1. Old Square Tax Chambers
15 Old Square, Lincoln's Inn
London WC2A 3UE
Tel: (020) 7242 2744
Fax: (020) 7831 8095
taxchambers@15oldsquare.co.uk
www.taxchambers.co.uk
VAT: Current Hot Topics
Philip Simpson QC
Etienne Wong
Mary Ashley
1 March 2016
2. A leading set of barristers’chambers
specialising in taxation and revenue law
CONTACT DETAILS
Tel: (020) 7242 2744
Fax: (020) 7831 8095
DX: LDE 386
Out of Hours: 07817 149 061
Address:
Old Square Tax Chambers
15 Old Square, Lincoln’s Inn
London, WC2A 3UE
Email Clerks:
taxchambers@15oldsquare.co.uk
Mary Ashley
1 March 2016
3. • Overview
• CJEU Jurisprudence
• UK Legislation and HMRC Guidance
• Intelligent Managed Services v HMRC
• Where do we go from here?
4. • TOGC
– The sale of a business including assets
– Neither a supply of goods nor a supply of services
• Purpose of the rules
– to relieve the buyer of a business from the burden of funding any VAT
on the purchase. Thereby helping businesses by improving their cash
flow and avoiding the need to separately value assets which may be
liable at different rates or are exempt and which have been sold as a
whole, and
– to protect government revenue by removing a charge to tax and
entitlement to input tax where the output tax may not be paid to
HMRC. For example, where a business charges tax, which is claimed as
input tax by the new business but never declared or paid by the old
business
5. • SDLT Advantage
– Consideration is VAT-free
• Mandatory
– Key to establish at the outset whether there is a TOGC
• Drafting Considerations
– Ensure protection for vendors through contract
– Ensure protection for purchasers through escrow account
6. • Article 19
In the event of a transfer, whether for consideration or not or as a
contribution to a company, of a totality of assets or part thereof, Member
States may consider that no supply of goods has taken place and that the
person to whom the goods are transferred is to be treated as the
successor to the transferor.
Member States may, in cases where the recipient is not wholly liable to
tax, take the measures necessary to prevent distortion of competition.
They may also adopt any measures needed to prevent tax evasion or
avoidance through the use of this Article.
• Article 29
Article 19 shall apply in like manner to the supply of services
7. • Two Key Cases:
– Zita Modes Sarl v Administration de l'Enregistrement et des Domaines
(C-497/01) [2005] S.T.C. 1059
– Finanzamt Ludenscheid v Schriever (C-444/10) [2012] STC 633
8. • Zita Modes sold a ready-to-wear clothing business to another
company, Milady which operated a perfumery
• Question for the ECJ:
– The questions raised by the national court in Luxembourg included
whether the no-supply rule applied to any transfer of a totality of
assets or only to those where the transferee pursues the same type of
economic activity as the transferor.
• A-G’s Opinion
9. • The purpose the provisions is to facilitate transfers and prevent
overburdening
• Autonomous and uniform interpretation
• Distinction between transfer of all or part of a business and mere
transfer of assets
• Clear limits on conditions a member state may impose
10. “44. However, it is apparent from the purpose of Article 5(8) of the Sixth
Directive and from the interpretation of the concept of "a transfer,
whether for consideration or not or as a contribution to a company, of a
totality of assets or part thereof" which flows from it, as set out in
paragraph 40 of [the judgment in Zita Modes], that the transfers referred
to in that provision are those in which the transferee intends to operate
the business or the part of the undertaking transferred and not simply to
immediately liquidate the activity concerned and sell the stock, if any.
45. On the other hand, nothing in Article 5(8) of the Sixth Directive
requires that the transferee pursue prior to the transfer the same type of
economic activity as the transferor.”
11. • Schriever ran a retail business selling equipment from premises
belonging to her. She transferred stock and fittings of the shop to
Sport S. She leased premises rather than transferring the freehold.
• Question for ECJ
“(1) Is there a "transfer" of a totality of assets within the meaning of the
Sixth Directive in the case where a trader transfers the stock and fittings
of his retail outlet to a purchaser and merely leases the premises which
he owns to the purchaser?
