Indirect Tax Update for week ending 03 March 2017

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ITU
Summary
This week saw the Advocate
General of the Court of Justice
(Advocate General Kokott) issue
two opinions in relation to the
operation of cost sharing groups.
In both of these cases the
Advocate General has made it
clear that, in her view, the cost
sharing exemption provided for
in the VAT Directive is not
available to businesses that make
supplies of either financial
services or insurance services.
She considers that the exemption
for such groups is only available
to entities which make supplies in
the public interest such as in the
medical, welfare or educational
sectors.
The full court has yet to give
judgment and may (or may not)
follow the Advocate General’s
opinion.
The Advocate General has also
issued an opinion in the
Compass Catering case
concerning the three-year cap.
03 March 2017
DNB Banka AS – CJEU – Advocate General’s opinion
This was a Latvian referral to the Court of Justice in connection with the operation of
the cost sharing exemption. Article 132(1)(f) of the VAT Directive provides an
exemption from VAT for services that are supplied by a cost sharing group (CSG) to
its members. The details of implementation are left to each Member State and, in this
case, there were a number of disputes between the taxpayer and the Latvian tax
authority such that the Latvian court decided to refer the matters to the CJEU for
guidance on interpretation of the VAT Directive.
The Advocate General (AG) (Juliane Kokott) has considered these arguments and is of
the opinion that the exemption for supplies of services is only available where they are
supplied by a single taxable person. DNB Banka had argued that supplies between
members of the DNB Banka group should qualify but the AG has said that, in her
view, there must be a separate entity with ‘taxable person’ status. Secondly, the AG is
of the view that members of a CSG must all belong in the same Member State. This is
due to the difficulties that Member States would endure if multi-state membership was
allowed. Thirdly, DNB Banka applied a 5% uplift to the recharge of costs and the AG
confirmed that, in her view, Article 132(1)(f) is clear. Where costs incurred by a CSG
are recharged to members, for the recharge to benefit from VAT exemption, that
recharge must be an exact reimbursement of the cost without an uplift.
Finally, the AG is of the view that, the history and schematic position of
Article 132(1)(f) means that the cost sharing exemption is not available to businesses
that make supplies falling within Article 135. In her view, the exemption is only
available to CSG’s which make supplies falling within Article 132(1) itself. These are
supplies that are made in the public interest (such as medical, welfare and educational
services). Banking / financial services (falling within Article 135) are not covered.
Comment – the AG provides a legal opinion to the full court which, in due
course, will provide a judgment. In the majority of cases, the full court follows
the opinion of the AG but it is not obliged to do so. There is some doubt
whether the AG’s interpretation of the Directive is correct as Article 132(1)(f)
merely states that the supplies made by a CSG should be exempt supplies.
There is no mention in the Directive that the supplies in question must be
exempt supplies falling within Article 132(1). However, if the AG is right, (that
the cost sharing exemption is not available to those supplying financial
services), this will be a major blow to banks and other financial institutions.
Issue06/2017
Blow to UK VAT Cost Sharing
Groups?
Indirect Tax Update

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Aviva – another cost sharing exemption opinion from the AG
Court of Justice
On the same day as the opinion in DNB Banka was released, Advocate General Kokott also issued
her opinion in the case of Aviva. This time the case was a referral from the Polish Courts which, like
the Latvian Courts in DNB Banka were struggling with the correct interpretation of the VAT
Directive in relation to the operation of the cost sharing exemption.
Aviva – a Polish insurance business wished to establish a cost sharing group to take advantage of the
exemption from VAT afforded to such groups under Article 132(1)(f). One of the conditions
contained in Polish law was that the VAT exemption for services supplied by a cost sharing group
should not lead to a distortion of competition. However, Polish law does not set out any conditions
as to how that distortion of competition condition should be met and, as a consequence, Aviva
argued that the Polish VAT law was contrary to the EU law principles of effectiveness, legal certainty
and the protection of legitimate expectation.
The AG confirmed in her opinion that failure to spell out in Polish VAT law how the ‘distortion of
competition’ condition is met was not contrary to those principles. However, the AG also added that,
in her view, the cost sharing exemption provided for by Article 132(1)(f) was not, in any case,
available to Aviva as its supplies were not covered by Article 132(1) but by Article 135. She reiterated
her view in DNB Banka that only those services supplied in the public interest qualify for exemption
under Article 132(1)(f).
Comment
The cost sharing
exemption appears to
be causing difficulties
not just in the UK but
across the EU.
Banks and other
financial institutions
and insurance
businesses will all be
eagerly awaiting the full
court’s judgment in
both this and the DNB
Banka cases.
Full judgment usually
follows within 3
months of the AG’s
opinion.
Compass Contract Services Ltd
Comment
Again, this is just the
opinion of the
Advocate General. The
full court is not obliged
to follow it but does so
in the majority of cases.
It is nearly 20 years
since the three-year cap
was imposed and
taxpayers are still
wrangling with HMRC
over the legitimacy or
otherwise of claims for
overpaid VAT. It
seems clear from this
opinion that the UK’s
different starting dates
for the cap do not
offend the principle of
equal treatment.
Court of Justice – Advocate General’s opinion
This is a UK referral to the Court of Justice. Compass had submitted a claim to HMRC for the
repayment of output VAT but HMRC ruled that that part of the claim falling after 4 December 1996
was out of time. HMRC had imposed a three-year cap for claims for output VAT paid in error but, at
the time, there was no equivalent cap for input VAT claims. HMRC rectified this by introducing a
three-year cap for input tax claims with effect from 1 May 1997. Compass argued that, had the claim
been for the recovery of input VAT (rather than output VAT), the periods between December 1996
and 30 April 1997 would have been ‘in time’. It argued, therefore, that the different start dates for the
two different three-year caps was contrary to the EU principle of equal treatment. The First-tier
Tribunal required assistance with the interpretation of EU law and referred the matter to the CJEU.
The Advocate General has issued his opinion and, having considered the issue, has said that, in his
view, there is no such breach of the principle of equal treatment. The recovery of overpaid output
VAT is not a right granted by the VAT Directive but is derived from general principles of EU law.
However, the recovery of input VAT is a right enshrined within the Directive and, as such, where
Member States wish to impose limitation periods (such as the UK’s three-year cap), it is within the
Member State’s margin of discretion to bring in different start dates for each of the regimes.
Accordingly, the AG is of the view that there is no breach of EU law and that, in the context of the
Compass case, this means that the post December 1996 periods are out of time.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Vinny
McCullagh
London & South East vinny.mccullagh@uk.gt.com (0)20 7383 5100