Grant Thornton - VAT Casebook January 2013


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Grant Thornton - VAT Casebook January 2013

  1. 1. VAT Casebook - A summary of recent VAT casesInes ZimmermannWhether different VAT rules can be Comment – The principle of fiscal neutrality raisesapplied to the supply of the same its head again. In many situations, tax authoritiesservice – fiscal neutrality impose conditions and the consequences are such that one taxpayer will meet the condition whereas another will not. The imposition of a conditionThe Court of Justice has released its judgment in the above may mean that the same or similar supplies arecase on 15 November 2012. The case once again centres treated differently and, if that is the case, thearound the EU principle of fiscal neutrality. principle of fiscal neutrality may be offended. The arguments will undoubtedly go on for some time The issue in this case was whether the welfare services yet.provided by Ms Zimmermann – care services provided toindividual patients on a freelance basis – were exempt fromVAT under the general Welfare provisions of the Directive, or European Commission v Irelandwhether, as contended for by the German tax authorities, the Whether the VAT Group rules onlyservices were subject to VAT. Under Article 13A(1)(g) of the apply to ‘Taxable persons’6th VAT Directive Member States were required to exemptfrom VAT the supply of services and goods closely linked towelfare and social security work by organisations (other than The Advocate General (Jaaskinen) issued his opinion in thePublic Bodies) recognised as charitable by the Member State. above case which concerns whether Ireland‟s VAT law - whichUnder the German law implementing this provision, the test allows non-taxable persons to be a member of a VAT Group -of whether a body was charitable (and thus able to exempt its is ultra vires. The case is important as the Commission hassupplies) was determined by whether the income from its commenced similar infraction proceedings against the UK andsupplies of welfare services exceeded a threshold imposed several other Member States. The Court has asked for a singleunder the German VAT law. In essence, to qualify as a opinion as the subject matter in all of the cases is the same.charitable organisation, the medical and pharmaceutical costshad to be borne in at least two thirds of cases wholly or mainly Essentially, the Commission brought the proceedings on theby the statutory social security or social welfare authorities. basis that, even though the word „taxable‟ does not appear in Article 11 of the VAT Directive in between the words „any Ms Zimmermann argued that the two thirds condition did persons‟, it is implicit in Article 11 of the VAT Directive thatnot apply to other similar bodies which, although governed by this provision encompasses only „taxable persons‟ as defined inprivate law, were nonetheless allowed to exempt their supplies. Article 9 of the VAT Directive. Otherwise, a VAT group couldAs such, Ms Zimmermann argued that the different treatment consist solely of non-taxable persons. For the Commission, theoffends the principle of fiscal neutrality. concept of „grouping‟ implies that all of the persons in the Article 11 group must belong to the same category for VAT In its judgment, the Court has confirmed that the purposes. Further, given that Article 11 derogates from theestablishment and use of the two thirds test is acceptable as it general rule that each taxable person is to be treated as ameets the need to identify which bodies are recognised by the separate unit, Article 11 is to be interpreted narrowly.Member State as „charitable‟. However, the Court has heldthat, in order to comply with the principle of fiscal neutrality, Ireland, on the other hand, took the position that Article 11the test must apply to all organisations (other than Public of the VAT Directive must be interpreted literally, and the useBodies) so that they are placed on an equal footing in relation of the term „persons‟ by the legislator without the attributeto whether or not the State recognises their „charitable‟ status. „taxable‟ was deliberate. If the legislature had intended to refer to taxable persons in Article 11, it would have inserted this The Directive provides an option whereby exemption can word into the recast VAT denied by the State if an organisation – such as MsZimmermann‟s – systematically aims to make a profit. The Advocate General states in his opinion that “I find itHowever, in this case, Germany has not availed itself of that difficult to accept the arguments of the Commission. As hasoption and, as a consequence, the principle of fiscal neutrality been pointed out by Ireland, elsewhere in the VAT Directive,means that national legislation may not lay down materially the term „taxable person‟ has been used, and not „person‟ whendifferent conditions for profit making entities on the one hand an entity is engaged in economic activities for the purposes ofand non-profit making entities on the other. the VAT Directive. While the legislative history is not decisive, it may imply that the legislator wanted to broaden the scope of those who may engage in VAT grouping. Further, I note that supplies between non taxable persons fall outside the scope of Keep up to date by joining our VAT Club LinkedIn group
