Tag Archives: Right to deduction

Constable VAT Focus 16 May 2019

16th May 2019

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”.

HMRC NEWS

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.

CASE REVIEW

CJEU

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.

Constable VAT Focus 28 March 2019

28th March 2019

HMRC NEWS

Trading With the EU if the UK Leaves Without a Deal

HMRC has updated its guidance on leaving the EU in particular to reflect the fact that there is to be an extension to arrangements already announced regarding the use of Transitional Simplified Procedures (TSP), which will make importing goods easier.

Impact Assessment for VAT and Services if the UK Leaves Without a Deal

HMRC has released an impact assessment on the effect on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU.

VAT Treatment of Pension Fund Management

The policy of allowing insurers to treat all pension fund management services as exempt from VAT under the insurance exemption is to be discontinued. This policy change applies from 1 April 2019.

CASE UPDATE

CJEU

1. Exemption for Letting Immovable Property

This case concerned the interpretation and applicability of the VAT exemption for the letting or leasing of immovable property. The Portuguese tax authorities assessed Mr. Mesquita for VAT on contracts relating to the transfer of the use of vineyards for agricultural purposes for a period of one year. These transactions had been treated as exempt from VAT.

The question before the Court was whether the exemption for letting immovable property related to this contract.

The Court considered that the purpose of the EU law conferring the exemption on certain transactions was owing to the fact that the leasing of immovable property is normally a relatively passive activity which does not generate a large amount of income.

Where services are supplied along with the immovable property in a single transaction, such as supervision or maintenance, then the whole transaction is subject to VAT. However, the Court found that there were no services provided with the vineyards so the exemption could be applicable.

Constable Comment: The contract in the main Portuguese proceedings led to what the tax authorities believed to be a transfer of assets thus creating a taxable supply. The Court held that even if assets are transferred in this type of contract, they are ancillary to the main supply and the exemption still applies to the whole contract value.

Supreme Court

2. Education Exemption: Meaning of “eligible body”

This appeal concerned the criteria to be applied when determining if a particular body is eligible for the purposes of the VAT exemption afforded to certain bodies providing education to students.

The appellant, SEL, the English subsidiary of a Dutch company, contended that its supplies of UK education were exempt from VAT as it was a college of Middlesex University (MU). It appealed against assessments to VAT raised by HMRC. The appeal was allowed in the First Tier Tax Tribunal but it was escalated by HMRC and eventually ascended to the Supreme Court.

MU is a UK university and as such benefits from the exemption from VAT. This exemption is, under UK law, extended to “… a university and any college, school or hall of a university”. The Court, therefore, gave some consideration to what constituted a college of a university and observed that the “integration test” employed initially by the First Tier Tribunal was correct. The following five factors must be considered in arriving at a conclusion as to whether a particular undertaking can be considered a college of a university:

Whether they have a common understanding that the body is a college of the university
Whether the body can enrol students as students of the university
Whether those students are generally treated as students of the university
Whether the body provides courses of study which are approved by the university
Whether the body can present its students for examination for a degree from the university

In examining whether or not these criteria applied to SEL and its arrangements with MU, the Court concluded that the exemption did apply to SEL which had been referring students for degrees from MU since the beginning of their arrangement in the 1980s. It was found that there is no need for there to be a constitutional association with a university in order to be a college of that university.

Constable Comment: The criteria laid down in this instance for determining whether or not a body is eligible are not intended to be definitive and the Court observed that, in each instance, regard must be had to the individual facts of each arrangement between a university and an associated body.

Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

This case concerned whether or not input VAT incurred by a company in defending its director was deductible by that company as input tax. Mr. Ranson left a company, CSP, and set up his own rival firm in the same area, taking three employees with him. It was alleged by CSP that he had breached his fiduciary duties and also that he had misused a contact list from CSP for establishing his own business. CSP sought an account of profits earned by Mr. Ranson as a result of his breach of duty and sought to recover funds from Praesto.

In defending against these claims, Mr. Ranson instructed solicitors who were successful in his defence. The issue arose as a result of the solicitors addressing one invoice to Praesto and a further eight to Mr. Ranson individually. HMRC did not dispute the deductibility of the input VAT in relation to the invoice addressed to the firm but disputed the others as a result of the addressee.

VAT incurred is deductible so far as it has a “direct and immediate” link with the company’s taxable supplies. However where the legal costs form a part of the cost components of the company’s supplies it is also accepted that they have a direct link with the company’s economic activity as a whole.

HMRC placed a lot of emphasis on the fact that the invoices being disputed were addressed to Mr Ranson. Mr Ranson argued that Praesto were party to the proceedings in all but name and there was a direct benefit to the company in defending him. The economic reality of the situation was the solicitors were defending both Mr Ranson and Praesto.

