Unfixed establishments: Barclays Services Corporation, fixed establishments, and VAT grouping

The Upper Tribunal (Tax and Chancery Chamber) (UT) has dismissed Barclays' appeal against the decision of the First-tier Tribunal (Tax Chamber) (FTT) upholding HMRC's refusal to allow a US company, Barclays Services Corporation (BSC), a member of Barclays' corporate group, to join Barclay's UK value added tax (VAT) group. The main reason for refusing the application was that the US company's registered branch in the UK was not a 'fixed establishment'.

        
            Quick read
        
A VAT group allows intra-group supplies to be disregarded for VAT purposes – this can result in significant VAT savings for partially exempt businesses (such as financial services businesses).
To join a UK VAT group, a non-UK company must have a 'fixed establishment' in the UK – a 'fixed establishment' requires a genuine operational presence in the UK with sufficient human and technical resources controlled and available to it.
The UT upheld the FTT's finding that BSC's UK branch was not a "fixed establishment" on the date of the grouping application – its staff were employed by the wrong entity, a backdated "start date" could not retrospectively create an employment relationship, and it had no formal "comparable control" over its premises, equipment or IT systems.

The UK's "whole establishment" approach to VAT grouping – under which the entire overseas entity, not just its UK branch, is treated as a group member – cannot be reinterpreted to impose a territorial limitation because that "would clearly be contrary to the underlying thrust of the legislation and its fundamental features" and so would "cross the boundary between interpretation and amendment".

HMRC's power to refuse an application for VAT grouping where they consider the refusal necessary for the protection of the revenue is much wider that the FTT had allowed. Where (as was the case here) a branch has only 'skeletal' substance, and the application is timed to obtain a large VAT saving, it is reasonable for HMRC to refuse an application for VAT grouping, even if the saving would be a normal consequence of grouping. The test is not whether savings arise from grouping generally, but whether the specific circumstances go beyond what grouping is designed to achieve.

The facts and circumstances in any particular case will be determinative. However, businesses should consider re-assessing their existing VAT grouping arrangements, assumptions, and plans.

There have been a lot of changes in (and commentary on) the rules surrounding the nature of 'permanent establishments' (for direct tax purposes), both domestically and internationally, recently. However, VAT has its own concept of taxable presence in a jurisdiction: the 'fixed establishment'.

The key question in this case was what was required for the UK branch of BSC (as a non-UK company) to constitute a 'fixed establishment' for UK VAT purposes.

The answer given by the UT was (unsurprisingly) that substance matters. Based on the UT's decision, a branch that has not yet assembled its own staff, formally secured its premises, or accessed systems that it needs to function, will not qualify even if it has been registered at Companies House. Furthermore, the existence of a 'fixed establishment' is assessed at the time the application to join the VAT group is submitted.

The UT's decision also suggests that HMRC's statutory power to refuse a VAT grouping application for the 'protection of the revenue' is much broader than the FTT had allowed.

As a result, businesses with overseas entities that have a 'fixed establishment' as a member of a UK VAT group, or are considering creating such arrangements, should now reassess their positions and plans.

The full decision can be found here: Barclays Services Corporation & Anor v HMRC [2026] UKUT 211 (TCC).

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How did it come to this?

BSC is a Delaware-incorporated limited liability corporation that provides services to other members of the Barclays corporate group, globally, including Barclays Execution Services Limited (BESL) in the UK. BESL is the representative member of the Barclays UK VAT group.

As part of a wider project to restructure its service provision (initiated in response to regulatory reform), BSC registered a UK branch (a UK establishment of BSC) with Companies House in July 2017. VAT planning was identified as a key driver for the creation of the UK branch: in addition to substantial future annual VAT savings, BSEL believed that a one-off benefit of £21m was available if the branch could be operational before the end of 2017. To expediate matters, the costs of the UK branch, including those related to employing the branch's intended staff, were initially attributed to BESL. On 1 December 2017, BESL applied for BSC to join its UK VAT group.

HMRC refused the grouping application on two grounds:

First, BSC did not have a 'fixed establishment' in the UK on 1 December 2017; and
Second, even if it did, refusal was necessary for the protection of the revenue.

The FTT dismissed BESL's appeal against HMRC's refusal in August 2024. The UT heard BESL's further appeal in March 2026 and issued its judgment on 8 June 2026.

Why does it matter?

VAT grouping allows two or more commonly controlled corporate bodies to be treated as a single taxable person. That means that supplies between group members are disregarded for VAT purposes: no VAT is charged and no VAT compliance is required.

For businesses that make largely exempt supplies (including, for example, financial services and insurance businesses), and so do not charge VAT on the supplies they make, VAT grouping is particularly important. This is because these businesses cannot reclaim the input VAT they incur on the services they receive; the VAT charged becomes a permanent, irrecoverable cost.