  2. 2. the VAT Directive, irrespective of whether they form a VAT Consequently, the Court confirmed in each of the casesgroup or not. This means that the Commission‟s hypothetical that a taxable person established in one Member State andconcern that a VAT group could consist merely of non taxable carrying out in another Member State only technical testingpersons is not pertinent. Therefore, Article 11 of the VAT (as in Daimler‟s case) or research work (as in Widex‟s case)Directive allow Member States to regard as „a single taxable which does not include making any taxable transactions,person‟ any legally independent persons established in the cannot be regarded as having in that other Member State aterritory of that Member State, provided that they are closely „fixed establishment from which business transactions arebound to one another by financial, economic and effected‟ within the meaning of Article 1 of the Eighthorganisational links. This conclusion is in conformity with the Directive.principle of legal certainty, which is particularly important intaxation matters, where not only taxable persons and taxauthorities but also the Member States need to rely on the clear A secondary issue in the Daimler case was whether theand precise wording of the relevant European Union law. I existence of a wholly owned subsidiary in the Membertherefore propose that the Commission‟s action should be State of refund made any difference to the question ofdismissed.” whether the parent company had a fixed establishment in that country. Once again, the Court ruled that it was not the case. Although the CJEU had ruled differently in the Comment – Although the full court has yet to DFDS case (Case C-260/95), it confirmed that the facts in deliver final judgment, this opinion is excellent DFDS were also very different and did not therefore bind news for VAT Groups in the UK. The removal of the court in the current case. non-taxable companies from UK VAT groups would be a costly exercise so the Advocate General’s views as expressed in his opinion will be Comment – Although, again, in what is a worrying welcome news. trend, this case has proceeded to judgment without the benefit of an Advocate General’s opinion, it must be regarded as a common sense judgment. ItDaimler AG demonstrates the lengths to which a Member StateWhether taxpayer was entitled to make will go in order not to pay a VAT refund. than 8 Directive claim – meaning offixed establishment Deutsche BankThe CJEU has issued its judgment in the above joined Whether discretionary fundcases which concerned the issue of what should be management services are exemptregarded for VAT purposes as a „fixed establishment‟. from VAT – whether a single orIn both cases, the Swedish Authorities claimed that the multiple supplytaxpayers had „fixed establishments‟ in Sweden whichprecluded refunds of VAT paid in Sweden under the The Advocate General (AG) has issued his opinion in theprovisions of the 8th VAT Directive. above case. In essence the AG has confirmed that the discretionary fund management service provided by Deutsche Bank AG to individual customers in return for a fee is a single Daimler AG is a German company which manufactures supply for VAT purposes. Whilst the various elements of themotor cars. It has a Swedish subsidiary which owns and service are separately identifiable and are capable of beingoperates a test track in northern Sweden. Daimler AG supplied separately. the AG is of the view that, when vieweddoes not carry out any taxable transactions in Sweden but, objectively, the customers interest lies in benefitting from aeach winter, it transfers equipment and personnel to the single supply rather than a multitude of component services.test track site in order to carry out the testing of cars. The Consequently, his view is that there is a single supply ofcompany incurred input VAT on costs associated with this portfolio management.testing and claimed a refund under the 8th Directive. TheSwedish Authority considered that the test track amounted The AG acknowledged and recognised that there are twoto a fixed establishment of Daimler AG in Sweden. main elements of the single supply of portfolio management; (a) the instigation of transactions which actually create, alter or Widex A/S is a Danish company with a research extinguish parties rights and obligations in respect of securitiesdivision based in Stockholm. It incurred VAT on costs (which if supplied separately may qualify for VAT exemption)associated with the research activity but it had no taxable and (b) the deployment of relevant financial expertise foractivities in Sweden. Again, the Swedish Authority which there is no VAT exemption. He concludes that aconsidered that the research division constituted a fixed customer who chooses a particular investment strategy isestablishment and refused to make a refund of the VAT interested in seeing that strategy applied. Whether securities areincurred. actually bought or sold is less important to him than the assurance that his investment is, at any given moment, structured in accordance with that strategy. He wishes to be In both cases, the CJEU has confirmed that the actual sure that any transactions which take place are carried out atcarrying out of taxable transactions in the Member State of the right moment, but also that there will be no buying orrefund is the common requirement for there to be selling when it is preferable to sit tight.exclusion of a right to refund, whether or not the applicanttaxable person has a fixed establishment in that State. 2 Keep up to date by joining our VAT Club LinkedIn group