(2) Is it relevant in that regard whether the premises were leased on the
basis of a long-term contract of lease for use or whether the lease
contract is concluded for an indefinite period and may be terminated by
either party at short notice?”
12. • Looked to the use of the premises
• Sufficient for the transferee to be able to carry on an independent
economic activity
• Fact sensitive
• Intentions of transferee
• Avoid arbitrary distinctions
• Fiscal neutrality
13. • SPO Article 5:
– There shall be treated as neither a supply of goods nor a supply of
services the supply by a person of assets of his business to a person to
whom he transfers his business as a going concern where:
- the assets are to be used by the transferee in carrying on the same
kind of business, whether or not as part of any existing business, as
that carried on by the transferor; and
- in a case where the transferor is a taxable person, the transferee is
already, or immediately becomes as a result of the transfer, a
taxable person.
14. • the assets must be sold as part of the transfer of a “business” as a “going
concern”;
• the assets are to be used by the purchaser with the intention of carrying
on the same kind of “business” as the seller (but not necessarily identical);
• where the seller is a taxable person, the purchaser must be a taxable
person already or become one as the result of the transfer;
• in respect of land which would be standard rated if it were supplied, the
purchaser must notify HMRC that he has opted to tax the land by the
relevant date, and must notify the seller that their option has not been
disapplied by the same date;
• where only part of the “business” is sold it must be capable of operating
separately; and
• there must not be a series of immediately consecutive transfers of
“business”.
15. • Background
– Coleridge sold property to the Royal College
– Royal College purchased but already had leases in place
• Held:
– No TOGC
– Appeal of HMRC failed nonetheless for reasons of being time-barred
16. • Mr Justice Birss at paragraph 28:
“It seems to me that a critical point arising from these mainly European
authorities (with some UK cases too) is that for a transfer to fall into the
relevant class there are two things which have to transferred. First of
course an asset must be transferred. However something else has to be
transferred as well. That further element is referred to variously as a
business, an undertaking, or an economic activity (or part of such a
thing). Merely transferring an asset on its own will never be enough to
satisfy the test. In order to work out whether the necessary second
element has been transferred, one needs to look at all the relevant
circumstances. The test is one of substance not form. The circumstances
can include the intentions of the parties.”
17. • IMS’s business consisted of owning, maintaining, operating, using,
developing and supporting an information technology
infrastructure in the provision of banking support services
• The whole of the IMS business was transferred to VMS, a member
of the Virgin Money Group VAT group
• After the transfer VMS provided banking processing services to
another member of the VAT group which provided retail banking
services to retail customers.
18. • HMRC position
– VMS not carrying on the same kind of business as IMS
– Disregards supplies with the group when looking at the business of the
group
• Taxpayer position
– Same kind of business not compatible with EU law
– Do not focus on the intra-group transactions
19. • Appeal of the taxpayer dismissed:
– It was clear from Zita Modes that for there to be a TOGC, the
transferee had to intend to operate the business transferred, namely
the business of the transferor. This would inevitable be the same kind
of business as that previously carried on and therefore UK is EU
compliant.
– There would be a TOGC but for the VAT grouping provisions the effect
of which was to disregard the supply of goods or services between
members of a VAT group.
20. • Key principles
– In order to be a transfer of a totality of assets, or part thereof, the assets transferred
must together constitute an undertaking capable of carrying on an independent
economic activity.
– This is to be distinguished from a mere transfer of assets.
– The nature of the transaction must be ascertained from an overall assessment of the
factual circumstances, which includes the intentions of the transferee, as determined by
objective evidence, and the nature of the economic activity sought to be continued.
– The transferee must intend to operate the business, or the part of the undertaking,
transferred and not simply to liquidate the activity concerned immediately and sell the
stock, if any.
– Although succession to the business is not a condition, but a consequence of the
application of the no-supply rule, the nature of the transaction must be such as to allow
the transferee to continue the independent economic activity previously carried on by
the seller.
