This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the deductibility of input VAT in different situations, where a tax point arises in relation to certain types of services and what constitutes “school or university education”.
Update to Public Notice 701/41: How VAT applies if you give or get sponsorship.
This notice explains how VAT applies if you give or receive sponsorship. A new section on crowdfunding has been added.
Update to Compliance Checks for VAT
This factsheet contains information about the penalties HMRC may charge you for a VAT or excise wrongdoing.
Update to Public Notice 700/22: making Tax Digital for VAT
This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.
VAT Single Entity and Disaggregation
HMRC has updated its list of useful legal decisions in its internal guidance for single entities and the rules around disaggregation.
1. When a Tax Point Arises for a Supply of Services
This case concerned Budimex S.A., a Polish company engaged in the provision of construction services. The question which arose was when a tax point arises for a supply of services under which payment only becomes due when the customer is satisfied with the works; when the services are “performed” or when the customer certifies their satisfaction. Polish law dictates that where an invoice has not been issued within 30 days after the completion of work then the tax point arises on this date. Budimex had not issued an invoice for the supplies it made to a customer as they had not yet certified their satisfaction so had not paid any money over, the Polish authorities sought to recover the output VAT as a de facto tax point had arisen after the passing of 30 days from the completion of the services.
In considering this question, the Court highlighted that, according to EU law, VAT is to become chargeable when the goods or services are supplied. However, it was also considered that, taking into account the economic and commercial realities of the industry, that the contractual term may incorporate part of the service offered.
That is to say that Budimex was supplying construction services which, contractually, would only be “performed” when the customer was satisfied with the work, a contractual term specifically allowed for by the Federation of Consulting Engineers. Therefore it was held that the requirement for the customer to be entirely satisfied is a part of the service being offered.
The Court held in favour of Budimex.
Constable Comment: The type of rule in question stating that a de facto tax point must arise at some stage seeks to combat avoidance by companies who deliberately do not create a tax point in order to defer VAT liabilities. However this case shows that it is possible for these rules to be circumvented where “customer satisfaction” is a specific provision of the supply made.
2. Fictitious Transactions: A Right to Deduct?
This Italian referral considered whether supplies which were fictional but created no loss to the Revenue bear a right to deduct input VAT.
EN.SA is an Italian company which produces and distributes electricity, the Italian tax authorities denied recovery of input VAT in relation to certain supplies as there was no actual transmission of energy. The question arose before the Court whether this refusal breached the principle of fiscal neutrality.
Whilst accepting that it was not the case in the current circumstances, the Court considered a situation in which the customer had acted in good faith in which case, it was hypothesized, that the right to deduct would have to arise owing to the underlying principles of the EU law. Therefore it was found that the Italian law which gave the Italian authorities the right to refuse the repayment of input VAT was not contrary to EU law.
However, in considering the question, the Court also pondered whether a fine may be levied equal to an amount of the deduction made. It was found that a fine of this amount would go against the EU principle of proportionality and, therefore, that domestic tax authorities are precluded from issuing this type of fine.
Constable Comment: this was an interesting case as, on the surface, a fictional transaction should clearly not give rise to a right to deduct VAT. However, the Court was forced to consider a situation in which a customer had acted in good faith in which it stated that the right to deduct must arise. Therefore this judgment applies to very specific facts and national legislation which prevents the right to recover more broadly may be incompatible with EU law.
3. The Exemption for Private Tuition
This case concerned whether the provision of driving tuition by a private company benefits from the exemption found in EU law for the provision of education in the public interest, typically provided by schools and universities, when provided by certain private bodies.
A&G Fahrschul-Akademie GmbH (A&G) is a German company which provides private driving tuition to students with an aim of ultimately earning a driving license. It applied to have its VAT debt cleared as it believed it was exempt from VAT but the German tax authorities refused on the grounds that the tuition provided is not normally taught by schools and universities. A&G appealed this point and the question was referred to the CJEU; does the concept of school or university education cover driving schools?