  3. 3. As a consequence, the AGs view is that the preponderant HMRC take the view that, just as in a non-fraudulent case,role of the expertise element over the transactions element the goods are physically handed over to the customer who ismeans that, the exemption provided for by Article 135(1)(f) then free to dispose of those goods. This therefore must becannot apply to the service in question. As a result, such regarded as a supply of goods within the meaning of Articleservices are taxable. 14.1. The state of mind, motive or dishonest conduct of a customer is not relevant as to whether there is a supply of On a final point, the AG confirmed that the service in goods. As far as payment is concerned, HMRC contend thatquestion qualifies as a financial service. Consequently, the payments received from the card issuer are directly linked toplace of supply of the service fell to be treated in accordance the supply of goods and should therefore be included in thewith what was Article 56(1)(e) [which has since been repealed]. calculation of the taxable amountFollowing the 2010 changes to the place of supply rules, theconsequences of this view is that the place of supply of such Comment – on the face of it, the taxpayer has aservices to Business customers (B2B) is where the customer very strong case here. The immediate question isbelongs (under Article 44), but the place of supply to whether or not the arguments apply equally toConsumers (non-taxable persons), will depend on whether or supplies of services that have been obtained bynot the customer is within or outside the EU. The place of fraudulent use of credit or debit cards. It is likelysupply to non-EU customers will be where the customer to be 18 months or so before the CJEU givesbelongs (under Article 59) whereas, the place of supply for judgment on the questions provided to consumers within the EU will be the placewhere the supplier belongs under Article 45.Dixons Retail plc Hope in the Community LtdWhether retailer entitled to reclaim Whether income is a grant and outsideVAT paid on supplies of goods paid the scope of VAT or consideration forfor by fraudulent use of credit cards a supplyThe First Tier Tax Tribunal (FTT) has announced that it has The First Tier Tax Tribunal has delivered its decision in thedecided to refer the issues in this case to the Court of Justice Hope in the Community Ltd VAT case. The caseof the European Union (CJEU) for a preliminary ruling demonstrates once again that those in the „not for profit‟concerning the interpretation of Articles 14.1 and 73 of the sector must take great care when determining the VAT liabilityVAT Directive. of income. Following closely on the heels of a similar case (Aberdeen Sports Village v HMRC), the Tribunal has ruled that income which the taxpayer had treated as outside the The taxpayer considers that VAT should not have been scope of VAT was, in fact, consideration for supplies ofaccounted where purchasers have fraudulently used credit or services and was, thus, clearly within the scope of VAT.debit cards to obtain goods. A claim for repayment of £1.9million of VAT has been rejected by H M Revenue & Customs(HMRC) and the taxpayer appealed to the FTT. Hope in the Community Ltd was established as a charitable company established with a view to providing support to faith and voluntary sector groups seeking to regenerate the The questions that have been referred centre around two communities which they serve. The company entered intomain issues. Firstly what is the correct meaning of the phrase various contracts with other bodies - who were themselves in“transfer of the right to dispose of tangible property as owner” receipt of funding from EU and UK funding agencies – tocontained within Article 14.1 of the Directive? Secondly, in provide feasibility reports in relation to a number of projectscircumstances where, under the terms of various agreements and the administration of various grants. HMRC had providedwith the card issuers, the retailer receives a payment from the a number of rulings to the company that the income in relationcard issuer, whether such a payment should be included in the to these projects was, in their view, subject to VAT and,taxable amount under Article 73. In other words, in initially, the company had accounted for VAT. However, thecircumstances when a fraudster uses a card which he is not company then submitted two voluntary disclosures to HMRCauthorised to use to obtain goods from the retailer, has a alleging that the income should have been classified as outside„supply‟ of those goods occurred for VAT purposes? Dixons the scope.argue that the presence of a legal relationship requiringreciprocal performance is a fundamental criterion to theidentification of whether or not a „supply‟ of goods has taken In many cases of this kind, it is often a very fine lineplace and that in cases where goods are obtained fraudulently, whether a payment received is truly funding provided in theno such reciprocity exists. As such, Dixons claim that if there form of a grant which is outside the scope of VAT or whetheris no supply, then no VAT can be due. Similarly, as far as the payment constitutes consideration for the supply of goodscomputing the taxable amount is concerned, Dixons argue or services. The company in this case tried to argue that thethat, in the circumstances of a fraudulent card transaction, money it received was not consideration and, as a result, itthere is no reciprocal assumption of any obligation by the could not therefore be within the scope of VAT. The Tribunalfraudster in connection with the payment for the goods and decided that the matter turned on a close examination of thethus there is no direct link between any sum received by the agreements and arrangements between the parties. It went onretailer and the release of the goods. As a consequence, to confirm that both Article 2 of the VAT Directive andDixons argue that payments received from the card issuers section 5(2) of the UK VAT Act require that for VAT to beshould not be included in the taxable amount. due there has to be a supply for a consideration. However, on the basis of the available documentation, the Tribunal stated that there was insufficient evidence to establish that the 3 Keep up to date by joining our VAT Club LinkedIn group