The Court agreed with Mr Ranson that there was a direct benefit to Praesto in defending claims against him as if the claims had succeeded against Mr Ranson, CSP would have sought to recover profits made by Praesto. It was concluded that the VAT incurred by Praesto in mounting a defence against the allegations of CSP was, indeed, deductible.

Constable Comment: This is an interesting topic as, more often than not, the actual receipts and contracts are looked through to the economic reality of the supply. Whilst this appeal was allowed, one judge dissented, believing the fact that the invoices were addressed to Mr Ranson personally to be fatal to the appeal. This type of case will always need to be considered carefully, it is prudent to seek professional advice in relation to input VAT recovery in this scenario.

4. Default Surcharge: Reasonable Excuse

This appeal against a default surcharge turned on whether or not the applicant had a reasonable excuse for late payment. The appellant argued that he was unable to log in to the online gateway necessary for making VAT payments.

Mr Farrell received a notice of liability to surcharge which required payment by 7 May 2017. He was unable to log in to the Gateway using the information he previously saved in his computer. When he contacted the webchat he was told that he needed to speak to technical support. Technical support informed Mr Farrell that they could not deal with his enquiry until after 8 May 2017; after the due date for payment of the surcharge.

On the 8 May he spoke to the technical support team and was told that he had been using an incorrect User ID, a new one was sent to him but it turned out to be the first ID he was given before having it changed by HMRC when the Commissioners updated the system. Based on the changing of his logon details, he contended that he was not to blame for missing the payment date.

HMRC denied that his logon details had ever been changed and said there was no record of the webchat which Mr Farrell claimed to have had. Mr Farrell had clear evidence that this was not the case in the form of a saved conversation with Alexander form HMRC’s webchat and his “Browser Password Recovery Report”. This showed that his ID had indeed been changed when HMRC updated their system and that it had changed back to the original.

HMRC sought to argue that Mr Farrell had been using an incorrect ID number and therefore that he was responsible and did not have a reasonable excuse.

The Court held that Mr Farrell made reasonable efforts to pay the VAT due and that it was not clear why HMRC did not have the facilities to deal with Mr Farrell’s enquiry. The appeal was allowed; there was a reasonable excuse.

Constable Comment: This case demonstrated that HMRC do make mistakes when dealing with the taxpayers. It is a useful reminder that it is always prudent to maintain your own records of conversations with HMRC officers in order to evidence advice given or any mistakes made on HMRC’s behalf. We would recommend obtaining an officer name and a “call reference number” when speaking with HMRC.

Constable VAT Focus 01 February 2019

1st February 2019

HMRC NEWS

Goods or Services Supplied to Charities

Find out when suppliers can apply the VAT zero rate VAT for advertisements and goods used for the collection of donations.

Software Suppliers for Sending VAT Returns

Find out which software packages support the Making Tax Digital pilots.

VAT Supply and Consideration

Payments that are not consideration: Grants. This section of guidance will help you determine whether a payment described as a grant is consideration for a supply of goods or services and will be of particular interest to charities and other not-for-profit organisations in receipt of grant funding.

Customs, VAT and Excise Regulations: Leaving the EU with No Deal

This collection brings together regulations, explanatory memoranda and an impact assessment in preparation for day one if the UK leaves the EU with no deal.

CASE REVIEW

CJEU

1. The Deductibility of Input Tax Incurred by Branches

This case concerned the Paris branch of Morgan Stanley and whether it was entitled to deduct input VAT it incurred on expenditure relating exclusively to the transactions of its principal establishment in another member state of the EU. The branch carries out banking and financial transaction for its local clients as well as supplying services to the UK principal establishment and had deducted in full the VAT incurred relating to both types of supply. The domestic tax authorities believed that this input VAT should not be fully deductible but that it should be apportioned using the principal establishments input VAT recovery fraction.

The main question which arose before the Court was whether the proportion of recoverable VAT incurred by the branch relating exclusively to the transactions of its principal establishment should be calculated in line with the branches or the principal’s input VAT recovery rate. It was also asked what rules should be applied in relation to expenditure relating to both transactions by the branch and by the principal.

Giving extensive consideration to the wealth of case law surrounding this subject, the Court decided that, in relation to the first question, that neither of the suggested calculations was correct. It was held that in relation to such expenditure, the associated input VAT is deductible in line with a fraction calculated as:

“Taxable transaction which would be deductible if carried out in branches states / Turnover (excl. VAT) made up of those transactions alone”

With regard to the second question of general costs of the branch which are used for both domestic transactions and transactions with the principal branch it was decided that account must be taken, in the denominator of the fraction, of the transactions carried out by both the branch and the principal establishment. The numerator of the fraction must represent the taxed transactions carried out by the branch and the taxed transaction carried out by the principal establishment.

