Indirect Tax Update for week ending 12 July 2017

1. © 2017 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
This week, the hearing took place
in the case of Littlewoods & Ors
v HMRC on the thorny question
of whether a taxpayer is entitled
to receive interest over and above
the interest that is provided
under VAT statute. Littlewoods
consider that the payment of
simple interest under the
provisions of s78 of the VAT
Act simply does not provide
adequate indemnity. HMRC on
the other hand considers that s78
provides taxpayers with the only
legal basis for the payment of
interest where VAT has been
overpaid and payment of simple
interest satisfies the ‘adequate
indemnity’ test.
The First-tier Tax Tribunal has
also released an interesting
decision this week. The case
relates to Loughborough
Student’s Union – whether
supplies it makes are closely
related to education. The
Advocate General has also issued
an opinion in a German case
relating to fiscal neutrality.
13 July 2017
Supreme Court hearing
The hearing in the Littlewoods & Ors v HMRC case has finally taken place at the Supreme
Court. The question to be resolved in this case is of concern not only to Littlewoods (whose
claim is in the region of £1.2 billion), but also to may hundreds of claimants that have stood
behind Littlewoods as a lead case. In essence, the question is whether as a result of the
taxpayer’s overpayment of VAT, the UK is liable to pay an amount over and above that already
paid in simple interest under the provisions of s78 of the VAT Act. It is understood that
nationally, there is approximately £15 billion at stake if Littlewoods were to win.
The hearing at the Supreme Court lasted two days and focused only on the two main issues. On
the first issue, HMRC’s submissions at the hearing were, principally, that s78 and s80 of the
VAT Act, when read together, comprise an exhaustive regime for the payment of interest in
cases where VAT has been overpaid in error. As far as the second issue was concerned, it
submitted that, when the amount of simple interest already paid is taken into account along
with the length of the period over which that interest has accrued and the amount by which that
interest exceeds the amount of VAT overpaid, the interest already paid on a simple basis
provides Littlewoods with the adequate indemnity that EU law requires.
Littlewoods argued that, as its claim for interest is a High Court claim in the law of unjust
enrichment, the provisions of s78 do not even come into play. In essence, it argued that s78
was introduced to ensure that taxpayers were entitled to a payment of interest if they otherwise
would not be so entitled. As Littlewoods’ entitlement arises out of common law, it submitted
that it could not also be covered by the statutory provisions of s78. As far as adequate
indemnity was concerned, Littlewoods also argued that under s78, it had received only £200
million (or so) of its claim. That represents only 24% of the amount of interest claimed and, it
submitted, that clearly does not represent an adequate indemnity. It takes the view that the term
‘adequate indemnity’ should equate to something more akin to ‘commensurate with the loss of
the use of the money’.
At the end of the hearing, Lord Neuberger confirmed that, after listening to the submissions of
both parties, the Court was minded to find for HMRC in respect of whether s78 provides the
only source of rights to the payment of interest for overpaid VAT. As far as issue two was
concerned (ie quantum), again, the Court was minded to either agree with HMRC that in the
circumstances of the case, simple interest provided an adequate indemnity or to refer the matter
back to the Court of Justice for further guidance on exactly what constitutes adequate indemnity
from an EU law perspective.
Comment – A decision whether or not to refer the case back to the Court of Justice will
be delivered after the summer recess. If the court does refer the case back to the Court
of Justice, it could be a further 18 months to two years before the issues are finally
resolved. However, the Court of Justice has already given guidance on the meaning of
the term ‘adequate indemnity’ when the Littlewoods case was referred to it by the High
Court so it is possible in the circumstances that the Supreme Court will simply dismiss
Littlewoods’ case completely.
Issue15/2017
A matter of great interest!
Indirect Tax Update

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GRT100456
Loughborough Students’ Union
First-tier Tax Tribunal
This is a case similar to the recent Brockenhurst College case reported in ITU 09/2017. Here, the
Loughborough Students’ Union (the Union) argued that supplies to students from its shops on the
campus (such as stationery and art materials) were closely related to the supply of education provided by
the University. As such, the Union argued that the supplies should qualify for exemption from VAT.
HMRC had ruled that the supplies from campus shops were not closely related and were, thus, taxable at
the standard rate.
The Tribunal agreed with HMRC. Although the Union is a charity and does not distribute its profits, it is
not an eligible body for VAT purposes. Its objects do not meet the requisite EU law test of being objects
similar to bodies governed by public law having as their aim the provision of university education or
vocational training or retraining. The Tribunal concluded that, on that point alone, the appeal should be
dismissed. However, if it was wrong on that point, it went on to consider whether the supplies of goods to
students were made in order to obtain additional income for the Union. On the evidence presented to the
Tribunal, it concluded that the basic purpose of the Union’s supplies is to obtain additional income for the
Union through transactions which are in direct competition with those of commercial enterprises subject
to VAT. As such, the VAT Directive precludes such supplies from being exempt from VAT in order to
prevent distortion of competition between bodies such as the Union and commercial enterprises which
offer the same type of goods but where such supplies are subject to VAT.
Comment
Given the recent
judgment of the Court
of Justice in
Brockenhurst, one can
see the force of the
Union’s case.
Unfortunately for it,
the Tribunal did not
accept that its supplies
to students from its
campus shops were
exempt from VAT.
The Union is not an
eligible body but, even
if it was, the case would
have been dismissed on
the ‘additional income’
point.
Boehringer Ingelheim Pharma GmbH
Comment
The principle of fiscal
neutrality is a powerful
weapon against a
member state which,
through its domestic
laws, treats the same or
similar supplies
differently for VAT
purposes. Here, the
German tax authority
argued that public
health insurers were
final consumers and so
were different to
private health insurers
which simply
indemnified their
customers for the cost
of the pharmaceutical
products.
Court of Justice – Advocate General’s opinion
There is a principle of EU VAT law that emerged from a Court of Justice judgment from as long ago as
1994. The principle is that VAT can only ever be due on the consideration actually received. The case in
question was Elida Gibbs and the issue was whether, as the manufacturer at the head of a supply chain, it
was entitled to reduce the amount of VAT due on a supply where retailers accepted money off vouchers
from customers and then claimed the value of the voucher from Elida Gibbs. The Court of Justice
decided that the taxable amount for VAT purposes must, in such circumstances, equate to the
consideration actually received (ie the value received after the rebate)
In a similar case, Boehringer was required by German law to provide a rebate for the supply of
pharmaceutical products made in the context of both public and private health insurance arrangements.
German VAT law allows Boehringer to adjust the taxable amount in relation to supplies to public health
insurers but not to private health insurers on the grounds that public health insurers are regarded as being
‘final consumers’. The taxpayer contested that, under German domestic law, such a difference in
treatment offends the EU principle of fiscal neutrality. Advocate General Tanchev agrees with Boehringer.
He concludes in his opinion that Article 90 of the VAT Directive ensures that the bases of assessment of
VAT is (as stated in Elida Gibbs) to be the consideration actually received. He considers that VAT
treatment of pharmaceutical supplies to publicly and privately insured persons are comparable situations
that are being treated differently, for which there is no apparent objective justification. This different
treatment offends the principle of fiscal neutrality and the German law is, thus, incompatible with EU law.
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