  4. 4. payments made to the company were not in consideration of a confirmed, in light of the evidence, that the treatment ofsupply of services. The company was not able to show that the Local Authorities as non-taxable persons in relation to suchrelationship between it and the funder was one of informal provision would not lead to negligible levels of distortion ofoptional cooperation not giving rise to any transaction capable competition but would, as a matter of fact, lead to significantof recognition as a supply. Indeed, many of the agreements, distortion of competition. As such, the Tribunal had noletters and other documents provided by the company actually alternative but to dismiss the Local Authorities appeal.supported HMRC‟s case that there was a direct link betweenthe supply and payment of the “grant” monies. In light of this,the Tribunal dismissed the company‟s appeal. Comment – It has taken the best part of a decade for this matter to be resolved. However, given the long and tortuous history of the litigation in this This is not an uncommon problem. Businesses and case, it would come as no great surprise to anyoneorganisations in the not for profit and charity sectors need to if the matter is appealed further. Given that therefully understand the VAT implications and consequences of are a substantial number of cases stood behind thistheir projects. Generally, in cases where, under an agreement, test case, it is difficult to believe that this is the endan obligation to provide goods or services exists and money is of the line!paid to the supplier, it is often extremely difficult not toconclude that the payment is anything other thanconsideration. As the Tribunal stated in this case, the burdenof proof in such matters rests entirely with the supplier. Borough Council of King’s Lynn &Bodies in receipt of such funding should continually review West Norfolktheir VAT position if errors are to be avoided. Whether voluntary overpayments for car parking by customers are subjectIsle of Wight Council (and others) to VATWhether the provision of off streetcar parking by a local authority The First Tier Tax Tribunal has issued its decision in this caseshould be subject to VAT which concerned whether voluntary overpayments by customers paying to park in the Council‟s car parks should beThe First Tier Tribunal has issued its decision in this long subject to VAT.running case relating to whether off street car parkingprovided by a Local Authority should be subject to VAT. The Borough Council of Kings Lynn & West Norfolk (theThe case has a very long history starting, as it did, at the VAT Council) operates pay and display car parks where customers& Duties Tribunal in 2004. pay for the parking using machines which give no change. Whilst there is a published tariff which sets out a scale of charges based on the length of time a vehicle is parked in the In simple terms, the issue in question is whether the car park, on occasion, the customer will not have the correctprovision of off street car parking by a Local Authority should change and will, as a result, elect to overpay (eg if the tariff forbe subject to VAT or whether, as claimed by the appellants in a two hour stay is £2.50, but the customer inserts £3.00). Inthis case, such provision should be treated as a „non-business‟ such cases, the Council took the view that the voluntaryactivity given the Public Body status of the Local Authority. overpayment was not consideration for the supply of the carArticle 4 of the 6th Directive stipulated that where such parking space and submitted a claim to HMRC to recover thebodies supply goods or services in their capacity as public VAT overpaid. HMRC refused to pay the claim contendingauthorities, they are not to be regarded as taxable personsunless such treatment is likely to cause significant distortion of that the overpayment was consideration for a taxable supply.competition with commercial providers of the same goods orservices. It was the interpretation of this „significant Having considered the facts and evidence, the Tribunal hasdistortion of competition‟ issue which was referred to the concluded that, as the charges for parking are fixed by aCourt of Justice which confirmed in its 2008 judgment that, to statutory „Order‟, the consideration payable in respect of aevaluate whether or not such distortion might exist, it is supply of parking cannot be unilaterally changed by either thenecessary to look at the activity as a whole rather than by customer or the Local Authority. The sliding scale publishedreference to the competition in any single local area. In tariffs which are shown on the machine reflects the scaleaddition, the ECJ confirmed that the word „significant‟ is, for charges in the Order. The Appellant is not able to changethe purposes