Constable Comment: This confirms that VAT incurred by branches on expenses relating to supporting its head office are recoverable by looking thorugh to the supplies made by the head office. The calculations for the recoverable amount of input VAT are complicated, especially where the look through reveals the head office to be making both taxable and exempt supplies. If your business makes supplies to a head office it would be prudent to seek professional clarification of the correct treatment of input VAT incurred in relation to these supplies.

Upper Tribunal

2. Welfare Services Exemption

The question before the Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality.

The Learning Centre Romford (TLC) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which TLC receives funding. TLC had treated these supplies as exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

TLC argues that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same style of care as TLC but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and TLC were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable Comment: This was an interesting joint case which focussed on an area of disparity between the implementation of EU law in England and other devolved powers such as Scotland and Wales. Whilst there is a difference in the ways in which the law operates in different areas of the UK, the Tribunal found that this is as a result of the devolved powers implementations and not a failure of the UK to adhere to an EU Directive. This decision will also be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, would generating taxable supplies be advantageous?

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

This case concerned whether or not there was a direct and immediate link between input VAT incurred by Adullam Homes Housing Association (AHHA) and its taxable supplies of support services. AHHA is a partially exempt business making taxable supplies of support services and exempt supplies of accommodation.

The dispute arose with regard to whether input tax incurred on acquiring, maintaining, repairing and cleaning accommodation can be linked to the taxable supply of support services or if, as HMRC contend, there is no such link and this input VAT is wholly irrecoverable. AHHA sought to argue that the acquisition and maintenance of accommodation was necessary as part of the overall supply made of accommodation based support services.

The Tribunal gave extensive consideration to case law around the issue of attribution of input VAT incurred by a partially exempt business. The conclusion was reached that the costs, whilst related to the provision of accommodation, were incurred in order that the Appellant had clean, safe and secure premises to enable it to bid for accommodation based support contracts. This constituted a direct and immediate link with the provision of support services.

It follows from this conclusion that the inputs incurred by AHHA in relation to maintain the accommodation were residual and fell to be recovered in line with their partial exemption percentage.

Constable Comment: Certain difficulties present themselves when performing partial exemption calculations, one of the most common is in deciding whether particular inputs should be directly attributed to taxable or exempt supplies or if they fall to be apportioned. Where looking through to the recipients onward supplies it can become difficult to ascertain the correct treatment of input VAT in line with the principles highlighted in this case. If your business is partially exempt and the calculations are complicated it is advisable to regularly review the attribution of VAT incurred and to seek professional clarification to ensure compliance if any obligation exists.

CVC VAT Focus 12 July 2018

12th July 2018

HMRC NEWS

VAT grouping eligibility criteria changes

This latest measure will allow certain non-corporate bodies to join VAT groups. For example a charitable trust which is VAT registered as a partnership may now be able to form a group VAT registration with its wholly owned trading subsidiary.

VAT treatment of vouchers

Draft legislation about the implementation of an EU Directive of the VAT treatment of vouchers.

VAT Notes 2018 Issue 2

This note explains how to receive payments by Bankers Automated Clearing System (BACS) and applications to the Fulfilment House Due Diligence Scheme.

Revenue and Customs Brief 4 (2018)

This brief sets out HMRC’s policy on the changes to the time limits for VAT refund schemes if you are a local authority, police or similar body.

HMRC and online marketplaces agreement to promote VAT compliance

Find out more about the agreement and how it will help build collaborative relationships. The list of signatories has been updated.

OTHER NEWS

CVC advises many charities. Our clients include a number who offer support to vulnerable people and those with disabilities. The recent decision in Sandpiper Car Hire Limited saw the Tribunal criticise HMRC’s approach to dealing with disabled people.

This article by one of our partners, Stewart Henry, gives an engaging analysis of the Court’s criticisms of HMRC and how it struggles to handle some of the challenges presented when dealing with more vulnerable members of the public.

CASE REVIEW

CJEU

1. Transfer of immovable property from a Municipality to the Treasury

This referral from the Polish Court asked whether the transfer of ownership of immovable property owned by the Municipality for compensation constitutes a taxable transaction for VAT purposes where the property continues to be owned by the Municipality as a representative of The Treasury.

In this case the State acquired, by compulsory purchase, immoveable property in order to develop a new national road from the Municipality. Concluding that the Municipality is a taxable person, the Court went on to outline three criteria necessary for a taxable supply to have arisen; a transfer of a right of ownership, made in the name of or by order by a public authority and there must have been payment.

On analysis of the circumstances in the case, it was concluded that there was a transfer of legal title of the property. With regard to the compensation received, as this was a State purchase of a Municipality piece of land, the purchase was handled as an internal accounting entry which it was argued prevented it being seen as payment for a taxable supply. The Court held that it was irrelevant as there had been consideration for a taxable supply of immoveable property; internal accounting or not.

