Contingent Success Fees Invoiced After Leaving a VAT Group Are Taxable: Article 64 PVD and Regulation 90 Create the Chargeable Event, Not the “Real‑World” Performance

Case: The Prudential Assurance Company Ltd v Revenue and Customs Commissioners [2025] UKSC 34 (11 September 2025)

Court: United Kingdom Supreme Court (Lady Rose and Lady Simler; Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Stephens and Lord Richards agreeing)

Introduction

This landmark Supreme Court judgment clarifies the relationship between the VAT group “disregard” in section 43(1)(a) of the Value Added Tax Act 1994 (VATA 1994) and the Time of Supply Rules (TOSR) governing when a supply is treated as made for VAT purposes. The specific issue was whether a success fee, invoiced and paid many years after the underlying investment management services were performed (and after the supplier had left the VAT group), is subject to VAT.

Silverfleet Capital Limited provided investment management services to Prudential. While both were members of the same VAT group, the quarterly management fees were rightly treated as disregarded for VAT under section 43(1)(a). Years after the services ended and after Silverfleet left the VAT group, hurdle rates were exceeded and Silverfleet invoiced “success fees” (with VAT). Prudential contended that because the “real-world” services were performed while both companies were in the same VAT group, no VAT could be charged on the later success fees. HMRC argued that the TOSR—specifically regulation 90 of the Value Added Tax Regulations 1995—determine when the supply is treated as occurring, and that, together with Article 64 of the Principal VAT Directive (PVD), the success fee created a new chargeable event at the time of invoice/payment, when the parties were no longer in the same group.

The Supreme Court dismissed Prudential’s appeal. The decision is important both for VAT grouping and for the treatment of contingent or performance-linked consideration (such as success fees) in service contracts.

Summary of the Judgment

• TOSR apply to section 43(1)(a): The Court held that to decide whether the VAT group disregard applies, one must first determine when the relevant “supply” is treated as made; that requires applying the TOSR (section 6 VATA and regulation 90).
• Article 66 PVD does not alter the chargeable event: The Court accepted that Article 66 only defers when VAT becomes chargeable (collection), not when the chargeable event occurs.
• Article 64 PVD can alter the chargeable event: Article 64(1) modifies the time of the chargeable event for supplies that give rise to successive payments. The Court held that the success fee here was such a “successive payment,” even though the services had ended years earlier, because the contractual consideration was uncertain/contingent and determined “from time to time.”
• Regulation 90 is compatible with Article 64: Read with section 6(14) VATA, regulation 90 treats services supplied “for a period” for consideration determined “periodically” or “from time to time” as “separately and successively supplied” at each invoice/payment. In doing so it validly implements Article 64’s modification of the chargeable event.
• B J Rice confined: The reasoning in B J Rice (CA) is inconsistent with later House of Lords authorities and is confined to its facts; it does not assist where, as here, the TOSR and VAT group rules must be read together.
• Outcome: The success fees were taxable because the relevant chargeable events occurred when the hurdle was met and invoices were issued (2015–2016), after Silverfleet had left Prudential’s VAT group. The VAT group disregard did not apply.

Analysis

1) Precedents Cited and Their Influence

a) Domestic authorities

• B J Rice & Associates v C&E [1996] STC 581 (CA)
  • Held: No VAT on pre-registration services paid for post-registration.
  • Relevance: Prudential invoked Rice to argue that non-taxability at the time of performance cannot be undone by later events. The Supreme Court held Rice is confined to its facts and is not a general rule displacing TOSR for VAT groups.
• Customs and Excise v Thorn Materials Supply Ltd [1998] 1 WLR 1106 (HL)
  • Pre-payment for goods within group; delivery after supplier left group. Majority held VAT due on 100% on delivery.
  • Key point: TOSR are used to identify whether and when a supply occurred for purposes of the VAT group disregard. All Law Lords agreed TOSR apply; they disagreed on the effect.
  • Influence: Supports applying TOSR to s43(1)(a).
• Svenska International plc v C&E [1999] 1 WLR 769 (HL)
  • Continuous office services, invoice issued after recipient joined VAT group. Majority treated supply as occurring at invoice/payment per continuous supplies rule; inputs attributable partly to exempt supplies of the group; input tax restricted.
  • Key point: Continuous supply rules (now reg 90) “require one to depart from the real world” to fix time of supply. Again, TOSR apply to s43(1)(a).
  • Influence: Rejects a “real-world performance” test for time of supply in VAT group cases.
• Royal & Sun Alliance Insurance Group plc v C&E [2003] UKHL 29
  • Lease payments treated as separate and successive supplies under what is now reg 90.
  • Key point: For services, reg 90 deems separate, successive supplies at each invoice/payment.
  • Influence: Supports reading reg 90 as substantively splitting service supplies in time.
• Lloyds Banking Group plc v HMRC [2019] EWCA Civ 485
  • Section 43 VATA 1994 properly implements Article 11 PVD; no overreach.
  • Influence: Confirms s43’s compatibility with EU law and the need to read it with the wider VAT code; s43 is not a standalone timing code.