of the second subparagraph of Article 4(5) to be those scale charges without changing the Order itself. Theunderstood as meaning that the actual or potential distortions paying member of the public is also not able to unilaterallyof competition must be more than negligible change the consideration by paying more or less than the scale charges which are stated on the machines. The agreement between the parties is that the payer must pay the scale With the ECJ‟s judgment in mind, the High Court referred charges in order to obtain a ticket for parking. The customerthe case back to the Tribunal for the matter to be reheard and understands, from the instructions on the meter, that wherefor the Tribunal to come to a decision on the distortion of there has been an overpayment, over and above the scalecompetition issue. Having taken account of a substantial charges, no change would be given. An overpayment by abody of evidence in relation to the operation of off street car customer is not accidental but may arise where the customerparking in the UK and the actual and potential competition does not have the precise change for the machine but requiresbetween commercial and Local Authority provision, the a ticket in order to park. A decision is then made by theTribunal has now confirmed that there is no doubt that Local customer to pay more than the sum required to obtain theAuthorities are in competition with commercial providers of ticket. In doing so the payer is making an ex gratia paymentoff street parking. More importantly, however, it has also of the amount which exceeds the scale charges. The customer 4 Keep up to date by joining our VAT Club LinkedIn group
  5. 5. understands that they are not receiving anything extra for theoverpayment which has been made. The parking service Comment – It is clear from this case that HMRC’sgiven by the ticket is being provided regardless of the new approach to the application of this concessionoverpayment. The overpaid sums goes into the general fund constitutes an unpublished change of policy inof the Council for general spending, they do not expect to relation to the recovery of input tax on partners’ taxhave to return those sums to the customer. return fees incurred by the partnership. This is likely to affect almost all professional partnerships going forward as clearly, HMRC do not consider In light of the above, the Tribunal held that the income that £170 VAT per partner is de-minimis. (There isreceived by the Council from the voluntary overpayments was no indication in HMRC’s manual as to what valuenot therefore consideration for a taxable supply and was, thus, is to be regarded as de-minimis).outside the scope of VAT. It also seems that the Tribunal has confused the Comment – An interesting decision. Whilst each EU principle of legitimate expectation with the case is, of course, decided on its own merits, it English law concept of equitable estoppel. Both are seems fairly clear that the ruling will apply equally similar but are not the same. In relying on the in other cases where customers voluntarily overpay principles of estoppel, it is possible that the in order to secure the underlying supply. Tribunal has erred in law and presented an opportunity for the matter to be appealed further on a point of law.Mundays LLPWhether VAT incurred by a firm ofSolicitors on the preparation ofpartner’s own tax returns is Our Communications Ltdclaimable by the firm Whether Repayment Supplement is payable in relation to voluntaryThis is a First-tier Tribunal decision relating to the recovery of disclosuresinput tax by a firm of Solicitors on fees relating to thepreparation of the firm‟s partnership tax return and those of The only issue under appeal in this case was whetherthe individual partners. Repayment Supplement, payable under section 79 of the VAT Act 1994, applies to claims for the payment of VAT credits Despite published guidance in its own manuals which not made on a VAT return but on an additional claim madeconfirms that “in order to avoid disputes over small amounts under the provisions of Regulation 29 of the VATof tax our policy is that VAT on a partnership‟s accountancy Regulations 1995.fees should usually be claimed in full”, HMRC took the viewin this case that the input tax was not reclaimable and issued Our Communications Ltd (the company) submitted itsan assessment in the sum of £18,647 for the VAT periods VAT return for the month of January 2006 in the normal waybetween January 2007 and October 2010. and claimed a repayment of £1.71 million. The return was received by HMRC on 6 February 2006. However, by a letter In the Tribunal‟s view, the published guidance is simply dated 3 March 2006 to HMRC, the company claimed anconcessionary treatment by HMRC and not (and was not additional repayment of £1.48 million in relation to the sameintended to be) a correct statement of the law. In this case, VAT period. The company also submitted similar returns forHMRC argued that the amounts in question were not for the months of February 2006 and March 2006. Each of thesesmall amounts and refused the claims. The appellant on the returns were subjected to extended verification by HMRCother hand argued that the concession should be looked at on who refused to repay the amounts of input tax claimed.a per partner basis. The fees per partner were £900 per yearand the VAT on these was thus „de-minimis‟. In July 2006 and September 2007, HMRC informed the company that the input tax claimed would not be repaid and The