In summary, the CJEU held that in circumstances where there is compensation given in exchange for immoveable property between taxable persons there is a taxable supply for VAT purposes even where the compensation is by way of an internal accounting entry.

CVC Comment: A supply of immovable property in exchange for consideration will constitute a taxable supply, even where the consideration is made purely by way of an internal accounting entry. A transfer is a transfer and the Court will be reluctant to read into supplies that they are not taxable transactions in the absence of any substantive evidence to the contrary. Before making any transfer of a significant value, or where operating in a grey-area, then it is always prudent to seek professional advice.

2. Buying back shares by transferring immovable property: A taxable supply?

The CJEU has responded to a Polish referral asking if the transfer by Polfarmex, a limited company, to one of its shareholders of immovable property as consideration for shares in that limited company by way of a share buy-back constitutes a taxable supply. Polfarmex argued that the plan was to restructure the share capital of the company by buying shares back and it was therefore not subject to VAT as the transaction did not form part of its business activities.

The Court stated as common ground that the transaction proposed by Polfarmex and the shareholder would lead to the transfer of the right of ownership of immovable property and that Polfarmex is a taxable person in Poland. In the absence of any place of supply issues, the main question looked at by the Court is when a supply of goods is made for “consideration”. It was held that a supply is made for consideration only where there is a legal relationship between both parties which requires reciprocal performance.

It was concluded that if the transfer of the immovable property to buy-back shares in Polfarmex would be subject to VAT if the actions by Polfarmex are ruled by the referring Court to constitute a part of its economic activity. The Court did not give direction on this topic.

CVC Comment: When restructuring companies and acquiring shares, complex VAT issues arise, as is demonstrated by this case. Before taking on the challenge of restructuring a company it is vital that professional advice is sought in order to ensure the highest degree of compliance is maintained.

3. Exemption on imported goods subsequently despatched to a taxable person different to that named on the invoice for the supply.

This decision relates to Enteco Baltic (EB), a Lithuanian wholesaler of fuel who imported fuel from Belarus free of VAT as it was to be sold onto third parties in other European Union member states.

Complying with relevant EU and domestic rules, EB provided the tax authorities with their own, the supplier’s and the purchaser’s VAT registration numbers and certificates of origin within the relevant time limits prior to import. However, EB’s intended supplies did not go ahead and the fuel was subsequently sold to businesses in other EU Member States. In order to remain compliant and to continue to benefit from the exemption for import VAT when an onward supply to a taxable person in another member state, EB declared this to the tax authorities with the VAT registration numbers of the new intended recipients. Whilst initially the tax authorities accepted this, an inspection in 2014/15 led to a discovery that the recipients’ VAT registration numbers declared on the initial import document did not correspond with those of the actual recipients.

In reaching a conclusion, the CJEU held that the exemption from VAT applying in the present circumstances is available where three core criteria are met;

The supplier has the right to dispose of the goods,
The supplier establishes that those goods are shipped to another Member State
As a result of the despatch the goods physically move out of the territory.

The inclusion of the purchasers VAT registration number on the invoice for the supply is not, therefore, essential, especially in situations such as those in these proceedings where the tax authorities were informed of the situation. It was held that application of the relevant exemption cannot be prohibited unless the supplier intentionally is participating in tax evasion.

CVC Comment: This complicated set of circumstances came down to a three-point test by the Court in order to reach a conclusion. The judgment reached shows that the Court will have regard to the economic reality of the transactions taking place where rigorous application of the law results in an unfair result.

Court of Appeal

4. VAT is not recoverable on supplies incorrectly treated as exempt by UK law

Here The Court of Appeal considered a question of whether the appellant, Zipvit, was entitled to deduct input tax on services received from Royal Mail which were treated as exempt by UK law at the time of supply but which should have been treated as standard rated according to EU law.

Royal Mail believed its supplies to be VAT exempt and it did not issue VAT invoices to Zipvit, nor pay over VAT to HMRC. The contract between the two parties made no comment with regard to VAT. Zipvit contended that it had a right to deduct VAT that should have been charged and should be deemed to be included in the invoices it had already received.

Two main issues fell before The Court; was VAT due or paid on the supplies by Royal Mail and whether the lack of VAT invoices barred any input VAT recovery by Zipvit anyway. Ultimately, the decisions of the FTT and UT were upheld by the Court; no VAT was paid over by Royal Mail and no right to deduct had arisen for Zipvit. The judgment focussed particularly on the importance of the lack of VAT invoices issued to Zipvit which ultimately ensured that no right to deduct had arisen.