The UK's approach to VAT grouping is relatively permissive and is often promoted as a comparative structural advantage, especially for UK based international financial services businesses.

A non-UK company can join a UK VAT group provided it has a 'fixed establishment' in the UK. A 'fixed establishment' requires a real, permanent trading presence in the UK. In addition, the UK operates a 'whole establishment' approach to VAT grouping. Once admitted, the whole non-UK company (not just its UK branch) is treated as part of the UK group for VAT purposes. This compares favourably with most member states of the European Union which take an 'establishment only' approach (which restricts the effect of a VAT grouping to the domestic 'branch' of the foreign entity).

After Brexit, the UK has legislative freedom to maintain or change its VAT grouping rules without reference to EU law. At the time of the Autumn Budget 2025, HMRC reconfirmed its commitment to the 'whole-establishment' approach to cross-border VAT grouping in Revenue and Customs Brief 7 (2025).

What were the main issues?

The UT had to consider three main issues.

Meaning of 'fixed establishment'

Whether BSC's UK branch was a 'fixed establishment' for UK VAT purposes was the main issue in the case.

The UK courts have followed the case law of the Court of Justice of the European Union (CJEU) when considering what a 'fixed establishment' is, and whether it exists. In summary, the UK courts' approach is, broadly, that there is no definitive test to determine the existence of a 'fixed establishment': instead, it is determined on a case-by-case basis by reference to the facts and circumstances in each case.

The FTT had decided BSC's UK branch did meet the definition.

BSEL appealed against that decision on three grounds but essentially its argument was:

(a) the FTT had misunderstood (and so misapplied) the concept of 'comparable control', and

(b) the FTT should have agreed that the UK branch's intention to trade was sufficient to make it a 'fixed establishment'.

Protection of the revenue

HMRC has the power to refuse a VAT grouping application where it considers the refusal as "necessary for the protection of the revenue". HMRC asserted it could exercise that power in this case, even if the 'fixed establishment' was held to exist. Under UK law, a tribunal can only overturn HMRC's decision to exercise this power if it considers that HMRC could not reasonably have been satisfied that grounds to refuse the application existed.

That is a high bar for a taxpayer to meet but the FTT had decided that BSEL had met it because the VAT savings involved were simply the sort of savings that a grouping is designed to produce.

As a result, in appealing this point, HMRC argued that it was reasonable to refuse the application because the timing of the grouping application was primarily driven by the one-off £21m tax saving, which was a significant amount relative to the branch's relatively negligible substance, and so was beyond the 'normal consequences' of grouping.

Danske Bank and territorial limitation

In a European case, Danske Bank, the CJEU held that VAT law carries an inherent territorial limitation: that is, a branch located in one member state cannot be part of a VAT group in a different member state.

HMRC argued that, if it were decided BSC did have a UK 'fixed establishment', and that grouping could not be refused for the protection of the revenue, UK VAT law should be read consistently with Danske Bank so as to restrict the effect of a grouping to include the UK establishment only (not the whole of BSC).

This was a slightly odd argument, noted by the UT as "somewhat strange", because both:

(a) the UK has long promoted its 'whole-establishment' approach to VAT grouping, and

(b) it was directly contrary to its position in published guidance, as set out in Revenue and Customs Brief 7, so recently published in November 2025.

What did the Upper Tribunal decide and why?

On the substantive point, the UT decided against BSEL. The decision, however, is noteworthy for its commentary on all three issues.

Fixed establishment

Adopting BSEL's approach, the UT decided that the test to decide whether there is a 'fixed establishment' is broad. The question is whether the branch has 'comparable control' over sufficient human and technical resources to make a "meaningful commercial contribution" to the business of the corporate entity of which it is part.

However, the UT agreed with the FTT, deciding that BSC's branch failed the test on the critical date of 1 December 2017 (when the VAT grouping application was made).

The UT agreed that the critical concept is one of 'comparable control'. It decided that, while need not own its resources outright, a branch must have a level of control over them that is comparable to ownership. The resources must effectively be at the disposal of the branch, as if they were its own, under arrangements that cannot be terminated at short notice. Whether that is the case is then a question of fact and circumstance.

In BSC's case, the branch fell well short of the necessary standard to be treated as being able to exercise 'comparable control'. Some of the key factors included:

The branch's intended head of operations was employed by BESL (the UK company) on 1 December 2017, not BSC. In addition, their employment contract with BSC was not signed until January 2018 and, although backdated, could not be said to create an employment relationship retrospectively.
The nominated head of operations also spent most of their time working for a different Barclays group entity, and not for BSC.
Two other intended employees had not yet started. A fourth did not join until January 2018.
BSC held no formal lease or rights of occupancy for the intended office premises, nor for the use of desk space, computers, and telephones. BSEL had suggested that access would not have been denied but the UT decided that access was enough for the branch to be considered to have 'comparable control' over the resources.
In addition, and even more critically, on 1 December 2017, the branch had no access to the IT systems needed to carry out its intended primary function (of monitoring and updating intragroup service agreements on behalf of the Barclays group).