– Arbitrary distinctions are to be avoided, where those distinctions do not apply by virtue
of the wording or purpose of Articles 19 and 29, and the principle of fiscal neutrality
must be respected.
21. “44. However, it is apparent from the purpose of Article 5(8) of the Sixth
Directive and from the interpretation of the concept of "a transfer,
whether for consideration or not or as a contribution to a company, of a
totality of assets or part thereof" which flows from it, as set out in
paragraph 40 of [the judgment in Zita Modes], that the transfers referred
to in that provision are those in which the transferee intends to operate
the business or the part of the undertaking transferred and not simply to
immediately liquidate the activity concerned and sell the stock, if any.
45. On the other hand, nothing in Article 5(8) of the Sixth Directive
requires that the transferee pursue prior to the transfer the same type of
economic activity as the transferor.”
22. • Key principles
– In order to be a transfer of a totality of assets, or part thereof, the assets transferred
must together constitute an undertaking capable of carrying on an independent
economic activity.
– This is to be distinguished from a mere transfer of assets.
– The nature of the transaction must be ascertained from an overall assessment of the
factual circumstances, which includes the intentions of the transferee, as determined by
objective evidence, and the nature of the economic activity sought to be continued.
– The transferee must intend to operate the business, or the part of the undertaking,
transferred and not simply to liquidate the activity concerned immediately and sell the
stock, if any.
– Although succession to the business is not a condition, but a consequence of the
application of the no-supply rule, the nature of the transaction must be such as to allow
the transferee to continue the independent economic activity previously carried on by
the seller.
– Arbitrary distinctions are to be avoided, where those distinctions do not apply by virtue
of the wording or purpose of Articles 19 and 29, and the principle of fiscal neutrality
must be respected.
23. • Looking at the transferee’s intention is not incompatible with EU
law
• Following Zita Modes “the” business means the same business
• As a matter of fact VMS was carrying on the same business as that
carried on by IMS
• There was nothing in the group rules to prevent the transfer of
assets by IMS from being a TOGC
24. • Same kind of business requirement?
• Changes to HMRC’s Guidance?
• A New Approach?
25. A leading set of barristers’chambers
specialising in taxation and revenue law
CONTACT DETAILS
Tel: (020) 7242 2744
Fax: (020) 7831 8095
DX: LDE 386
Out of Hours: 07817 149 061
Address:
Old Square Tax Chambers
15 Old Square, Lincoln’s Inn
London, WC2A 3UE
Email Clerks:
taxchambers@15oldsquare.co.uk
Etienne Wong
1 March 2016
26. • Deductible input tax:
– taxable person
– acting as such
– input supply to be used for purposes of taxable transactions
• Non-deductible input tax:
– not taxable person or taxable person not acting as such
– input supply to be used for purposes of exempt transactions or …
– … activity other than making of taxable supplies?
27. • Taxpayer:
– for-profit legal person
– activities:
- provision of accommodation and food & beverages
- organisation of trade fairs, conferences & leisure activities
- engineering
- consultation on above activities
• Baltic mythology recreational (discovery) path
• Construction costs – 90/10 split (national agency/taxpayer)
• Free access (five years)
28. • Tax authority objection: input supplies not intended to be used for
purposes of activity subject to VAT
• Question: is input tax deductible where recreational path:
(i) directly intended for use by public free of charge; but also
(ii) may be means of carrying out taxed transactions?
29. • Input supplies ultimately intended for carrying out economic
activities
– recreational path = means of attracting visitors with view to providing
them with e.g. souvenirs, food & drinks, access to attractions, paid-for
bathing
• Input costs should come partly within price of goods or services
provided under planned economic activity
30. • Direct and immediate link between input supplies and taxable
output transactions?