CVC Comment: Zipvit has been a lead case and it will be interesting to see if it is appealed further as there have been many cases “stood behind” this judgment. Whilst this is a disappointing result for the appellants and others, it serves as an important reminder to always give consideration to VAT when drafting contracts in order to avoid complex and potentially costly situations such as the one at hand arising. The decision also emphasises the importance of obtaining correct evidence to support a right to deduct VAT incurred.

First Tier Tribunal

5. Failed zero-rating of a disposal of a renovated property

This case concerned an appeal against a decision reducing the input tax claim of a property development company.

Fireguard Developments Limited (Fireguard) renovated and subsequently sold a property (the property), believing the house had been vacant for ten years making the onward supply zero-rated. To reflect this Fireguard sought to reclaim the VAT incurred on the renovation in respect of the VAT accounting period ending 31 December 2016 on its VAT return. HMRC contended that the property had not been vacant for ten years prior to disposal and therefore that the supply was exempt meaning recovery of input VAT should be restricted.

The FTT found in favour of HMRC who submitted PAYE records and electoral role entries to support its position that the property had not been vacant for ten years prior to the refurbishment and disposal. As the property was found not to have been empty for ten years immediately prior to its sale the disposal was exempt and directly attributable input VAT was therefore irrecoverable.

CVC Comment: In cases where a business is seeking to benefit from a reduced or zero-rate of VAT it is essential to ensure that all material facts are known. The rules around when the reduced and zero-rates of VAT apply are complex and before taking on any significant or high value land or property related projects it is safest to seek professional advice.

CVC VAT Focus 17 May 2018

17th May 2018

HMRC NEWS

VAT on antiques or art from historic houses (Notice 701/12)

This explains which disposals of assets from historic houses are within the scope of VAT.

HMRC and online marketplaces agreement to promote VAT compliance

HMRC has committed to working with online marketplaces to set out a cooperation agreement to promote VAT compliance.

VAT: missing trader fraud

Find out how to spot VAT missing trader fraud and how to protect yourself or your business from organised criminals.

Revoke an option to tax after 20 years have passed

Form VAT1614J has been updated.

OTHER VAT NEWS

We understand that HMRC has begun to contact firms directly regarding the VAT treatment of electronic searches following the Brabners LLP VAT case summarised on our website. The Law Society has issued guidance which can be viewed here.

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

Exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to VAT recovery may be ‘specified’ to do so when the customer is located outside the EU. Follow the link to read our most recent blog, by Robert Thorpe, which explains this further.

CASE REVIEW

CJEU

1. Right of deduction after a tax inspection

This request for a preliminary ruling concerns the interpretation of EU law and the principles of fiscal neutrality, effectiveness and proportionality. In the main proceedings, Zabrus Siret filed VAT returns following tax inspections requesting repayment of VAT. The national tax authorities refused to reimburse this tax as the amounts being claimed related to a tax period which had already been subject to an inspection by the domestic tax authority. Zabrus Siret appealed this decision.

There were two questions before the court in this instance, amounting to one main question, being whether EU law precluded national legislation which the right to reclaim VAT in respect of a tax period which had previously been subject to a tax inspection.

As the Court has held previously, the right of deduction is an integral part of the VAT system and may not, in general, be limited. The right to deduct VAT in Romania is subject to a five year limitation period which is shortened in the event of a tax inspection. The effect of this is that the taxpayer cannot correct VAT returns for tax periods which have been subject to an inspection. Whilst the Romanian authorities argued that this was a legitimate practice, the Court held that the EU law principles does preclude national legislation which prevent, in circumstances such as those in the main proceedings, a taxable person from claiming his right of deduction following a tax inspection.

CVC Comment: The right of deduction is fundamental and can only be limited in very specific circumstances. This ruling demonstrates that even where domestic laws seem to preclude this right in line with EU law, the CJEU are prepared to rule in favour of the taxpayer in matters such as those at hand. In practice this decision will have no impact on UK taxpayers as the UK rule preventing recovery of VAT once a VAT period is more than four years old is considered proportionate to the needs of the State to have certainty on its fiscal position.

2. Deductibility of VAT in a failed takeover

This case concerns Ryanair’s bid to take over Aer Lingus. Despite failing with its bid, Ryanair incurred significant VAT costs. Ryanair claimed a deduction of this VAT, which was denied by the Irish tax authorities on the grounds that acquisition and holding of shares does not constitute an economic activity within EU law.

Two questions are before the CJEU in this instance; whether an intention to provide management services to a takeover target is sufficient to establish that the acquirer is involved in an economic activity and if there can be a direct and immediate link between professional services rendered in the context of such a potential takeover and the potential provision of management services.

