Background

Barclays Execution Services Limited (BESL), the representative member of a UK VAT group, applied on 1 December 2017 for Barclays Services Corporation (BSC), a Delaware corporation with a UK branch, to join the VAT group. HMRC refused on two grounds: (1) BSC was not established and did not have a fixed establishment in the UK; and (2) even if it did, refusal was necessary for the protection of the revenue (POR). Upon BESL bringing the case to the First-tier Tribunal (FTT), HMRC also raised a further argument that the UK legislation should be read to conform with Article 11 of the EU Principal VAT Directive, thereby excluding overseas establishments from the scope of VAT grouping per the decision of the Court of Justice of the European Union (CJEU) in Danske Bank A/S (Case C-812/19) (Danske Bank).

The FTT dismissed the taxpayers’ appeal in August 2024 on the grounds that BSC did not have sufficient substance to form a fixed establishment in the UK at the time the VAT grouping application was filed. However, the FTT dismissed HMRC’s arguments concerning the scope of its POR powers and Danske Bank. Both sides appealed to the Upper Tribunal (UT) against the arguments found against them.

Issue 1: Danske Bank

HMRC lost – the UK’s whole entity VAT grouping is preserved.

This is the most important piece of good news in the decision. HMRC argued that, following Danske Bank, s. 43A, VATA 1994 should be given a conforming construction to impose a territorial limitation — meaning only the UK branch (not the entire overseas entity) could join a UK VAT group. This is despite HMRC’s longstanding published policy supporting the ‘whole legal entity’ approach, a policy confirmed in RCB 7 (2025) as recently as November 2025, which is something the UT highlighted as making it “somewhat strange, to put it mildly, that HMRC should be taking this position”.

The UT, whilst for different reasons as given by the FTT, rejected this argument in the clearest possible terms, concluding that a conforming construction of the legislation to impose a territoriality condition “would clearly be contrary to the underlying thrust of the legislation and its fundamental features.”

Therefore, it remains the case that, when an overseas body corporate with a UK fixed establishment joins a UK VAT group, it does so in its entirety — not merely through its UK branch.

Issue 2: Fixed establishment

The UT agreed with HMRC and the FTT that BSC did not have a fixed establishment in the UK – BESL’s appeal was dismissed on this basis.

Like the FTT, the UT declined to articulate a definitive test for a ‘fixed establishment’ within the context of VAT grouping (in contrast to the rules regarding place of supply). Instead, it adopted the same approach as the FTT, applying the ‘comparable control’ test whereby nothing more is required provided the human and technical resources in the UK make a meaningful commercial contribution to the business of the non-UK company. 

On the facts, the UT agreed with the FTT that BSC did not have actual or comparable control over sufficient human and technical resources in the UK to make a meaningful commercial contribution to the non-UK company. This conclusion was enough to dispose of the appeal, although the UT also rejected the taxpayers’ ground of appeal on the analogy between the branch and an intending trader.

Issue 3: Protection of the revenue

HMRC's appeal is allowed, overturning the FTT’s position.

While making very clear that its comments on POR were obiter (i.e. not forming legal precedent), the UT gave a somewhat unclear, and potentially unhelpful view that HMRC 'could' reasonably have decided to refuse the application for BSC to join the VAT group under the POR provision, even if BSC had a UK establishment.

The UT accepted that one of the normal aims and consequences of VAT grouping is to provide a freedom to structure a business in a way that best meets its commercial needs while ensuring it is taxed in the same way as a single company organised on a divisional basis. However, in considering whether to deny grouping using its POR powers, HMRC must reach a decision on the extent to which a particular grouping application gives rise to a risk of avoidance or abuse.

Consequently, the UT went on to highlight that the anticipated annual VAT savings were very considerable, at the time of the application the resources of the branch were skeletal, and the timing of the application was driven by the opportunity to generate a one-off benefit that would have been lost had BESL waited until the branch of BSC was more established. On this basis, it concluded that HMRC could have reasonably have rejected the application based on the POR provision, not whether it had reasonably done so in the given case.

Points of consideration

If you have an overseas company providing services to UK group members outside a VAT group, you should now consider:

• Whether any planned VAT grouping application of the overseas company has genuine, legally documented substance in place from day one;
• Whether the application timetable is driven by commercial reality or by a tax deadline — and if the latter, whether the risk of a POR challenge has been properly assessed; and
• Whether your group's ongoing structure continues to deliver the intended VAT outcomes in light of the POR balancing exercise applied by the UT.

Please contact your usual adviser or one of the team members listed below to discuss how this decision affects your specific position.