Constable VAT Focus 12 October 2020


Changes to VAT Treatment of Overseas Goods Sold to Customers
At the end of the transition period, the Government will introduce a new model for the VAT treatment of goods arriving to GB from outside the UK. HMRC’s note gives information on the changes to VAT treatment of overseas goods sold to customers from 1 January 2021.

Revenue & Customs Brief 15 (2020)
HMRC has now released this Brief about a review of the correct treatment for the deduction of import VAT paid by a taxable person who is not the owner of the relevant goods.

Deferral of VAT Payments Due to Coronavirus
On 24 September 2020, the Chancellor announced that businesses who deferred VAT due from 20 March to 30 June 2020 will now have the option to make smaller payments over a longer period. This Guidance has been updated to reflect the changes.

VAT Reverse Charge Technical Guide
HMRC has released some new Guidance which covers technical information about the VAT reverse charge if you buy or sell building and construction services.



Foodstuff or Supplement?

This case concerns the correct VAT rate to be applied to certain products sold by a Dutch company, X. X is a VAT registered sex shop in the Netherlands and sells products including capsules, drops, powders and sprays which are marketed as aphrodisiacs. Those products, which are composed essentially of elements of animal or vegetable origin, are intended for human consumption and are designed to be taken orally.

X treated its supplies of these products as reduced rated for VAT purposes as the Netherlands provides a reduced rate for foodstuffs which are fit for human consumption. The Dutch tax authorities challenged the application of the reduced rate, adopting the view that the products in question were not foodstuffs, so were liable to the standard rate of VAT. The lower Courts agreed with X but the Dutch Court of Appeal referred the matter to the CJEU.

The CJEU considered whether “foodstuffs for human consumption” should be interpreted as meaning any substance or product which is intended to be consumed by people and, if not, how the term must be defined. Noting that neither the VAT Directive nor Implementing Regulations gives a definition of foodstuffs, the Court turned to consider the everyday meaning of the word.

It observed that any product intended for human consumption which provides the human body with the necessary nutrients to keep it alive and to enable it to function and develop comes within the idea of a foodstuff, even if the consumption of that product also produces other effects. By contrast, it noted that a product which does not contain nutrients, or contains a negligible amount thereof, the consumption of which serves solely to produce other effects other than sustaining the human body, cannot be considered a foodstuff.

In concluding, the Court observed that foodstuffs refers to all products containing nutrients which serve as building blocks, generate energy and regulate functions which are necessary to keep the human body alive and enable it to operate and develop. The CJEU commented that it would appear that the aphrodisiacs in question fall into the second camp of supplies which may contain some nutrients, but which is consumed solely for the other effect generated. However, this matter will be referred back to the Dutch courts for a final decision.

Constable Comment: All reduced rates and exemptions from VAT must be interpreted strictly in line with the general principles of the VAT system. It seems to follow that a reduced rate for foodstuffs should not apply to powders and drops taken with the primary purpose of enhancing sexual drive, purely because they happen to contain some nutritional value. However, X might argue that increasing libido and encouraging sexual stimulation is enabling the human body to function properly and develop.

Deductibility of VAT

Vos Aannemingen (VA) constructs and sells apartment buildings. It constructs these buildings on land belonging to third parties; VA sells the property and the landowners sell the land corresponding to the apartment which is being purchased. VA purchases in all expenses including advertising and administrative costs as well as paying agent’s fees – it then deducts the VAT incurred on these expenses through its VAT return.

Following a tax inspection, the Belgian tax authority restricted the input VAT which VA was claiming, applying a fraction to the claim amount. The numerator of this calculation was the price of the building and the denominator was the price of the building and land combined. VA disagreed with this assessment, believing it could deduct the input VAT incurred in full, claiming that the benefit to the landowner did not prevent it from being able to recover input VAT that it had incurred and which benefitted both parties. It argued that there is a direct and immediate link between the expenditure and its own economic activity and that the benefit to the third party was ancillary to VA’s own business purposes.

The Court considered the cases of Iberdrola and AES-3C. The Court concluded that where, in the context of the sale of land owned and where a third party also derives a benefit from services supplied to the taxable person, this cannot have the effect of limiting the scope of the taxable person’s right to deduct input VAT.

The Court went on to observe that where it is possible for the taxable person (VA) to pass through costs to the third party, that the situation is less clear as this situation would give support to the conclusion that the expenditure being incurred does not relate wholly to a taxable output transaction. However, the ability to pass through costs is not, in isolation, sufficient for the purposes of determining VA’s right to deduct VAT as it is necessary to consider all of the circumstances for the purposes of the “direct link test” – the carrying out of this test is left for the Belgian court to carry out.

Constable Comment: This decision confirms that input VAT is deductible where a third party also benefits from the expenses incurred, provided that there is a direct and immediate link between the input cost and a taxable output. However, it will be interesting to see if the direct and immediate link test is met in cases where the costs can be passed on to the third party as this may remove the direct link with a taxable output transaction. The Court noted correctly that a decision of this nature must always be made on the unique facts of any given case so referred the matter back to the Belgian Court.  

Issues with Invoices

This case concerned Vikingo, a Hungarian company involved with the sweets and confectionery industry. It entered into two agreements with Freest Kft for the supply of several packaging and filling machines between 2012 and 2013. Under the terms of these agreements the machines were purchased by Freest from a third company, which had itself purchased the machines from a fourth company. Vikingo recovered the input VAT which it incurred on these purchases.

Following a tax inspection, the Hungarian tax authority assessed Vikingo, disallowing the input VAT which it had recovered in relation to these transactions. This was on the grounds that the machines had been purchased from an unidentified party, with the result that those transactions had not taken place between the persons identified on the invoices, or in the manner indicated on them. Essentially, the supply chain contained companies without sufficient human or technical resource to be engaged in business.

The dispute ascended through the Court system, with the tax authority continuing to infer that because the content of the invoices was implausible, there must be tax evasion. Vikingo argued that the right to deduct input VAT, read in tandem with the principles of fiscal neutrality, effectiveness and proportionality, meant that it was entitled to deduct the VAT it had incurred unless the tax authority could prove to a sufficient legal standard that tax evasion was occurring.

The question referred to the Court was whether the abovementioned principles must be interpreted as precluding a national practice, by which tax authorities refuse the right to deduct VAT incurred, on the grounds that credence cannot be given to the invoices relating to the purchases as those invoices were issued by parties without sufficient human or technical resource to have made the supplies described on those invoices.

Considering previous caselaw, as well as wider points about statutory interpretation and broad principles of EU law, the Court considered that whilst the facts in the case may contain evidence that Vikingo knew or should have known that it was participating in VAT fraud, it is the responsibility of the domestic tax authority and Court system to adduce if there is sufficient proof of tax evasion for the right to deduct to be refused. A mere possibility that tax evasion may exist in a chain of transactions is not sufficient for the tax authority to refuse repayment. If there is a sufficient level of proof that Vikingo knew or should have known it was involved in fraud then the right will, of course, be refused.

Constable Comment: This judgment essentially relates to the extent to which a tax authority needs to prove involvement in tax evasion to deny the right to recover input VAT. The approach of the Hungarian tax authority did not seem sustainable as, if agreed by the CJEU, tax authorities throughout the EU would have been able to refuse input VAT repayments based on a mere suspicion that something may be wrong, without having to actually prove that anything was. This would be an unacceptable result from the view of both the taxpayer and also the legal system.

This article is intended to give general guidance only and cannot be relied on in respect of any individual business. The facts may change as more information on the application of the reduced rate in particular circumstances is issued by HMRC. If you require advice specific to your business please contact Constable VAT or your usual adviser.