Even in the post-Brexit reality, British court sentences on VAT cases continue to draw attention. Why? There are several reasons, and we will examine them in detail through the lens of a recent court ruling issued by UK First-tier Tribunal in JPMorgan Chase Bank NA vs. HMRC (TC/2020/03842)

Have a question or need support?

Contact us

Firstly, the case pertains to a period when the United Kingdom was still a member of the European Union. This means that the transactions under review were subject to the same VAT regulations that apply in the rest of the EU.

Secondly – and crucially – the British court bases its ruling on the provisions of the EU VAT Directive and the case law of the Court of Justice of the European Union (CJEU). This implies that the reasoning adopted by the British authority may be reflected in the tax practice of "European" authorities. Consequently, conclusions similar to those of the First-tier Tribunal may also find approval in the rulings of Polish authorities, as well as those of other EU countries.

Although the United Kingdom is no longer a member of the EU, the reasoning outlined in this ruling may have significant implications for taxpayers operating in Poland and, more broadly, Europe particularly for multinational corporate groups. This is especially true given that such structures often apply the cooperation model that became the subject of the dispute between JPMorgan and HMRC.

Complex supplies – why it is so important?

The issue of recognizing complex supplies for VAT purposes remains one of the most controversial and complex issues in tax practice. The sentence in the case of JPMorgan Chase Bank vs. HMRC underscores, yet again, the challenges involved in distinguishing between a single complex supply and a series of seperate supplies, especially when it comes to the compound service structures rendered in multinational corporate groups.

The classification of supplies as complex supplies is one of the key issues in VAT practice – such classification can fundamentally impact how VAT is accounted for in relation to the rendered service. In the case of recognition of activities as a single complex supply, the entire “package” of activities follows the VAT treatment of its main component – including VAT rate or the tax point. Recognition as a complex service often allows the application of a "favorable" method of taxation – for example in the form of broad application of a reduced rate or VAT exemption.

The core of JPMorgan's dispute with HMRC – what did the UK tax authority question?

The case under review involved support services provided by the U.S.-based JPMorgan Chase Bank NA (CBNA) to its U.K. subsidiary JPMorgan Securities plc (SPLC). CBNA provided SPLC with a range of services, from specialized technological and operational infrastructure used directly to perform financial transactions, to broad support services (such as HR management, legal, accounting and regulatory compliance support). In practice, CBNA as the service provider divided the support provided to SPLC into two main categories - business support services (specialized support for handling financial transactions) and general support services (administrative support, HR, payroll etc.).

The primary question and – at the same time – and the core of the dispute between JPMorgan and the tax authority was whether the nature of the two aforementioned groups of services allows them to be treated as separate supplies, where some of them could benefit from VAT exemption. This was JPMorgan's position – arguing that the business support services including technology, operations, quantitative research and market risk management are directly related to the financial transactions carried out by SLPC. Due to this close connection JPMorgan contended that CBNA's services should also qualify for the VAT exemption. According to JPMorgan, these services should be treated as indispensable for SPLC’s financial transactions, forming an integral part of them and without which the financial operations could not be conducted. Other services — i.e. general support services — were classified by JPMorgan as VAT-taxed.

The problematic aspect of the Bank's argument, however, turned out to be the lack of a precise distinction between these categories of services in the framework agreement between CBNA and SPLC. The agreement broadly described the services, indicating that CBNA’s support included a range of interrelated and complementary services essential to SPLC’s operations. The absence of a clear division in the agreement further enhanced the argument for treating the services as a single taxable supply. As it turned out, the "insufficient" differentiation of service streams in the framework agreement ultimately became one of the authority's main arguments against JPMorgan's position.

The UK tax authority (HMRC) was not convinced by JPMorgan’s arguments. HMRC asserted that the services constituted a single complex supply subject to VAT. This conclusion was based on several key factors, which, in HMRC’s view, were evident from the structure of the framework agreement between the parties:

  • Inseparability of support components – the various service components were closely interrelated and complementary. In particular, the authority stressed that both the services provided by CBNA directly related to financial transactions, but also the support services, formed an integral whole, necessary for the operation of SPLC. The resulting single complex supply could not in practice be separated without undermining its essence and functionality.
  • Artificial division – according to the HMRC, attempt to isolate the various components would be artificial from an economic perspective. As CBNA provided a comprehensive solution including both technological and operational infrastructure, as well as general administrative support, all of which collectively enabled SPLC to operate its business.
  • Perspective of the average recipient – from SPLC's perspective as the recipient, the services were treated as a unified package of services, essential to its business. This was reflected in the way SPLC utilized CBNA’s integrated support system as a whole, without distinguishing between business and general services.
  • Lack of choice – SPLC had no real opportunity to choose individual service elements as it had to accept the entire “package” of services provided by CBNA based on the framework agreement.

