Indirect Tax Update for week ending 16 November 2016

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The headline this week is the
First-tier Tax Tribunal's decision
in a case relating to the recovery
of input VAT by a company on
professional costs associated with
a management buyout.
The Tribunal has confirmed that
HMRC is not entitled to view the
activities of the buyout company
in isolation where it is a member
of a VAT Group.
The Advocate General has issued
an opinion in relation to a
Hungarian referral. The case
involved the purchase of
movable property at auction and
focused on whether the
transaction was covered by the
reverse charge mechanism.
Finally, the Court of Justice has
issued a judgment in a case
concerning a racehorse trainer
and whether prize money earned
(from being placed in the races)
was within the scope of VAT.
18 November 2016
Heating & Plumbing Supplies Ltd
The issue in this case is a common one. A company (the buyout company) was
established to acquire the share capital of another company (the target company) and
the buyout company incurred VAT on professional fees in relation to the management
buyout. The buyout company and the target company were VAT grouped with effect
from 1 April 2011 and the professional fees were invoiced after that date.
HMRC took the view that, despite the existence of the VAT group, when looked at in
isolation, as the buyout company did not have any taxable activities, it was not entitled
to reclaim the VAT incurred. HMRC cited the recent judgment of the Court of Appeal
in the BAA case as its vires for that stance.
The Tribunal concluded that HMRC's position was wrong. It was clear from the
evidence before the Tribunal that the purpose of the buyout was to incentivise
management and staff to develop the business going forward. Moreover, following the
judgment of the Court of Justice in the case of Skandia America, HMRC was not
entitled to isolate the activities of the buyout company from those of the VAT group
as a whole.
The VAT group is a single taxable person and HMRC must consider the activities of
the VAT group when deciding whether the activities constitute a taxable activity giving
the right of deduction. It was clear that the costs of the buyout were an overhead of
the VAT Group. Accordingly, as the VAT group was itself fully taxable (ie it only
made taxable supplies), there was no valid reason for HMRC's decision to disallow the
input VAT on the professional fees. There was clearly a link between these overheads
and the VAT group's taxable activities.
Comment – the appellant taxpayer in this case was advised by Grant Thornton
UK LLP's indirect tax team. Although the decision is from the FTT and is,
thus, only binding on the parties, it is, nevertheless an important one. It is the
first case to expressly state that the tax authority cannot simply look at the
activities of a member of a VAT group in isolation. The concept of the VAT
group being a single taxable person (ie for VAT purposes, an entity in its own
right) is one which HMRC has struggled to accept. This decision suggests that
HMRC will now have to amend its current policy. Any business in similar
circumstances to those of the appellant should challenge HMRC's policy.
Issue34/2016
VAT Groups – another defeat for
HMRC
Indirect Tax Update

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GRT100456
Tibor Farkas – Case C-564/15
Court of Justice – Advocate General's opinion
In a Hungarian referral to the Court of Justice, the Advocate General has issued his opinion in this
case. The issue was whether the Hungarian tax authority was entitled to deny the taxpayer the right
of recovery in relation to VAT that was payable under the reverse charge mechanism. The taxpayer
purchased an asset (a mobile hangar) at an auction that was established to sell the assets of a
judgment debtor. The seller charged VAT and the taxpayer sought to reclaim that VAT through his
VAT return. The Hungarian authority considered that VAT should not have been charged by the
seller as Hungarian VAT law stipulates that, in such circumstances (ie the auction of a debtor's
assets), any VAT due on the transaction is payable by the purchaser using the reverse charge
mechanism. As the taxpayer had failed to use the correct mechanism, the tax authority sought
payment of the VAT due on the reverse charge but denied the taxpayer recovery of the input VAT
claimed.
The Advocate General has said that such a stance by the tax authority is in clear breach of the
principle of fiscal neutrality. Whilst the tax authority is entitled to seek payment of the VAT due
under the correct procedure, it cannot also deny recovery of the VAT paid under the wrong
procedure.
Comment
Clearly, a pragmatic
opinion from the
Advocate General.
Whilst the case has
little, if any, relevance
to the operation of the
UK VAT system, it
does serve to highlight
the lengths that some
tax authorities will go
to in order to secure
additional revenue.
This is not the first case
from Hungary where
the actions of the tax
authority have been
questionable.
Pavlina Bastova – Case C-432/15
Comment
The case is important
because the Court of
Justice accepted that
where services are
received by a business
that are intended to
promote or advertise
the business, the
services are regarded as
an overhead.
If the business is fully
taxable (ie there are no
exempt or non-
business activities), any
VAT incurred by the
business on such
services ought to be
recoverable in full.
Court of Justice - Judgment
Ms Bastova is a race horse trainer established in the Czech Republic. She operates training stables
where she trains her own horses as well as horses owned by third parties. She receives income from
the third parties for her training services and also from prize money. The question for the court was
whether her prize money was taxable from a VAT perspective. The Court of Justice has decided that
as the income from prize money is only earned if a horse is successful in a race and there is no
certainty that the income will be received, there is not a sufficient link between the supply of the
horse for the race and the prize money awarded. As such, prize money is outside the scope of VAT.
The Court was also asked, in light of the answer to the prize money question, whether Ms Bastova
was entitled to reclaim all of the input VAT that she incurred in her training business. The Court
considers that this was a matter for the Czech courts but, on the basis that Ms Bastova's horses were
used to advertise her business and attract customers to her training stables, the court could accept
that the costs of keeping her own horses were an overhead of the training business which was itself a
taxable activity. As such, the input VAT incurred on those overheads was claimable.
Finally the court was asked whether, in the circumstances, Ms Bastova's training activities could be
classed as "the use of sports facilities" and benefit from a reduced rate of VAT under Czech VAT
law. The Court concluded that the services were "training" services and not the 'use of sports
facilities'. As such, the training services were liable to VAT at the standard rate.
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