The Court has yet to issue a judgment but the Advocate General has issued a preliminary opinion, that input tax recovery was justified by Ryanair, not as a holding company, but because it was seeking to take over Aer Lingus in order to extend an operating business.

CVC Comment: We await a CJEU decision but if this follows the AG’s opinion then this would suggest that HMRC’s policies on input tax recovery are, in some cases, too restrictive.

Court of Appeal

3. VAT recovery: VAT incurred in relation to investment activity

The Court of Appeal has referred matters raised in The Chancellor, Master and Scholars of the University of Cambridge case to the CJEU for guidance. The Court of Appeal proposes to ask the CJEU for guidance on the following:

Where management fees are incurred in relation to a non-taxable investment activity is it possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income.

The Court of Appeal also seeks confirmation that its reading of the Sveda decision is correct and that no distinction is to be made between exempt and non-taxable transactions for deciding whether input tax is deductible.

CVC comment: the First Tier and Upper Tribunal previously ruled that the input tax incurred in relation to investment management fees could be treated as residual input tax and is recoverable to the extent that income derived supports taxable business activities. Taxpayers must hope that the CJEU agree.

4. Zero-rating the construction of a relevant charitable purpose building

Wakefield College, a charity, appealed against the Upper Tribunal’s decision that construction services provided to it in the course of constructing a new building were not zero-rated for VAT purposes. The supply in the course of construction of a building intended for use for a relevant charitable purpose i.e. a non-business activity, may be zero-rated.

The issue in this case was whether subsidised fees charged to students prevents the zero-rate from applying because it renders the education a business activity.

The Court of Appeal found that the supply of courses by Wakefield College to students paying subsidised fees is a business activity. The Court of Appeal provided the following reasons for its decisions:

The sole activity of the College is the provision of educational courses, this is not an ancillary activity.
The provision of courses to students paying subsidised fees is significant.
The fees paid by subsidised students are significant in amount.
The subsidised fees made a significant contribution to the cost of providing courses.
The level of course fees was fixed by reference to the cost of the courses.
The fees were not fixed by reference to the means of the student.

The College’s appeal was dismissed.

CVC comment: Wakefield College previously won its case before the First Tier Tribunal; however, HMRC succeeded in appealing the FTT’s decision to the Upper Tribunal. This decision provides further clarification of ‘non-business’ for VAT purposes. The Court of Appeal considered the CJEU decisions in Borsele and Finland, as well as the decision in Longridge on the Thames.

Upper Tribunal

5. Third party consideration in a points reward scheme

This appeal by Marriot Rewards LLC & Whitbread Group PLC concerned whether payments made by Marriot Rewards (MR) to hotels participating in the loyalty scheme were consideration as a supply to MR or, alternatively, represented third party consideration paid by MR for supplies to customers redeeming points earned on the scheme, the reward being a “free” stay in a hotel. MR had submitted a reclaim of input VAT on the basis that payments made to participating hotels were consideration for services supplied.

A further issue arose; if payments were not third party consideration then were they payments for services relating to immovable property or advertising. This was relevant to the issue of where the supplies arose under VAT place of supply rules.

Upholding the decision of the FTT, the UT held that payments made by MR to hotels participating in the scheme were for supplies of services to MR. As regards the question of whether the supplies were related to land (immovable property) or advertising, the UT held that the supplies fell into neither description. This was relevant because for periods prior to 2010 Whitbread had sought to recover overpaid output VAT on the basis that it was, as a participating hotel operator, supplying services that fell outside the scope of VAT. Conversely, for periods after 2010, HMRC argued that the supplies should not have attracted VAT under the general place of supply rule, such that MR was ineligible to reclaim that VAT under the 13^th Directive (MR wanted the services to be land related such that UK VAT charged could be reclaimed.

CVC Comment: This was a complex case involving three parties with different interests in the outcome. However, as far as the fundamental question of who redeems supplied services to it further undermines HMRC’s attempts to view the beneficiary of business promotion schemes as the recipient of supplies, a preferred analysis if HMRC in seeking to block VAT refunds. Whilst there are aspects of this case and appeal which are unique, those operating points rewards schemes should consider and clarify the VAT position in relation to any supplies made between parent groups and “redeeming” participating parties. It is also important to consider carefully exactly what supplies are being made and where they are being made for tax purposes.

First Tier Tribunal

6. Requirement to provide security for VAT

This appeal concerns a requirement to provide security to HMRC in respect of, amongst other taxes, VAT. Owing to historic non-compliance by the appellant and on-going non-compliance following entering into a “Time to Pay” arrangement with HMRC for substantial arrears, HMRC served a Notice to Derby Access Scaffolding (DAS), the appellant, requiring security for future VAT.

