Constable VAT Focus 25 June 2020


End of VAT Payment Holiday
HMRC announced that UK taxpayers could defer payments of VAT which are due between 20 March and 30 June 2020. This deferral period will end soon and taxpayers will need to begin payments again. Those who have cancelled a direct debit for VAT will need to reinstate this at least 3 working days before a VAT return is filed.

Option to Tax: Extension to Time Limit
HMRC has revised its temporary change to the time limit for notifying an option to tax. Taxpayers now have 90 days to notify HMRC. This measure applies to decisions to opt made between 15 February 2020 and 31 October 2020.

Revenue & Customs Brief 9 (2020)
HMRC has released a new Brief informing overseas businesses about the current delay in processing and refunding VAT claims submitted under the Overseas Refund Scheme.

Pay No Import Duty or VAT on Visual & Auditory Goods
HMRC has released new Guidance explaining how public, educational, scientific and cultural establishments, which are approved by HMRC, may claim relief from duty and VAT on certain items.

Pay Less Duty and VAT if Importing Capital Goods
HMRC has released new Guidance on claiming relief from duty and VAT when transferring a business to the UK in certain circumstances.

VAT Notice 708: Buildings and Construction
New information has been added regarded charges for change of use as a result of COVID-19.

Help & Support For VAT
Recorded webinars about VAT accounting schemes and the VAT Flat Rate Scheme have been updated.



1.Vodafone: VAT Liability of Early Termination Charges

This CJEU referral considered the correct VAT liability of fees levied by Vodafone against customers who terminate their contracts early. Vodafone entered into contracts with consumers, many of which include special promotions subject to the condition that the customer is tied in for a minimum period. If a customer ceases to make payments during this period, Vodafone charges the consumer a fee.

In 2016, Vodafone declared VAT on monies which it received from consumers who had failed to comply with the tie-in period. However, in 2017, it subsequently sought to change its position as it no longer considered that the amounts in question were ever subject to VAT. The case of MEO states that such payments are liable to VAT where the amount of the payment corresponds to the remaining value of the contract as this constitutes consideration for a supply of services. However, Vodafone calculates these amounts in line with a formula which does not relate to the remaining value of the contract and so argued that MEO was not entirely relevant as the payments received represented damages rather than consideration for a supply of services.

The Court observed that a supply of services is carried out for a consideration where there is a legal relationship between the provider of the service and the recipient, pursuant to which there is reciprocal performance. Therefore, the fundamental question before the Court was whether amounts received by a service provider in the event of early termination of a contract for the provision of services must be judged to be further consideration for the underlying services.

The referring Court made it clear that the amounts charged to consumers who terminate the contract early reflect the recovery of some of Vodafone’s costs associated with making the supply. The CJEU remarked that, consequently, the amounts received by Vodafone must be considered to represent part of the cost of providing the service. It was noted that the amount due upon early termination seeks to guarantee a minimum contractual remuneration for Vodafone which, it stated, indicates that those payments must be regarded as part of the consideration for the supply as this is the economic reality.

Concluding that fees charged to consumers who terminate their contract early do constitute consideration for a supply of services, the Court noted that just because the amount is calculated by reference to a formula rather than the remaining instalments does not change the fact that there is consideration for a supply of services.

Constable Comment: Damages received as a result of breach of contract are normally outside of the VAT regime as they usually represent compensation and not consideration. However, for this to be the case, the damages awarded must be truly compensatory and not relate to an underlying supply for which a supplier has not yet received payment. This line can often be difficult to draw in practical terms and this case seemed to be a genuinely grey area. Hopefully this judgment will help provide some clarity on this topic but, when reaching a decision of this nature, regard must always be had for the economic reality of the transactions in question. As Vodafone sought to recover the costs it incurred by levying charges against consumers, the CJEU concluded that the economic reality was that the payments received represented a further, if reduced, consideration for the underlying supply. At the current time the COVID 19 pandemic has had an impact on the economy. If your business is restructuring existing arrangements with suppliers or customers and there is uncertainty around the correct VAT treatment of income received or payments made please do not hesitate to contact Constable VAT.

2. KrakVet: Place of Supply of Goods

This referral from the Hungarian Courts concerned the place of supply of goods and a technical disagreement between the Hungarian and Polish Tax Authorities as to the correct place where KrakVet should pay VAT on its supplies.

KrakVet is a Polish company which sells animal products online. It advertises in Hungary and has made sales to many Hungarian customers. During 2012, it offered the possibility for purchasers to conclude a contract with a Polish transport company to deliver the goods to Hungary; KrakVet was not a party to these contracts. Customers were also free to collect the goods from KrakVet or to choose their own carrier of the goods. Where necessary, the goods were delivered by the Polish transport company to the warehouses of two Hungarian couriers. The goods were then subsequently distributed to Hungarian customers.

KrakVet applied to the Polish Tax Authority for a ruling, seeking to clarify that it was supposed to treat its sales as Polish. The Polish Tax Authority took the view that the supplies arose in Poland and that VAT should be paid at 8% in Poland. However, in August 2016, the Hungarian Tax Authority concluded that deliveries had been made in Hungary on behalf of KrakVet and that it had exceeded the Distance Sales threshold. It assessed Krakvet for unpaid output VAT at a rate of 27% with an associated penalty and default interest. The Hungarian Tax Authority also imposed a fine for failure to comply.

The technical liability difficulty arose as a combined effect of the wording of the distance sales provisions, and the fact that the shipping contracts were with the third-party Polish transport company. The usual place of supply of goods is where the goods are located when they are dispatched. However, there is an exception to this rule when goods are dispatched or transported “…by or on behalf of the supplier” between member states and the customer is a non-taxable individual which switches the place of supply to the ultimate destination of the goods. Therefore, the question before the Court was whether the goods being transported by the third party which was recommended by the supplier, but with whom the purchasers were free to contract or not, should be considered as dispatched or transported “… by or on behalf of the supplier.”

The Court considered that goods are dispatched or transported on behalf of the supplier if it is the supplier, rather than the customer, that effectively takes the decisions governing how those goods are to be dispatched or transported. It clarified that this means that a supply of goods falls within the distance selling provisions where “… the role of the supplier is predominant in terms of initiating and organising the essential stages of the dispatch or transport of the goods.”

Whilst the arrangements need to be considered in the light of this judgment, the Court stressed that the contractual arrangements should be taken into consideration, but that the economic and commercial reality underlying the transaction must be the primary consideration. It noted that the contractual terms in the present case do not reflect the economic reality where the purchasers merely endorse the pre-arranged shipping choices made by the supplier. Therefore, it seems that the supplies will be regarded as arising in Hungary by virtue of the distance sales provisions.

Constable Comment: This complex case also considered whether the objectives of preventing jurisdictional conflicts between Member States and double taxation preclude the tax authorities of one Member State from being able to unilaterally subject transactions to VAT treatment different from that under which they have already been taxed in another Member State. There is a lengthy discussion on this point in the released decision and readers with an interest in the functioning of EU law may be interested to read this. The Court concluded that such practices are not precluded.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.