Tribunal agreed with HMRC holding that the the company appealed to the First Tier Tribunal . Theconcession clearly related to the annual accountancy fee as a Tribunal allowed the appeal in December 2008 the totalwhole. Each bill was for (roughly) £20,000 (in other words, amount of VAT credits claimed in the three periods was23 multiplied by £900) with VAT varying between 15% and20% during the period. As such, the Tribunal considers that £9.77 million. In February 2009, the company claimedthe concession was not intended to cover invoices of this size repayment supplement and HMRC conceded that Repaymentand the appellant cannot rely on it. The Tribunal also Supplement was due in relation to the credits claimed on theconfirmed that the appellant had not relied on a legitimate VAT returns but not in relation to the credit claimed in theexpectation to its detriment as, clearly, all the appellant did letter of 3 March 2006. The company appealed to thewas claim VAT which it was not strictly, as a matter of law Tribunal against HMRC‟s refusal to pay Repaymententitled to claim. As such it had not altered its position to its Supplement.detriment. 5Keep up to date by joining our VAT Club LinkedIn group
  6. 6. The Tribunal held that the company was entitled to the VAT was payable. Finally, having acquired the rights to thepayment of Repayment Supplement on the full amount of vehicles, this company only accounted for VAT on any£1.48 million. The language of section 79 means that margin it made because, when it sold the car to a customer,Repayment Supplement is payable in respect of any VAT it did so under the second hand margin scheme.credits whether they are claimed in a VAT return or otherwiseafter the return has been submitted. Under the Halifax abuse of law principle, if transactions are entered into which result in the accrual of a tax Comment – Repayment Supplement (at 5% or £250 advantage the grant of which would be contrary to the whichever is greater) is payable in situations where purpose of the VAT Directive and, it is clear from the following conditions are met: objective factors that the essential aim of the transactions • a person is entitled to a VAT credit and has in question is to obtain a tax advantage, the transactions submitted a return or claim by the due date must be redefined. In this case, the First Tier Tribunal • HMRC fails to make the repayment within 30 found that the essential aim of the transactions in question days (allowing for it to make reasonable enquiries) was not to seek to gain a tax advantage but to generate • the amount claimed has not been adjusted by finance for the group. As a result, Halifax abuse was not „in more than 5% or £250 (whichever is greater). point‟ and the First Tier Tribunal allowed Pendragon‟s appeal. This is a new and major development – businesses that have submitted voluntary disclosure claims in The Upper Tribunal has, however, concluded that, "the the past should examine whether the conditions evidence in this case does not come anywhere near above were met and, if so, where appropriate, displacing the overwhelming case for saying that the further claims for Repayment supplement should essential aim of the transactions in this case was to obtain a be made. Consider all of the Fleming claims that tax advantage". The First Tier Tribunal‟s decision must were made up to 31 March 2009. therefore be reversed and the transactions re-defined.Pendragon PLC Comment – An interesting case which discussesWhether the essential aim of the ‘Halifax’ abuse of rights principle in somearrangements put in place was to detail. It should be borne in mind that the Tribunalgain a tax advantage – whether has found that the ‘essential aim’ of thearrangements abusive under ‘Halifax’ principle transactions in question was to obtain a tax advantage. This does not mean that planning per se is dead as transactions which are entered into forThe judgment of the Upper Tribunal in the Pendragon other commercial reasons should not fail thePLC case [2012] UKUT 90 TCC has been released and is a ‘essential aim’ test. However, the case doesresounding defeat for the taxpayer. Allowing HMRC‟s highlight that great care is always needed whenappeal from the First Tier Tax Tribunal‟s decision, the such arrangements are being considered.Upper Tribunal has held that the arrangements put in placeby the taxpayer involved an abuse of law and, as aconsequence, following the judgment of the EuropeanCourt of Justice (as it then was) in the case of Halifax and Robinson Family Ltdothers [2006] STC 919, the Court has had to redefine the Whether transfer of a business as atransactions in question so as to achieve an appropriate going concern (TOGC) whereoutcome for VAT purposes. transferor retained a reversionary interest in the property transferred Pendragon PLC entered into arrangements in relation tothe sale of cars. These arrangements included a number of This case concerns the VAT provisions relating to thesteps and relied on the operation of the second hand car transfer of a going concern (TOGC). In essence, thescheme as well as the rules relating to the transfer of going question to be resolved was whether the disposal of aconcerns which de-supply certain transactions. In essence, property by a developer to a third party purchaser by waycars were sold by Pendragon PLC to a number of captive of the granting of a new sub-lease constituted the transferleasing companies. These supplies were taxable and of an asset which could be treated as part of the