In considering this point at length the Court suggested a broad definition of what does constitute “school or university education” for the purposes of the exemptions:
“…an integrated system for the transfer of knowledge and skills covering a wide and diversified set of subjects, and to the furthering and development of that knowledge and those skills by the pupils and students in the course of their progress and their specialisation in the various constituent stages of that system.”
The Court then posited, in the light of this consideration, that driving tuition provided by a private body would be specialised tuition rather than a transfer of knowledge and skills covering a wide set of subjects.
Constable Comment: This judgment will be important in the future as it provides a reasonably solid framework for what constitutes a school or university education, a part of the legislation which comes without a definition. However, whilst a good starting point, this is a broad definition with plenty of constructive ambiguity meaning the issue is likely to surface in the Courts again.
4. Incorrectly Charged VAT: Recoverable?
This case concerned whether PORR, a Hungarian company involved in construction, was entitled to deduct input VAT on certain transactions in relation to which VAT had been incorrectly charged under the normal VAT system where the reverse charge mechanism should have been applied by the supplier.
PORR sought to argue that the supplies were not subject to the reverse charge mechanism and, in any case, the tax authority had denied it the fundamental right in the VAT system to deduct input VAT. The tax authorities contended that such a right had not been denied, indeed that it had been expressly provided for under the reverse charge procedure. PORR also put forward that the tax authorities had failed to ascertain if the suppliers could correct this mistake at no expense to PORR.
The Court considered the relevant EU law and concluded both that the tax authority had no obligation to seek corrections from the supplier and that PORR has failed, in a substantive way, to fulfil its obligations under the reverse charge mechanism. The VAT charged was, therefore, not deductible by PORR.
Constable Comment: Different to the EN.SA case which dealt with fictional transactions, the transactions in this instance took place but had been classified incorrectly as normal supplies rather than reverse charge supplies. This outcome may appear harsh to a customer who has acted in good faith but it is vital to ensure that input tax cannot be deducted twice; once by the supplier and once by the customer.
5. Restrictions on Recovery of Input VAT
This case concerned Grupa Lotos S.A., a parent company to a group of companies in Poland, operating in the fuel and lubricants sector. Polish law excludes the recovery of input VAT incurred on overnight accommodation and catering services with limited exceptions where the cost relates to a supply of tourism services or, in the case of food, the provision of microwave meals to passengers. This provision in domestic law predates Poland’s accession to the EU however it was extended in 2008 to further exclude all overnight accommodation.
The dispute in the domestic court concerned whether Grupa Lotos could deduct VAT incurred on accommodation and catering services purchased, in part, for its own use and part for its subsidiaries. Grupa believed it should be entitled to recover a portion as it was not the consumer of the services and VAT is a tax on the consumption of goods or services. The Polish tax authorities disagreed and claimed that the Polish law made no distinction between the consumption and purchase for resupply of these services.
The matter was referred to the CJEU, the question being whether EU law must be deemed to preclude legislation such as the Polish law in question after its accession to the EU and whether domestic law can extend pre-existing exclusions after accession to the EU.
Giving consideration to the nature of the VAT system and relevant case law such as Iberdrola, the Court turned to look to Article 176 which provides that Member States may maintain restrictions on recovery which were in force before their accession to the EU. It was held that the Polish law, as it was in place prior to Poland’s joining the EU, was valid but that EU law would preclude the introduction of legislation akin to this were it to be introduced whilst any given Member State was within the EU. Therefore the extension to the exclusion in 2008 was invalid.
The question of VAT recovery in this particular case has been referred back to the domestic courts to determine if the supplies involved are ‘tourism services’.
Constable Comment: This case serves as a reminder of how EU law works. Whilst “direct effect” means EU law takes precedence where domestic law is incompatible with new EU laws, where a country joins the EU and becomes a member state, direct effect does not apply retrospectively. This is interesting given the current climate with five nations seeking to join the EU; they may be allowed to keep certain restrictions but will not be allowed to extend them if they successfully enter the EU.