The Upper Tribunal has upheld HMRC’s refusal to admit the UK branch of an international service company into a UK VAT group, confirming no fixed establishment existed at the date of application. The decision is of practical importance for partly exempt financial services groups relying on cross-border VAT grouping.

In Barclays Services Corporation v HMRC [2026] UKUT 00211 (TCC), the Upper Tribunal (UT) has dismissed an appeal by Barclays entities seeking to include a US service company, Barclays Services Corporation (BSC), within a UK VAT group. The case is of particular importance to banking and financial services groups operating cross-border service models with partial VAT recovery.

The application was refused on the basis that BSC did not have a “fixed establishment” in the UK at the relevant time. The UT also indicated, in obiter comments, that refusal would have been justified for the protection of the revenue.

Outcome on fixed establishment: UT follows FTT

The UT upheld the First-tier Tribunal’s conclusion that no fixed establishment existed as at 1 December 2017. The finding turned on the absence of sufficient human and technical resources under the control of the branch at that date, with the branch characterised as having, at best, preparatory or auxiliary activity.

The UT placed significant weight on the lack of employees, lack of control over resources, and absence of operational capability at the point the VAT grouping application was made.

Intending trader argument rejected

The taxpayer argued, by analogy with an “intending trader”, that a forward looking approach should be adopted when only preparatory activities were being undertaken at the point of application but would develop at a later stage.

The UT rejected this argument. It held that there is no authority supporting the proposition that steps taken to establish a branch are sufficient to constitute a fixed establishment for VAT grouping purposes.

The tribunal emphasised that preparatory or auxiliary activities, without established resources, are insufficient.

Eligibility for VAT grouping is assessed at the date of application, and not by reference to subsequent development of the business. This is a significant practical point. Groups must ensure that sufficient substance, particularly control over human and technical resources, is in place before making a VAT grouping application. When this point is reached will be a question of fact and degree in every case.

Obiter: fixed establishment informed by place of supply case law

Although the UT did not need to determine the correct legal test, it provided important obiter comments on the meaning of “fixed establishment”.

The tribunal rejected the taxpayer’s formulation adopted before the FTT as setting the bar too low and instead endorsed the approach taken in HSBC, under which the concept is informed by CJEU case law on place of supply.

Crucially, the UT stated that CJEU case law, including Planzer, is relevant and must be taken into account in determining whether a fixed establishment exists, and that the factors and concepts from those cases form part of an overall evaluation.

At the same time, the tribunal warned that those principles should not be applied mechanically or read across wholesale.

This creates an immediate tension. The relevant case law was developed in the context of place of supply rules; its application in VAT grouping requires transposition into a different statutory and commercial context. The UT offers limited guidance on how that should be done in practice.

Uncertainty for cross-border financial services groups

The decision highlights the ongoing difficulty in applying the concept of fixed establishment in cross-border VAT grouping structures.

On the one hand, the UK’s whole establishment approach allows non-UK entities with a UK fixed establishment to enter a VAT group, potentially mitigating reverse charge costs in partially exempt groups.

On the other hand, the UT’s approach requires businesses to engage with place of supply jurisprudence that was not considered in respect of grouping contexts. The need to translate principles, including concepts of permanence, control and resource availability, into a test for VAT grouping adds complexity and uncertainty; particularly for businesses that are being established and will evolve. What might constitute sufficient human and technical resources in relation to one service may differ from another. By logical extension, whether a branch has a fixed establishment will vary depending on the service, or combination of services, being supplied. The result is a less predictable threshold for establishing eligibility, particularly for service company structures with complex cross-border service flows in the banking and financial services sector.

Protection of the revenue: emboldening HMRC?

Although it was not in issue, given the finding on fixed establishment, the UT also addressed HMRC’s protection of the revenue power. Departing from the FTT, the UT indicated that HMRC could reasonably have refused the application on those grounds, citing the combination of significant anticipated VAT savings and the minimal substantive presence of the branch at the relevant time.

The tribunal also emphasised that the statutory test focuses on whether HMRC could reasonably reach its conclusion, not whether it was correct on the merits.

These comments may encourage HMRC to take a more assertive approach to the use of those powers, particularly in cases involving material VAT savings and limited operational substance. Taxpayers will want to ensure the correct presentation of information such that HMRC cannot reasonably conclude that refusal is necessary.