TOGCPendragon PLC accounted for VAT in the normal way. and thus outside the scope of VAT.The captive leasing companies reclaimed the input tax onthese transactions and then hired the cars to dealerships Robinson Family Ltd is a company which carries on aunder the terms of hire purchase agreements. The leasing property development business. The company purchased acompanies then assigned the benefit of the hire agreements leasehold site for a term of 125 years. The company thento a Jersey based bank and treated this assignment as a constructed a number of commercial units. Due to varioustransfer of a business as a going concern. As a restrictions in this head lease, the company could notconsequence, no VAT was due on this transaction. In turn, dispose of their interest in the completed units except bythe Jersey bank assigned the benefit of the agreements to a way of the grant of sub-leases. Accordingly, as far as Unitfurther captive company within the Pendragon group. This 3 was concerned, the unit was sold by way of the grant of awas also treated as a transfer of a going concern and no sub-lease for the duration of the head lease less 3 days. At 6Keep up to date by joining our VAT Club LinkedIn group
  7. 7. the time of the grant of the sub-lease, the company stated should not have taken into account the „behaviour of thein the sale contract that the transfer of the unit was subject taxpayer‟ but should have focused solely on the contractualto a proposed further letting to another sub-tenant and, as arrangements. Had it done so, the First-tier would nota consequence, treated the transfer as the transfer of a have come to that letting business for VAT purposes. HMRC appealed to the Court of Appeal which has held However, that further sub-lease did not materialise and that the Upper Tribunal was incorrect in its view that theHMRC therefore took the view that the TOGC conditions First-tier Tribunal was wrong to hold that the correctwere not satisfied and raised an assessment on the approach, when determining the nature of a supply forcompany. Essentially, HMRC concluded that there was VAT purposes, was to look not only at the all the variousinsufficient evidence of intended economic activity to contractual documents but also at „the behaviour ofjustify the argument that there was a property letting Medhotels‟. The Court considered that two questionsbusiness either in place (or indeed proposed) at the time of needed to be answered. Firstly, whether the First-tier erredthe grant of the original sub-lease to treat them as the in law in its approach and secondly, whether, if thattransfer of a going concern. Following a review, HMRC approach was correct, whether it was entitled to reach thethen focused on the question of whether the grant of the conclusions that it did.sub-lease could ever qualify as a TOGC because, as statedin notice 700/9, it is HMRC‟s stated policy that the grant Citing the dicta of Justice Laws in Reed Personnelof the sub-lease was, in fact, the creation of a new asset and Services, the Court held that the Tribunal was entitled tonot the transfer of the existing asset [the head lease]. examine all relevant factors including the behaviour of the taxpayer. Consequently the answer to the first question The company argued, and the Tribunal accepted that the was that the First-tier had not erred in law. Secondly,condition in the head lease which stipulated that lessee‟s based upon the evidence before it, the First-tier was alsocould only grant sub-leases rather than make assignments entitled to reach the conclusion that Medhotels acted as ameant that, if HMRC‟s view was correct, adherence to the principal and its supply of designated travel services werecondition in the head lease would be sufficient to deny the thus within the scope of TOMS and taxable in the the availability of the TOGC provisions. On thefacts of the case, the Tribunal confirmed that there was a Looking at the „whole package‟ and not just theletting business in existence at the time of the grant of the contractual obligations the Court found that Medhotelssub-lease. Crucially, the Tribunal also confirmed that a dealt with holidaymakers in its own name in respect of theproperty letting business existed after the grant of the sub- use of its website and in cases where a hotel operator waslease. The Tribunal held that in light of those facts, unable to provide accommodation as booked. Similarly,ownership and possession of the unit was transferred to Medhotels dealt with complaints and providedthe sub-tenant and should be treated for VAT purposes as compensation in its own name. Further, Medhotels dida TOGC. not invoice the hotel providers for commission nor did it pass on deposits received from holidaymakers for This is a welcome decision albeit it is decided on the bookings. All in all, the First-tier Tribunal‟s decision thatfacts and is binding only on the parties to the appeal. Medhotels did not act as an intermediary but actuallyHowever, this case goes some way to dispel the myth that supplied the holidays to the holidaymakers was the correctit is only the assignment of the existing asset (the head in this case) that can qualify as aTOGC Comment – Given the values involved, one can only assume that this judgment is not necessarily theSecret Hotels2 Ltd (formerly Med end of the litigation. If the judgment stands, itHotels Ltd) seems clear that the nature of a supply for VATWhether taxpayer acting as agent or purposes must be determined by an examination ofprincipal – whether Tour