It was submitted by the appellant that the Notices requiring security to be provided were flawed and unreasonable. HMRC had failed to enter into dialogue with the appellant and had therefore made unreasonable projections of profit for DAS. It was also submitted that HMRC’s internal reviews could not be fair as they were internal and that the principle that decisions be made in a fair and reasonable manner had not been followed in this case. HMRC contended that it was reasonable to require security in the given circumstances, especially when considering historic non-compliance.

The Tribunal gave very little consideration to the notion that HMRC’s internal reviews were not partial. It also held that there is no obligation on HMRC to enter into dialogue with those to whom it serves notices of requirement of security and that for the purposes of protection of the revenue the amounts required in security were not unreasonable. Ultimately DAS failed to satisfy the Tribunal on any aspect of its appeal and the appeal was therefore dismissed.

CVC Comment: In cases of serious non-compliance, HMRC will seek security against not only VAT but all other taxes. This case illustrates that when the obstacles to challenging such a judgment are exceedingly high and the Tribunal has shown no enthusiasm for involving itself in matters of detail and respects HMRC’s discretion.

CVC VAT Focus 26 April 2018

26th April 2018

HMRC NEWS

HMRC has updated guidance on its website as follows:

Register for VAT if you own land with another person

Find out if you need to register for VAT jointly or as an individual when you buy, let or develop land with another taxable person.

VAT registration for groups, divisions and joint ventures

Link to VAT registration for people who own land with another person added to ‘Joint ventures and VAT’ section.

Tell HMRC about an option to tax land and buildings

Notification of an option to tax land and or buildings (VAT1614A) form has been updated.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

OTHER VAT NEWS

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

CASE REVIEW

CJEU

1. Time limits on right of deduction of input tax: Portugal

In Biosafe, there were taxable supplies made in 2011 from one VAT registered trader to another (Flexipiso), in the course of business, with appropriate supporting documentation. Under EU VAT law, this gives rise to a right of deduction of the input tax incurred by the purchaser in the relevant VAT period on purchases which relate to those taxable supplies. Flexipiso recovered the relevant input VAT, charged at the reduced rate of 5%, incurred on purchases from Biosafe. Several years later, Biosafe were subject to a tax inspection which revealed that the reduced rate of 5% had been incorrectly charged. The Portugese authorities assessed that the supplies were subject to the standard rate of VAT of 21% (Portugal) and Biosafe paid over the monies assessed.

Biosafe sought reimbursement from Flexipiso who refused to pay on the grounds that, under domestic law, their right to deduction of input VAT expired four years after the original supply was made. This brought two questions before the CJEU. The first being, does EU law preclude domestic legislation which prevents the four year period during which a right to deduction arises beginning again on the date assessment documents are issued to the supplier. The second being, if the answer to the first question is no, does the EU law preclude domestic legislation which, in the current situation, makes it legitimate for the purchaser to refuse to pay VAT when it is impossible to deduct that additional tax?

In response to the first question, it was held that the Directive does preclude domestic legislation where the right to deduct input tax is refused on the ground that the time limit for that right started to run from the date of the initial invoice. In the light of this response, the Court held that the second question did not require an answer as it follows logically from the first that a taxable person may not be denied the right to recover input tax by domestic time limits.

CVC Comment: This case confirms that where input tax has been deducted at an incorrect rate, the right to recovery by the business incurring the incorrect expense cannot be precluded by domestic time limits on the right to recovery.

2. Interpretation of EU Law on deduction adjustment

This case concerning SEB Bankas AB (SEB) was related to a supply made to SEB by VKK Investicija (VKK) of building land. Initially the parties had agreed that the transaction was subject to VAT. Some years later VKK decided that the supply was VAT exempt and raised a credit note to SEB to reflect this. This left SEB owing the authorities the input VAT originally deducted on the transaction. A fine was raised on SEB by the authorities as well as the assessment to tax. After progressing through domestic courts, questions came before the CJEU regarding the interpretation of the EU law on VAT adjustments.

The key questions before the court were; whether the obligation to adjust undue VAT deductions applies where the initial recovery could not have been made lawfully as the transaction was exempt and, if so, whether the mechanism for doing so applies in situations such as those in the main proceedings. The Court held that the EU law does require the adjustments of VAT deductions which should not have arisen because VAT was charged unlawfully.

As regards the date on which the adjustment should be made, the CJEU held that this is for national courts to decide, taking account of the principles of legitimate expectation and legal certainty and that a taxpayer’s deduction of VAT cannot, applying the principle of legal certainty, be open to challenge for an indefinite period.

CVC Comment: Where a deduction of tax has been, mistakenly, unlawfully made in relation to an exempt supply, then there is a duty on the person making the deduction to make an adjustment when this is discovered. Whether or not the obligation arises immediately is a matter which has been left open to domestic interpretation. It appears that UK policies are already in line with this decision insofar as in most cases, after four years, VAT periods are no longer open for a mandatory adjustment.