Resolving the dispute, the Court agreed with HMRC's arguments and confirmed that a holistic view of the unified nature and purpose of the services is paramount. It further highlighted that one of the important elements considered in assessing the nature of the services – in addition to how they are actually performed – is how the supplies are structured and described in the contract between the parties. The lack of a precise distinction in the agreement between business support services and broad support services proved to be a decisive factor in favor of treating the whole as a single complex supply.

As a result, it was primarily the way the agreement was formulated that left no basis for different VAT treatment of CBNA’s services. The Court's sentence underscores the practical importance of detailed drafting intra-group agreements, not only to define the mutual rights and obligations of the parties, but also in the context of potential tax implications.

Complex supplies in tax practice

The above premises regarding complex supplies – being central to the JPMorgan case – are not specific to UK law, but instead reflects the approach developed through years of CJEU case law. The Court has repeatedly addressed the criteria for distinguishing complex supplies and its position is subsequently adopted by national courts, including in Poland.

Under the general VAT system principle, each activity as a rule should be treated as separate and independent. The concept of complex supplies developed by the Court, representing an exception to this principle, is assessed primarily considering the strict connection between at least two components, objectively forming an inseparable economic supply – where separation would be artificial[1].

Crucially, although the Court has developed a number of criteria and circumstances to be taken into account when deciding on the complex nature of supplies, the application and accuracy of such classification can be (and often is) questioned. Being a matter of assessment, the taxpayer and the tax authority will take a different position in this regard - usually pursuing an opposing „objectives” in terms of taxation.

As shown by the JPMorgan case, the issue of complex supplies plays an important role, particularly in the context of intra-group support services, and even more so in sectors "benefiting" from the VAT exemption (in these sectors, due to a partial or lack of VAT deduction right, every purchase with input VAT means an additional cost). CJEU, in its published rulings[2] concerning financial sector stressed that regardless of support services being required for VAT-exempt business operations, it does not automatically qualify them for a VAT exemption as well. Such services must themselves constitute VAT-exempt transactions (e.g. financial), rather than merely administrative or technical support for such transactions.

Polish judicature on complex supplies also reiterates these criteria, emphasizing that "it is particularly important to examine the scope of the service provider's responsibility, and especially whether this responsibility is limited to technical aspects or covers specific and essential elements of the transaction.[3]” Thus, the emphasis is placed on the nature and course of the services provided, assessed particularly through the prism of the actual connection with the main activity (especially when the auxiliary activities are in nature administrative or precisely technical).

VAT challenges in centralizing group services

The JPMorgan case is not just an interesting anecdote from the UK, but rather another alarm signal for multinational corporate groups about potential pitfalls in VAT classification of supplies performed between related entities. It is a frequent practice to centralize functions in specialized units, which then provide complex services to operating group companies. This raises questions about the correct VAT recognition of both „service packages,” as well as of individual components.

Another court proceeding over the recognition of services as a complex supply may be treated as a signal for a critical review of support service structures and their qualification for VAT purposes. Proper preparation can be crucial to avoid potential disputes with tax authorities, and an accurate description of services in intra-group agreements seems to be fundamental. As experience has shown, from the perspective of the tax authorities it is the contract that is the primary source of information about the nature of the supply, being the primary material used by the authorities and the courts in verifying the tax approach taken by taxpayers. Agreements will, therefore, form the first line of defense during a tax audit.

It is worth remembering that the precise and comprehensive drafting of intragroup agreements must not be neglected especially in the case of cooperation between related parties, for which (only seemingly) strict approach as to the formalization of mutual settlements may seem not so important. Proper formulation of agreements is a key element of tax risk management also in relations involving related parties within corporate groups.

Practical takeaways from the JPMorgan Case

The JPMorgan case sheds light on one of the most complicated areas of tax law – the recognition of complex supplies for VAT purposes. For multinational corporate groups, this issue represents not only a challenge but may also be deemed to be a potential tax "trap".

Is your company prepared to address such challenges? If not, here is what you should do:

  • Analyze your structure: Are the services provided within your group correctly classified for VAT purposes?
  • Verify and update your documentation: Precise agreements and descriptions of services provided, as well as evidence of their execution, are your first line of defense in case of a tax audit.
  • Stay up to date: The legal environment is constantly changing. Regular consultations with your tax advisors will help you avoid unpleasant surprises.

Considering increased activity from tax authorities, proactive measures are key to success. Do not wait until it's too late - contact us today.

[1] CJEU in case C-392/11 Field Fisher Waterhouse

[2] CJEU in cases C-2/95 SDC or C-607/14 Bookit

[3] Cf. the judgment of the Supreme Administrative Court of April 13, 2023 (no. I FSK 251/20) and the judgment of the Supreme Administrative Court of June 12, 2018. (no. I FSK 1145/16).