• Input costs can be linked to planned economic activity
• Access to recreational path not exempt
– link to taxable output transactions not severed
• Immediate use of recreational path free of charge has no effect on
existence of direct and immediate link between input supplies and
output transactions or with economic activities as a whole
31. • “… whether … a taxable person has acquired goods for the purposes
of his economic activity … is a question of fact which must be
determined in the light of all the circumstances …”
• “… a person who acquires goods for the purposes of an economic
activity … does so as a taxable person, even if the goods are not
used immediately for such economic activities”
• “… [no] rule excluding the right of deduction where the use of
goods for the purposes of economic activities falls below a certain
threshold …”
– so even “very limited” use does not displace right of deduction
33. • Securenta, C-437/06
– taxpayer found to carry out three types of activities:
(i) non-economic activities;
(ii) exempt economic activities; and
(iii) taxed economic activities
• VNLTO, C-515/07
– activities in question:
(i) unrelated to activities subject to VAT; and
(ii) held not to be direct, durable and necessary extension of economic
activities
• Larentia + Minerva, C-108/14 & C-109/14
– would be apportionment if some shareholdings were in subsidiaries in the
management of which taxpayer was not involved
34. • Use for private purposes
• “Mere” acquisition of financial holdings
• Supply effected other than for consideration
• Activity funded entirely by outside-the-scope income?
35. • X (non-profit organisation) vs Y (commercial coffee house)
• 50% of space = exhibition space
• Remainder of space = shop + coffee bar
36. • Floridienne, C-142/99
– “… involvement … in the management of subsidiaries must be
regarded as an economic activity … in so far as it entails carrying out
transactions which are subject to VAT …”
• FTT [2014] UKFTT 573
– taxpayer was actively engaged in managing subsidiaries
– its services capable, in principle, of amounting to taxable supply BUT …
– … they were not made for consideration
37. • Apple and Pear Development Council, C-102/86
– direct link between thing done and payment
– “… no relationship exists between the level of the benefits which
individual growers obtain … and the amount of the mandatory charges
which they are obliged to pay … The charges … are always recoverable
from each individual grower … whether or not a given service … confers a
benefit upon him”
• Tolsma, C-16/93
– “for consideration”
- legal relationship
- reciprocal performance
- payment = value actually given in return for the thing done
38. • “… supplies were made without … any common understanding of
what was payable, when and in what circumstances”
• “… supplies were not made for consideration; they were made
gratuitously”
39. • Floridienne, C-142/99
– “Certain features of dividends account, in particular, for their exclusion
from VAT …
- [(i)] … the existence of distributable profits is generally a
prerequisite of paying a dividend … payment is thus dependent on
the company's year-end results …
- [(ii)] the proportions in which the dividend is distributed are
determined by reference to the type of shares held, in particular by
reference to classes of shares, and not by reference to the identity
of the owner of a particular shareholding …
- [(iii)] … dividends represent, by their very nature, the return on
investment in a company and are merely the result of ownership of
that property”
40. A leading set of barristers’chambers
specialising in taxation and revenue law
CONTACT DETAILS
Tel: (020) 7242 2744
Fax: (020) 7831 8095
DX: LDE 386
Out of Hours: 07817 149 061
Address:
Old Square Tax Chambers
15 Old Square, Lincoln’s Inn
London, WC2A 3UE
Email Clerks:
taxchambers@15oldsquare.co.uk
Philip Simpson, Q.C., C.T.A.
