Thank you for subscribing to our VAT Focus. This edition provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Tribunals and Courts. This version discusses the rulings in American Express Services Europe, KPC Herning and The Lilias Graham Trust. Issues covered include the place of supply for international services and what constitutes “closely linked” for the purposes of VAT.
VAT Mini One Stop Shop for Agents
HMRC has updated its guidance to reflect changes which will take effect after Brexit.
Refunds of VAT for UK Businesses
Guidance has been updated to reflect the way in which cross-border reclaims will function after Brexit.
VAT Government and Public Bodies
HMRC has made some minor amendments to its internal guidance on VAT and public bodies.
1. Supplies of Land: Taxable or Exempt
This case concerned the VAT exemption for supplies of land and the categorisation of a supply of land as “building land”. Danish law excludes certain supplies of land from the exemption, including “the supply of building land, whether developed or not, and in particular the supply of built-on land”. The Danish legislation explains the meaning of “building land” and clarifies that “The supply of buildings and the land on which the buildings stand is not subject to VAT where they are not new buildings. If the supply is made for the purpose of a new building, however, the supply shall be considered to be a supply of building land.”
A Danish property development company, KPC Herning, decided to develop social housing for young people and worked alongside Boligforeningen Kristiandal (BK), a low rent housing body. KPC purchased land with a warehouse on it from the Port of Odense, which BK was to demolish in order for KPC to build a new residential property on the site. KPC subsequently transferrred the land to BK. The dispute in the Danish Court arose because KPC believed the sale of the land by the Port of Odense was exempt from VAT and the Danish tax authority disagreed as it believed it was a supply of building land.
The question posed to the CJEU was whether the relevant EU law must be interpreted as meaning that a supply of land supporting a building at the time of sale may be classified as “building land” where the parties intention was that the building be demolished and replaced with a new building. KPC’s main contention was that it was inappropriate to classify the property in question as building land as, at the time of the sales, there was a building on the land. The Danish tax authority argued, essentially, that the economic reality of the transactions made them one transaction, which it would be artificial to split, of land for the purpose of construction. Therefore, the sale to KPC and the sale by KPC should have attracted VAT.
The Court considered that the relevant EU law precludes land with a building on it from being classified as “building land” where the transaction is economically independent from other services, such as demolition, even where it is the parties intention that the building on the land is demolished to make way for a new one. The transactions were, therefore exempt as KPC had contended.
Constable Comment: This case is reasonably useful in demonstrating that where a chain of transactions exists which provides a benefit to a taxpayer, the Court will almost always consider the nature of the supply chain and assess each individual transaction. Whilst in this case the taxpayer was successful, this is not always the case and taxpayers should be careful about using artificial links in chains to gain a tax advantage.
2. Whether supplies were closely linked with exempt supplies of welfare
This appeal by The Lilias Graham Trust (LGT) concerned whether supplies by LGT were VAT exempt by virtue of their close association with a supply of welfare. LGT makes its supplies to a Local Authority. The service offered is to act as an observer watching the parent care for the child, in a residential assessment centre, and offering advice to the parent as appropriate.
Families are sent to LGT through social worker referrals and LGT invoices the local authority. LGT argued that its supplies were not directly connected with exempt supplies of welfare as there are intermediaries between its supply and the care of children (The Local Authority).
HMRC argued that the supplies are exempt as they are closely linked with, or directly connected to, exempt supplies of welfare services; namely the care and protection of children. To support this claim it contended that the supplies by LGT guarantee, insofar as possible, the care and protection of the children. Whilst any judgments about the child being taken into care were not made by LGT, it was argued that this did not prevent LGT’s supplies from being directly related to the care and protection of children.
Drawing on a wealth of caselaw, the Tribunal assessed what constitutes “directly connected”. LGT sought to split the words apart and give them their dictionary meaning, contending that their supplies are blocked from being directly related to the supply of welfare as the local authority is an intermediary. The Tribunal, and HMRC, disagreed with this approach, asserting that the “essential purpose” of LGT’s supplies is to ensure the care and protection of children and, therefore, that its supplies are both closely linked and directly connected with exempt supplies of welfare. The appeal was, therefore, dismissed.
Constable Comment: It may appear that HMRC would argue for exemption given that, after deducting claimed input tax, LGT would be due a net VAT repayment of £400,490.97. However, LGT would usually only be able to make such a claim if it refunds the overdeclared output VAT to its customer which, in turn, would need to refund an equal amount to HMRC which it had previously claimed as input tax. Therefore, looking at the supply chain as a whole, this is a beneficial judgment for HMRC.
3. International Services: Place of Supply
This appeal by American Express Services Europe Limited (AESEL) concerned the place of supply of VAT exempt payment services. AESEL believed it made its supplies to TRSCo, a company established outside the EU. By virtue of The Specified Supplies Order 1999, AESEL could recover input VAT on costs relating to the supplies made to TRSCo. HMRC argued that AESEL actually made its supplies to AESPL, a company established within the EU; supplies of VAT exempt payment services between AESEL and AESPL would not give a right to input VAT recovery for AESEL.
The Tribunal drew on the vast quantity of caselaw relating to place of supply issues including Airtours and Adecco. As a starting point it was highlighted that identifying the correct recipient of the supply is a two-step process; first the contractual position is assessed and then the economic reality of the transactions. Whilst there were many agreements in place between various AMEX Group entities, the main agreement in question was the Card Issuer Agreement. Whilst HMRC tried to dilute the terms of the main contract with pieces from other contracts, the Tribunal found that the Card Issuer Agreement was, in fact, the correct point of focus and that, contractually, there was no doubt that the supplies made by AESEL were to TRSCo.
The Tribunal went on to assess the economic and commercial reality of the transactions. HMRC sought to argue that a payment which passed from AESEL to AESPL under one of the contracts which was not discussed at great length showed that the supply was to AESPL and not to TRSCo. The Tribunal asserted that it is not necessary for the payment to pass between AESEL and TRSCo and that the entire transaction must be considered. It was concluded that the economic reality of the transaction corresponded to the contractual position and that, therefore, AESEL was making supplies of VAT exempt payment services to TRSCo outside of the EU. It was entitled to input VAT recovery on associated costs.
Constable Comment: This appeal related to input tax reclaims which amounted to £57,633,216.00 so represents a significant loss for HMRC. As the Tribunal has granted leave to appeal, we would expect HMRC to appeal this decision further. With this in mind, the discussion is a useful reminder of the two-step process in determining place of supply for services. Whilst the contractual position is important, it is not the decisive factor if the contracts do not reflect the economic reality. When a business is making international supplies within a complex supply chain it is always worth seeking VAT advice to clarify the VAT position and often worth submitting a non-statutory clearance to HMRC to obtain certainty on HMRC’s view. Litigation on issues of this kind can be hugely expensive and, when unsuccessful, can expose a business to unexpected and unplanned VAT liabilities.