3. Triangulation and EC Sales Lists

Firma Hans Bühler, a limited partnership established and VAT registered in Germany and also identified in Austria for VAT purposes, bought products from suppliers established in Germany. Those products were sold to a VAT registered customer in Czech Republic. The products were dispatched directly from the German supplier to the customer in Czech Republic. The German supplier provided its German VAT registration number and Firma Hans Bühler’s used its Austrian VAT registration number on its invoices provided to the Czech Republic customer. The triangulation simplification was used; as such, the final customer in the Czech Republic accounted for VAT due in the Czech Republic.

The Austrian tax authorities found that Firma Hans Bühler’s supplies were ‘abortive triangular transactions’ because the reference to triangular transactions did not appear on Firma Hans Bühler’s EC Sales List.

The CJEU stated that the triangulation simplification cannot be refused because the EC Sales List has been submitted late. In addition, it is not relevant that Firma Hans Bühler’s Austrian VAT registration number was no longer valid on the date it submitted its EC Sales List (it is relevant that the VAT number is valid at the time of the supply). If the failure to submit correct EC Sales Lists on time meant that the taxpayers could not evidence the conditions for triangulation had been met, the triangulation could not apply.

The CJEU also commented that the benefit of the triangulation simplification cannot be refused on the basis that the intermediate supplier is VAT registered in the member state of dispatch.

CVC comment: the judgment confirms that the triangulation simplification can apply even if the taxpayers EC Sales Lists are not compliant provided the taxpayers can evidence that all of the conditions for simplification are met.

First Tier Tribunal

4. Sufficiently Self-contained?

This appeal by Colin James Mitchell and Kim Louise Mitchell concerned the recovery of input VAT under the DIY Builders Scheme in respect of the construction of a building in their garden. HMRC had initially refused the recovery on the grounds that not only was the building was not “self-contained living accommodation” but also that the planning consent prohibited the separate use of the building from the house; conditions necessary for a claim under the DIY Builders Scheme.

In order for a refund to be successful the building must be self-contained living accommodation and a key issue between the appellants and HMRC in this case was the absence of a kitchen in the new building. HMRC contended that this meant the building was incapable of being self-contained. The Tribunal agreed, on this point, with the appellant who argued that the ability to install and use a microwave was sufficient for the building to be constituted as self-contained.

The second prong of HMRC’s contention was the prohibition of separate use of the building in the planning permission, “…shall not be used as a separate residential unit at any time” amounts to a prohibition on separate use. They also add that the planning permission for a “garage” cannot be construed as a “dwelling”.

The Tribunal agreed with HMRC on the second point and dismissed the appeal.

CVC Comment: In cases where planning permission specifically forbids separate residential use of a construction then the Tribunal are unlikely to find in favour of the applicant. Prior to any expenditure on development it is vital that the tax implications be considered and this involves detailed analysis of the proposal and planning permission granted.

5. Printed matter: Zero-rated goods or standard rated service?

In this instance, The Tribunal had to decide supplies by Paragon Customer Communications Limited (Paragon) to Direct Line Insurance Services (DLIS) amounted to, as Paragon contended, a single supply of booklets comprising of predominantly zero-rated matter or, as HMRC contended, a supply of services, of which booklets were not a predominant element. It is also asserted by HMRC that some of the booklets supplied as zero-rated were in fact not supplies of booklets and so should have been standard-rated.

Paragon supplied various documents in relation to insurance documents for DLIS including advertising, standard Terms and Conditions, appraisals and reminders. The question came before the Tribunal as a result of an assessment on Paragon who HMRC contended was making a single, standard-rated supply of services based on the preparation and packaging involved in the process of supplying the products, the envelopes used and separate documents which were not part of the main supply i.e. the aforementioned appraisals and terms and conditions documents. Paragon appealed this assessment by HMRC on the grounds that the supplies made were one composite supply of zero-rated booklets, this was, in essence, a question of single or multiple supply.

Whilst the Tribunal considered multiple cases, including the single supply criteria in Card Protection Plan and issues of divisibility considered in Levob Verzekeringen BV, the conclusion of the Tribunal was relatively clear; Paragon is successful in its appeal against the assessment. It is held that packaging and delivery of the disputed documents is, in this instance, considered to be a single, zero-rated supply of booklets.

CVC Comment: this decision may have a wider implication, in particular for charities. Many charities cannot recover VAT incurred because of their non-business and/or VAT exempt activities. HMRC changed its policy some years ago with respect to the VAT liability of direct mailing services (standard rated). This decision may call into questions HMRC’s policy. It will be interesting to see if this decision is appealed by HMRC to the Upper Tribunal.