1 March 2016
41. • Fundamental to VAT is idea of ‘taxable person’
• Article 11 Principal VAT Directive
• Confers power on Member States
• Member States free to choose the criteria for taxable persons being
‘closely bound’, provided they are economic, financial or
organisational
• Purpose: simplify administration and prevent abuse
• No direct effect, but within the scope of implementation national
provisions must be consistent with EU law
42. • Clash between concept of ‘single taxable person’ and national law
which has no possibility for aggregating distinct legal entities into a
single one
• UK implementation of rules
• Intended to replicate within constraints of structure of UK law the
concept of a ‘single taxable person’
43. • Case C-162/07 Ampliscientifica and Amplifin v.Ministero
dell’Economia e delle Finanze [2008] ECR I-4019
• Case C-7/13 Skandia America Corp (USA) v. Skatteverket, Judgment
dated 14 September 2014
• Cases C-108 and 109/14 Larentia + Minerva / Marenave, Judgment
dated 16 July 2015
44. • Italian legislation recognised VAT groups
• But only where organisational connection existed from at least the
start of the previous calendar year
• ECJ held:
– If in a VAT group, cease to be entitled to submit separate VAT return /
be identified, within and outside group, separately for VAT purposes
– Conditions laid down by Member States are subject to general
principles of EU law, including fiscal neutrality, abuse of rights, and
proportionality
45. • Company established in US
• Branch in Sweden
• Head office bought IT services in from third parties
• Distributed them to Swedish branch with 5% mark-up
• Then onwards through group
46. • Normally no supply because internal to single legal entity - Case C-
210/04 Ministeria dell’Economia v. FCE Bank [2006] ECR I-2803
• But Swedish branch was part of VAT group in Sweden, with other
Skandia group members
• Therefore it was a different taxable person for VAT purposes from
the company’s head office in US
• Supplies by head office to branch taxable supplies
47. • Discussions initiated by Commission and carried forward by EU VAT
Committee
• Working Papers 845 (Commission) and 879 (Sub-committee of VAT
Expert Group)
• Interpretation of Article 11
– ‘persons established in the territory of the country’
– broad interpretation – includes branch outside territory – e.g. UK
approach
– narrow interpretation – excludes branch outside territory – e.g.
Swedish approach
48. • Principal issues:
– Goods
– Other ‘intra-entity’ structures
– Consideration / ‘legal relationship with reciprocal performance’ –
company decide, transaction by transaction, whether there is
‘consideration’
– Cost-sharing associations – who is the member
49. • Territorial scope
– Where different parts in different Member States e.g. UK approach
– Where different parts in same Member State e.g. Swedish approach
– Purpose of VAT group rules
– Potential for clash between different approaches by different Member
States
• Place of supply
– Head office or branch?
• Automatic grouping?
• Harmonisation?
50. • Sub-committee of working group
– Broad interpretation of FCE
– Narrow interpretation of Skandia
• Recommendations
– Apply Skandia only within facts of case
– Transactions involving non-EU head offices / branches
– VAT groups in Member States with narrow territorial approach
– Member States with no anti-avoidance rules – and anti-avoidance
rules should be enacted
– Externally bought services
51. • Depends on whether Member State which has recognised VAT
group takes broad or narrow territorial approach
• If narrow, then Skandia will be applied
• If broad, then not
• Lists of Member States which apply narrow / broad territorial
approach
52. • Facts
– German KG as limited partner in KG
– German GmbH owning shares in 4 German KGs
• KGs have no legal personality
• No relationship of control in Marenave
53. • Held (1) financial, economic and organisational ties that make
persons ‘close’ must be specified at national level (cp. variety of
tests in direct tax in UK law)
• Therefore no direct effect
• Held (2) additional conditions e.g. relationship of subordination, or
legal personality, competent only if appropriate and necessary for
preventing tax abuse / avoidance
54. • UK issues arising
• Loosening of control test
• Extension to partnerships / individuals
• HMRC currently in discussions pre-consultation
• Consultation due to start in spring 2016
• Likely outcomes
55. • Taylor Clark Leisure Limited v. HMRC [2013] SFTD 381 (FTT); [2015]
STC 223 (UT); Court of Session awaited
• Standard Chartered / Lloyds v. HMRC [2014] UKFTT 316 (TC)
• MG Rover / BMW v. HMRC [2014] UKFTT 327 (TC)
• Gala Leisure Limited v. The Commissioners For Her Majesty’s
Revenue and Customs [2015] UKFTT 516 (TC)
56. • Who is entitled to repayment
• What if wrong person has put in the claim
57. 15 Old Square, Lincolns Inn
London, WC2A 3UE
DX: LDE 386
Tel: (020) 7242 2744
taxchambers@15oldsquare.co.uk
www.taxchambers.com
MEMBERS OF CHAMBERS
Robert Venables, Q.C. James Kessler, Q.C. Amanda Hardy, Q.C. Philip Simpson, Q.C.
Patrick Cannon Etienne Wong Rory Mullan Setu Kamal
Harriet Brown Oliver Marre Mary Ashley
