Were HMRC correct to deny VAT grouping to a Scottish Partnership?
Jan Garioch CA discusses a recent case, Baillie Gifford & Co v HMRC, which saw Scottish Partnerships hold centre stage.
Baillie Gifford & Co (BG&Co) is a Scottish Partnership which is in the business of providing investment management services.
Due to regulatory requirements governing financial services and investments providers, the group’s business cannot be provided solely through the structure of a partnership.
Consequently, BG&Co is the sole shareholder of Baillie Gifford & Co Limited, Baillie Gifford Savings Management Limited and Baillie Gifford Life Limited In the absence of VAT grouping, the VAT due on intra-group supplies, to the extent that it is irrecoverable, represents an artificial cost to the group’s business. In 2013, that led to a request for VAT grouping with BG&Co as the representative member.
HMRC refused that request back in February 2014 on the grounds that a Scottish partnership is not a body corporate. While HMRC accepted that a Scottish partnership is distinct from other partnerships, in that it is a legal person in its own right, it is not a body corporate, which in their view made it ineligible for registration to form a VAT group at that time.
It should be noted that in 2019 s43 VATA was amended to widen the eligibility for VAT grouping to individuals and partnerships and, from the time of that amendment, BG&Co is eligible to form a VAT group. Consequently, the effect of this decision is most likely to be limited to this particular appellant, and to the period from 12 November 2013, when the group application was made, until s43 VATA was amended in 2019.
The long passage of time between appealing HMRC’s decision, and the case having its day in court, arises because the appeal was stood over pending the decision of the ECJ in the joined cases of Larentia + Minerva and Marenave Schiffart (L+M). When the ECJ produced its judgement in July 2015, the UK government recognised that there would have to be changes to UK law and VAT grouping provisions.
However, that change did not come in rapidly. There was a consultation period, followed by a further extension period. Ultimately the FTT informed BG&Co that the stay on the proceedings had expired, and the case proceeded, with leave to amend grounds of appeal to incorporate the ECJ’s decision in L+M.
The principle thrust of BG&Co’s case was that UK law on VAT grouping would breach EU law (including the principles of equal treatment and fiscal neutrality) if it were to restrict VAT grouping to bodies corporate. UK legislation can and should be given a conforming construction, with the result that Scottish partnerships can form a VAT group.
Following L+M, it is clear that the UK legislation at the relevant time, in limiting the application of VAT grouping to bodies corporate, is contrary to EU law, in particular the principles of equal treatment and fiscal neutrality. (It would not infringe EU law if it were justified as necessary and appropriate to prevent abuse, but there is no such justification.)
The restriction in UK legislation allows BG&Co’s competitors to enjoy the commercial advantage of VAT grouping, whilst BG&Co cannot. A conforming construction that permits a Scottish partnership to form part of a VAT group is perfectly possible in this case.
HMRC’s case submits that a Scottish partnership is not a body corporate. HMRC argue that it is not possible to apply a conforming interpretation to the VAT grouping provisions to enable a Scottish partnership to be given VAT grouping treatment.
Firstly, it lacks legal certainty because there would be no basis for saying when a non-corporate body could be controlled by another member of the group.
Secondly, the proposed alteration will amount to ‘judicial legislation’ disrupting the tests set down by Parliament for inclusion in a VAT group which are a fundamental feature of the legislation.
Thirdly, there is doubt as to the alteration being conforming interpretation because it is only ‘conforming’ if it is compliant with EU law. A conforming interpretation which would benefit only some of those affected by the incompatibility would itself be a breach of the principle of fiscal neutrality.
Fourthly, any conforming interpretation would have to relate to the ‘control tests’ that would enable the legislation to define entities that are ‘closely bound to each other by financial, economic and organisational links’.
The Tribunal’s deliberations
The Tribunal took a deep dive into L+M to find the pearls. The ECJ ruled it is not consistent with the Sixth Directive for a country to reserve VAT grouping solely to entities with legal personality and subordinate to the controlling company of that group unless it is necessary to prevent abuse.
It is for the referring court to determine whether such a measure in domestic law is necessary to combat abuse, tax evasion or tax avoidance. The L+M ruling made clear that the existing VAT grouping legislation infringed the principle of fiscal neutrality by excluding the appellant from participating in a VAT group.
The Tribunal recognised their decision was likely to be limited to this case alone or any outstanding VAT grouping appeal in similar circumstances.
The Tribunal picked out the control test as the central feature in the UK’s law on VAT grouping. That was trying to implement the VAT Directive’s grouping provisions for ‘persons … who, while legally independent, are closely bound to one another by financial, economic and organisational links’.
The Tribunal considered that a conforming interpretation which goes with the grain of the legislation is by extending the deeming of the controlling non-corporate body under subsection 43A (3) as if he or they were a company.
They were not deflected from this on the grounds of protection against abuse. They acknowledged that restriction to bodies corporate could shield against abuse it was not ‘the panacea for prevention’. The appeal succeeded and this allowed BG&Co to be VAT grouped.