Cross-border VAT groups: a new decision and increasing pressure
The recent case of Barclays Services Corporation v HMRC, involving the UK branch of a service company based overseas, hints at cross-border VAT groups coming under increasing scrutiny and pressure from HMRC.
Creating a VAT group to cover two or more companies can reduce the VAT costs on supplying goods and services between those companies. To form a VAT group, those companies need to satisfy the control and UK establishment conditions.
When the VAT grouping provisions were enacted, the UK deliberately defined the VAT group on a whole entity basis. This was partly, in the words of the judgement, to “set out its stall on the international stage as having a relatively competitive VAT grouping regime”. But times have changed.
While demonstrating that the UK was open for business may previously have been a priority, in the current budget climate, HMRC and the Government now seem to consider the potential VAT lost on allowing cross-border VAT groups to be profligate.
While BSC ultimately lost the appeal because it had no fixed establishment in the UK at the relevant time, the other issues in the appeal say more about what the future may have in store for the cross-border VAT group.
The issues
First issue: Conformal interpretation
HMRC argued that:
- The UK VAT grouping provision was incompletely worded and should be interpreted conformally with EU law
- Essentially, for an overseas (in this case, US) company with a UK branch, only the UK branch should be able to join the VAT group – and not, as is currently the case, the entire company
- This would mean that taxable services supplied from the overseas company to the VAT group would be chargeable to VAT except where those services were supplied by the UK branch itself
In a wholly unsurprising decision, the Upper Tribunal rejected HMRC’s argument as it went against the grain of the legislation. Courts and tribunals are meant to interpret legislation, not to enact replacement legislation.
Given the low likelihood of success on this ground, could this ground of appeal have had another purpose: to make the case for adjusting the legislation in the future? If so, we have a good idea of how that future legislation would read, since HMRC put it before the Tribunal:
- A change from “Two or more bodies corporate are eligible to be treated as members of a group if each is established or has a fixed establishment in the United Kingdom”
- To “Two or more bodies corporate are eligible to be treated as members of a group if and to the extent that each is established or has a fixed establishment in the United Kingdom”
However, even as currently worded, there is little to prevent HMRC from applying this policy given the wide protection of revenue powers explained in point three.
Second issue: Fixed establishment
In order to be a VAT group member, a company must at least have a fixed establishment in the UK: the permanent presence of both human and technical resources necessary to make and receive supplies.
Often this is provided by having an office and staff capable of signing contracts on behalf of the company.
HMRC had decided that BSC had no fixed establishment in the UK because the branch had no employees or comparable control over human and technical resources at the relevant time.
The Tribunal agreed with HMRC.
HMRC’s first reason for rejecting BSC’s VAT group application was that they considered BSC had no fixed establishment in the UK. Since this ground was rejected, their second reason did not need to be considered.
Third issue: Protection of the revenue
The Tribunal remarked on HMRC’s second reason for rejection which was under their power for protection of the revenue (POR).
This enables HMRC to refuse VAT grouping “if it appears to them… that refusal of the application is necessary for the protection of the revenue.”
An appeal against the use of POR powers can only succeed if it can be shown that “HMRC could not reasonably have reached the decision to deny grouping.”
Given that HMRC did have reasons for exercising their POR power – the significant VAT savings the VAT group expected to make, compared to the meagre resources of the branch itself – the Tribunal would have held that HMRC could have reasonably reached its decision.
What this means for cross-border VAT groups
There is enough information in this decision, and the recent update to HMRC’s guidance on VAT groups, to conclude that:
- HMRC consider that the whole-entity framing of the VAT grouping provisions is too wide.
- HMRC will use POR powers to deny VAT grouping for cross-border VAT groups where they consider that the main aim of the VAT group is to disregard supplies from the company’s overseas establishments to the VAT group.
- The POR powers to deny VAT grouping are wide enough that HMRC should rarely have a decision to deny VAT grouping overturned by the tribunals/courts, as long as HMRC set out their reasons for using this power.
How BKL can help
For a conversation about the VAT implications of your group structure, including groups involving overseas entities with UK branches, get in touch with your usual contact or Allon Greenstein using the form below.
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Frequently asked questions: Barclays Services Corporation v HMRC and cross-border VAT groups
What did the 2026 Barclays Services Corporation case decide about VAT grouping?
The Upper Tribunal confirmed that a non-UK company must have a UK fixed establishment to join a UK VAT group. In BSC, the appeal failed because the US entity could not demonstrate it had sufficient people and resources in the UK at the relevant time.
This reinforces HMRC’s strict approach: simply having a UK branch on paper is not enough. Businesses need real operational substance in the UK to support VAT grouping.
What counts as a ‘fixed establishment’ for UK VAT purposes?
A fixed establishment is a UK presence with both human and technical resources capable of making or receiving supplies.
In practice, this typically means having staff, premises and decision-making capability in the UK e.g. employees who can negotiate or conclude contracts. Without this level of substance, HMRC are unlikely to accept that a fixed establishment exists.
Can overseas companies still join a UK VAT group?
Yes, but only if they have a genuine UK fixed establishment.
The current legislation allows the whole legal entity to join a VAT group, not just its UK branch. However, HMRC are increasingly challenging arrangements where overseas entities are included primarily to achieve VAT savings, especially where UK presence is minimal.
Are HMRC trying to restrict cross-border VAT grouping?
Yes, HMRC have signalled concern that current rules are too broad.
In the BSC case, HMRC argued for a narrower interpretation aligned with EU principles, where only UK establishments would be included. Although the Tribunal rejected this argument, it indicates the direction HMRC may push for through future legislative changes or policy.
What are HMRC’s ‘protection of revenue’ powers in VAT grouping?
HMRC can refuse a VAT group application if they believe it is necessary to protect the Exchequer.
This is a broad discretionary power. Even if a business meets the technical criteria (such as having a UK establishment), HMRC can deny grouping if the arrangement appears designed mainly to reduce VAT liabilities, particularly by eliminating charges on intragroup cross-border services.
How likely is it that a challenge to HMRC’s refusal of VAT grouping would be successful?
It is difficult to overturn HMRC’s decision where protection of revenue powers are used. The Tribunal will generally uphold HMRC’s decision unless it is clearly unreasonable.
In practice, this sets a high bar for taxpayers. If HMRC can show rational grounds, such as disproportionate VAT savings compared to the UK substance, the refusal is likely to stand.
What risks should businesses consider before forming a cross-border VAT group?
The main risk is that HMRC may deny or later challenge the VAT grouping.
Key red flags include limited UK activity, reliance on overseas services, and significant expected VAT savings. Businesses should assess whether their structure has commercial substance and can withstand HMRC scrutiny, particularly in light of recent guidance and case law.
Could the UK change its VAT grouping rules in the future?
Yes, future legislative reform is a realistic possibility.
HMRC’s arguments in the BSC case suggest a move towards restricting VAT grouping to UK establishments only, rather than whole entities. Businesses with cross-border structures should monitor developments closely and consider how changes could affect their VAT position.
What should businesses do if they are considering or already using cross-border VAT grouping?
They should review the commercial substance and VAT risk of their arrangements.
This includes assessing whether UK operations meet the fixed establishment test, documenting the business purpose of the structure, and modelling potential VAT exposure if grouping is denied. Early advice can help identify risks and support discussions with HMRC where needed.