b) CJEU authorities

• Commission v Ireland (C-85/11)
  • Purpose of VAT grouping: administrative simplification and neutrality, preventing abuse.
  • Influence: Supports neutrality but does not create a bespoke time-of-supply rule for groups.
• Ufficio IVA di Trapani v Italittica SpA (C-144/94)
  • Article 66 (then art 10(2) SD) defers chargeability; it does not move the chargeable event.
  • Influence: Adopted by UKSC: Article 66 cannot alter the chargeable event.
• Finanzamt Goslar v baumgarten sports & more GmbH (C-548/17)
  • Agent’s commission paid in conditional six‑monthly instalments after placement; Article 64(1) applies: chargeable event/chargeability occur at expiry of the periods to which the instalments relate, not at placement.
  • Influence: Core analogical support for treating contingent success fees as “successive payments” under Article 64 even after services completed.
• Finanzamt B v X‑Beteiligungsgesellschaft mbH (C-324/20) (XB)
  • One‑off mediation service with payment in time‑scheduled instalments; Article 64 does not apply merely because payment is split; Article 64 concerns supplies whose nature justifies instalments (continuous/recurrent).
  • Influence: Limits Article 64, but UKSC reads XB as distinguishing mere instalments for a one‑off supply from genuinely contingent/uncertain payments akin to baumgarten.
• C SPRL v AJFP Cluj (C-696/22) (SPRL)
  • Continuous insolvency services; Article 64 applies; VAT is not conditional on receipt.
  • Influence: Confirms that Article 64 modifies the chargeable event for supplies with successive payments/statements; receipt is not determinative absent Article 66.

2) Legal Reasoning

a) TOSR govern the time of supply for VAT group purposes

The Court rejected the “real-world performance” approach. Section 43(1)(a) does not contain its own timing rule; it must be read with section 6 VATA and regulation 90. As in Thorn and Svenska, the TOSR tell us when a supply is treated as made for VAT purposes and therefore whether the VAT group disregard applies at that time.

b) Article 66 PVD: chargeability only, not the chargeable event

Accepting Prudential’s core proposition, the Court held Article 66 (and the UK’s implementation via section 6(4) and regulation 90 as a matter of chargeability) cannot alter when the chargeable event occurs. This aligns with Italittica and the structure of Articles 62–66. Accordingly, the VAT group disregard is not disapplied merely because VAT becomes chargeable later. What matters is whether the chargeable event occurred while the parties were grouped.

c) Article 64 PVD: modifies the chargeable event for “successive payments”

The hinge of the case is Article 64(1). The Court held:

• Article 64(1) can change the time of the chargeable event, not just chargeability, where the supply “gives rise to successive statements of account or successive payments.”
• Following baumgarten, this can include conditional or contingent remuneration determined at later dates—i.e., where the nature of the remuneration means value is ascertained “from time to time.”
• XB prevents Article 64 from being used for a one‑off supply with artificial instalments; but it does not preclude its use where remuneration is inherently uncertain/contingent and tied to later events (as with success fees). SPRL confirms the purpose and mechanics of Article 64.

On the facts, the success fees were not merely time‑scheduled instalments of a pre‑agreed consideration for a one‑off service. They were contingent payments only triggered if benchmark returns were surpassed. That contractual structure justified successive payments within the meaning of Article 64(1). Accordingly, the chargeable event for those amounts occurred at the time of the triggering and invoicing/payment in 2015–2016—not when the services ended in 2007.

d) Regulation 90 validly implements Article 64 and applies here

Regulation 90(1) treats services supplied “for a period” for a consideration determined “periodically” or “from time to time” as “separately and successively supplied” at each invoice/payment. Read with section 6(14), it operates substantively, not just as a bookkeeping device. The Court held this language comfortably captures success fees that are contractually contingent and determined long after the performance period. Thus, regulation 90 fixes the relevant time of supply for those components at invoice/payment.

e) Interaction with the VAT group disregard

Because the chargeable event for the success fees occurred when they were invoiced/paid, and Silverfleet had already left the VAT group, the disregard in section 43(1)(a) does not apply to those amounts. By contrast, the quarterly management fees accrued and were paid while both parties were grouped; those chargeable events fell within the disregard, and HMRC did not seek VAT on them.

3) Impact

a) Practical implications for VAT groups

• Contingent/earn‑out/success-based fees: Where service contracts include performance-linked or contingent consideration payable “from time to time,” VAT may become chargeable when such fees are triggered and invoiced, even if the underlying services were performed years earlier within a VAT group. The disregard will not protect those later amounts if the supplier has left the group by then.
• Contract drafting and structuring:
  • Identify and segregate contingent consideration in service agreements.
  • Consider the VAT profile of later success payments upon reorganisations or group exits.
  • Maintain records mapping “periods to which the payment relates” to determine chargeable events under Article 64/reg 90.
• Reorganisations and carve‑outs: Exiting a VAT group before contingent sums crystallise will generally expose such sums to VAT. Transaction planning should stress‑test the VAT outcomes of contingent fee mechanics against the timing of group exits.
• Accounting and systems: Tax engines must track contingent fee triggers as potential new chargeable events under reg 90/Article 64, not as mere timing of collection (Article 66).

b) Broader doctrinal significance

• Time of supply is not “real‑world” performance: Reconfirms Svenska and Thorn that TOSR control even in VAT group contexts; section 43 is not a freestanding timing code.
• Article 64’s scope clarified: The UKSC adopts a principled middle ground between baumgarten and XB: Article 64 applies to genuinely contingent or uncertain remuneration determined later; it does not apply to dividing a fixed price for a one‑off service into instalments.
• Rice confined: Pre-registration reasoning cannot be generalised to defeat TOSR in group cases.