Operators’ the whole package and not, as the Upper TribunalMargin Scheme applied concluded by simply looking at the contractual obligations.In a unanimous judgment released on 3 December 2012,the Court of Appeal has allowed HMRC‟s appeal in thislong running case relating to VAT and the Tour Operators‟ Volkswagen Financial Services (UK)Margin Scheme (TOMS). In 2010, the First-tier Tribunal Ltdhad originally dismissed the taxpayer‟s appeal on the Whether Partial Exemption Specialgrounds that, looking at the whole of the facts of the case Method was fair and reasonableand not just at the contractual obligations of the respectiveparties, the taxpayer acted as a principal when it supplied The Upper Tribunal has issued its judgment in the abovetravel services to holidaymakers. case and has allowed H M Revenue & Customs‟ (HMRC) appeal against the First Tier Tribunal‟s (FTT) decision. The Upper Tribunal allowed the taxpayer‟s appeal ruling The FTT had ruled that a partial exemption special methodthat the First-tier Tribunal had erred in law. The First-tier adopted by Volkswagen Financial Services (UK) Ltd 7Keep up to date by joining our VAT Club LinkedIn group
  8. 8. (VWFS) which apportioned residual input tax based on the We understand that all organisations want the peace of ratio of taxable transactions to total transactions (which in mind that comes with knowing that they are dealing with this case was 50%) was fair and reasonable. This was on their indirect tax affairs efficiently. We minimise the the basis that for each vehicle sale there were two impact of indirect taxes for all types of organisations; transactions. Firstly, the taxable sale of the vehicle at cost from global companies and large plcs, AIM listed and secondly the exempt supply of credit. The FTT found companies, owner managed businesses and inbound that although the residual overheads incurred by VWFS investors in start-up situations, through to not for profit were not cost components of its taxable supplies, and government bodies. We advise on VAT, Customs nevertheless, to ignore the taxable transactions would be Duty, cross border activities, VAT compliance inherently unfair and unreasonable. requirements, landfill tax and other indirect taxes. HMRC appealed to the Upper Tribunal. HMRC‟s principal contention was that the FTT had found as a fact For further information in that VWFS‟s residual input costs had been built into the relation to any of the issues price of its exempt supplies of finance and that there was highlighted in this no authority (statutory or otherwise) for the proposition Casebook please contact: that there could be any recovery of input tax that has been incorporated into the price of an exempt output supply. Scotland/Northern/England/ Not surprisingly, VWFS, on the other hand, contended Northern Ireland Stuart Brodie that the FTT had been correct for the reasons it gave at the time. The Upper Tribunal trawled through a long list of existing case law authority (including Rompleman, BLP London/South East Group, Midland Bank, Abbey National, Kretztechnik, St Karen Robb Helen‟s School Northwood, Investrand, and London Clubs Management) all of which are concerned with the deductibility of input tax and whether an input is „used‟ for Thames Valley/Southwest the purposes of a taxable output or is a cost component of James Hurst the output. However, what really mattered to the Upper Tribunal was the economic reality of what VWFS were supplying. The FTT formed a very clear view of the nature Midlands/East Anglia of the economic reality. VWFS did not simply supply Mike Sheppard credit but supplied vehicles on credit and as such the economic reality was that the overheads were consumed for the business as a whole. Unfortunately, the Upper Tribunal disagreed with that view and held that „the observable terms and features of VWFS‟s business start with the fact that it is the finance arm of Volkswagen AG. It exists in order to provide finance to those purchasing Volkswagen brands of vehicle and will only be involved in any transaction when the purchaser requires such finance‟. In essence therefore, the Upper Tribunal concluded that, Join our fast growing VAT although VWFS‟s transactions will always involve a taxable Club group on LinkedIn to transaction and an exempt transaction, the economic reality hear about Case alerts, of the situation was that VWFS was a finance company Indirect Tax updates, Court rulings and other updates making exempt supplies of finance and that the residual as and when they happen. overheads are used for its financing business which is exempt from VAT. Consequently a partial exemption method which apportions 50% to taxable activities would LinkedIn not be a fair and reasonable apportionment. HMRC‟s VAT Club appeal was allowed. group Comment – A blow to Finance Companies but, one suspects, this is not the last we will hear on this matter.© 2013 Grant Thornton UK LLP. All rights reserved.Grant Thornton means Grant Thornton UK LLP, a limited partnership. Grant Thornton is a member firm of Grant Thornton International Ltd (GrantThornton International). References to Grant Thornton are to the brand under which the Grant Thornton member firms operate and refer to one ormember firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are deliveredindependently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provideservices to clients. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting orrefraining from acting as a result of any material in this 8