The UT also rejected BSEL's argument based on an analogy with an 'intending trader'. The UT decided that there was no basis to conclude that a branch, which was still being set up, with no actual resources under its control, could qualify as a fixed establishment, even if it genuinely intended to trade in the future: it is the position as at the date that an application is made that is determinative.

Protection of the revenue

Having decided that BSC did not have a 'fixed establishment', the UT's views on the 'protection of the revenue' issue were incidental, but of interest nonetheless to businesses operating with UK VAT groups.

The FTT had concluded that HMRC could not reasonably have refused the application on this ground: the VAT savings, in its view, fell within the "normal consequences" of a grouping. The UT disagreed.

Two features of the case, in combination, were enough for HMRC to have reasonably concluded that refusal was necessary for the protection of the revenue: the branch had only "skeletal" substance at the application date (no employees, no premises, no IT access), yet the application was timed specifically to capture a £21m tax benefit before the end of the year.

That combination, the UT decided, went well beyond what grouping is designed to achieve, and would have been enough to justify HMRC exercising its protection of the revenue power.

Danske Bank

Again, because the fixed establishment issue was decisive, HMRC did not need to rely on its Danske Bank argument, making the issue academic. The UT's commentary on it, however, is both instructive and, considering HMRC's 2025 commitment to the 'whole-establishment' approach in Revenue and Customs Brief 7 (2025), and the state of flux in the post-Brexit UK status of CJEU case-law, reassuring.

The UT declined to accept HMRC's request that additional wording be read into the UK VAT grouping rules to impose a territorial limitation in line with the Danske Bank judgment.

The UT decided that the 'whole establishment' approach (that is, that when the branch is grouped, the entire body corporate also becomes a group member) is the correct interpretation of the law, which "as it stands clearly imposes no … territorial limitation".

To change that, by reading additional words into the law to restrict the effect of VAT grouping to the 'UK portion' of a company, would cross the boundary from judicial interpretation into legislative amendment. Any change in the law, of course, would require Parliamentary legislation.

So what?

Deciding whether a 'fixed establishment' exists requires a multifactorial assessment of the facts and circumstances that are relevant in any given case.

Some key points, however, can be extracted from the BSC case. The main consideration will be whether the branch has 'comparable control' over sufficient resources to make an economic contribution to the entire body corporate of which it is part.

The following practical pointers will be relevant for any business with, or hoping to add, a UK branch of an overseas entity as part of its UK VAT group:

Time grouping applications carefully

Eligibility will be assessed as at the date of the application. Businesses should avoid making an application until the branch has the resources it needs to function (e.g., employees, property, etc.) formally in place. An intention to put them in place, however well evidenced, is unlikely to satisfy the requirement.

Document economic substance, not just structure

Comparable control requires more than informal access or group arrangements. Businesses should clearly record and document employment contracts, lease agreements, and the branch's actual operational activities.

Be commercial

Where tax is a consideration in making an application for grouping, businesses should ensure that the commercial rationale is fully satisfied first: the tax tail should not be allowed to wag the commercial dog. Where an application is (or appears to be) made to capture a short-term tax benefit, the risk that HMRC will open an enquiry, and exercise their discretionary power to 'protect the revenue' is materially higher.

Review existing VAT group structures

Existing arrangements should be reviewed. Businesses with a UK branch of a non-UK entity already in its VAT group should consider reviewing whether the conditions that existed at the time of admission are properly documented (and whether it continues to meet the fixed establishment test).

Reassess input VAT recovery assumptions

The case highlights the importance of assessing a business' entitlement to input VAT recovery. With careful structuring planning, businesses can ensure that exposures to irrecoverable VAT costs can be minimized.

HMRC's published guidance is not the law

HMRC's odd line of argument in relation to Dansk Bank, taking a position directly contrary to its own published guidance, serves as yet another reminder that guidance is not law. Businesses, then, should always exercise caution when relying on HMRC guidance because, as this case highlights, HMRC themselves do not seem to consider that they are bound by it.

How can we help?

Our tax team advises on the full range of VAT and VAT grouping issues. We can assist with fixed establishment assessments, VAT group structuring, and maximizing input VAT recovery. We can also provide advice in connection with HMRC enquiries and the conduct of VAT disputes and appeals, in addition to all aspects of transactional VAT advice.

If you would like to discuss any aspect of this briefing or how it applies to your business, please contact a member of the Travers Smith Tax team.

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