability. The timing provision in VATA s. 6(14)(a) and SI 1995/2518, reg. 90(1) simply did not come into play.
HMRC argued that, under reg. 90(1), SCL's services had to be treated as being separately and successively supplied each time SCL received a payment or issued a VAT invoice relating to those services. At the dates on which the VAT invoices relevant to this appeal were issued, SCL and the appellant were not members of the same VAT Group. Accordingly, VAT was properly charged by SCL in invoicing the performance fees.
The issue was whether SCL's services should be disregarded entirely as a result of VATA 1994 s. 43(1) or if, as HMRC contended, they were only disregarded to the extent that SCL's services were treated as supplied while SCL was a member of the appellant's VAT group.
Various previous decisions were cited that, the FTT noted, established the time of supply rules, and reg. 90, are applied to determine when a supply of services should be treated as taking place, including supplies between members of a VAT group.
However, SCL was a member of the appellant's VAT group throughout the time when it actually provided the investment management services in question. Section 43(1) VATA clearly stated that throughout that time any business carried on was to be treated as carried on by the representative member. This direction was not tied to any of the time of supply rules and placed SCL in a similar position to that of the taxpayer in the Court of Appeal decision of BJ Rice & Associates v C & E Commrs [1996] BVC 211.
In that case, it was found all four elements of the charge referred to in VATA 1994, s. 4(1)(i)
- a UK supply;
- which is taxable;
- by a taxable person;
- in the course or further of their business.
had to be met before the time of supply rules in s. 6 were engaged.
In BJ Rice & Associates the appellant had not satisfied the third requirement. The FTT concluded SCL, in this case, did not satisfy the fourth requirement at the time it actually supplied its services to the appellant. Since VATA 1994, s. 6(1) does not create a supply, it merely fixes the time when it takes place, it could not create one here. SCL's position could not be distinguished from BJ Rice & Associates. The appeal was, therefore, allowed.
As was noted in the decision, common sense may dictate that the time of supply rules could not create a fictitious supply where there would not otherwise be one according to the charging provisions, but common sense does not always prevail. It would appear to have been applied in this instance but given the sums involved, an appeal is perhaps likely.
[1] The Prudential Assurance Company Ltd (the “Appellant”) appeals under section 83(1)(b) of the Value Added Tax Act 1994 (“VATA”) against HMRC's decision that VAT is chargeable on the provision of certain investment management services provided to the Appellant by Silverfleet Capital Ltd (“SCL”).
[2] There is no disagreement on the facts. The issue is a pure point of law: briefly, whether the payments for SCL's services are outside the scope of charge because it rendered its services to the Appellant while it was a member of the Appellant's VAT group (the Appellant's position), or whether the payments are within the charge to VAT because they were invoiced and paid after SCL had ceased to be a member of the Appellant's VAT group (HMRC's position).
[3] I had in evidence before me a witness statement of John Euers, a Director at M&G Private Funds Investment, and a co-leader of the team of investment professionals responsible for managing the private equity funds investments of the Appellant's with-profits fund (otherwise known as “the Funds Fund”). HMRC raised no objection to the admission into evidence, without more, of Mr Euers' witness statement and did not require to cross-examine him. So far as relevant to my decision, Mr Euers' evidence is incorporated in the summary of the facts that I have set out below.
[4] The Appellant is a regulated life assurance company and at the time in question carried on with-profits and non-profit life and pensions insurance business. The Appellant's with-profits fund is a segregated part of the Appellant's business and the Appellant outsources the management of its investments to a number of authorised management companies of which SCL was one. SCL (which at the time was known as PPM Ventures Limited) provided investment management services to the Appellant and, in particular so far as concerns this appeal, to the with-profits fund known as “the Funds Fund”.
[5] The Funds Fund consisted of a portfolio of third-party private equity investments. The funds had a term of at least 10 years and could be subject to fund extensions of up to an additional 2 years. Normally, the underlying fund manager would make investments over years 1 to 5 of the fund term. The holding period for each underlying investment was typically 4 to 6 years. As such, the underlying fund manager would typically realise those investments over years 6 to 10.
[6] The Funds Fund was divided into a number of distinct sub-funds, each with a sequential commitment period (during which new investments are made) dating from 1 January 2000. “Sub-Fund 1” was the sub-fund established for all commitments made to the Funds Fund between 1 January 2000 and 31 December 2003; “Sub-Fund 2” was the sub-fund established for all commitments made to the Funds Fund between 1 January 2004 and 31 December 2006.
[7] Under an investment management agreement date 30 August 2002 (effective as of 1 January 2002), the consideration that SCL received for its services comprised two elements-
- A management fee calculated by reference to the amount of investments made in the Funds Fund and accruing on a daily basis over the period during which the Funds Fund services were provided.
- Performance fees, payable in respect of Sub-Funds 1 and 2 in the event that the performance of these sub-funds exceeded a set benchmark rate of return.
[8] The purpose of the management fee was to cover the cost of running the portfolio. As SCL had no role in the management of the Funds Fund after 8 November 2007, it had no right to management fees after this date. As regards the performance fee as it related to the Funds Fund and, specifically, Sub-Funds 1 and 2, the Appellant was to receive all receipts until it had received in aggregate an amount equal to the amount committed to the fund plus a set hurdle rate of return. SCL was then to receive an amount equal to 10 per cent of the hurdle rate and thereafter subsequent receipts were to be apportioned 90:10 between the Appellant and SCL. Accordingly, given the time required to create value from the Funds Fund investments, a performance fee in respect of SCL's Funds Fund investment management services only became payable more than 10 years...
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