The document summarizes a court case in the UK regarding VAT rates on energy saving home improvements. The Court of Justice of the European Union ruled that the UK's application of a reduced VAT rate to energy saving installations and materials was contrary to EU law. While EU law allows reduced rates for certain social housing purposes, the court agreed with the European Commission that the UK's policy aimed at environmental rather than social objectives. As such, applying reduced rates to all housing went against the VAT Directive. The court also found the UK law defective for not limiting the reduced rate to installations where materials' value was not significant relative to installation costs. The UK will need to amend its law in response to this judgment.

1. © 2015 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
Under the common VAT system,
Member States are obliged to
implement the provisions of the
VAT Directive into their own
national legislation. Where a
Member State fails to do so, the
Commission can bring
proceedings (infraction
proceedings) against that
Member State at the Court of
Justice.
The Commission took the view
that the UK's national law on the
supply and installation of energy
saving products was contrary to
the VAT Directive. The CJEU
agreed.
In due course, the UK's law will
have to be repealed to take
account of this judgment.
09 June 2015
Court of Justice of the European Union (CJEU)
In a judgment issued last week, the CJEU has confirmed that the UK's application of a
reduced rate of VAT to the supply and installation of energy saving products into
residential accommodation is contrary to EU law.
Under the VAT Directives, Member States are allowed to apply reduced rates of VAT
to a limited range of supplies of goods and services. In particular, the Directive allows
reduced rates to apply to the provision, construction, renovation and alteration of
housing as part of a social policy and the renovation of private dwellings (excluding the
supply of any materials which account for a significant part of the value of the services
supplied). Under UK law, the reduced rate applies to the supply of services relating to
the installation of energy saving products in residential accommodation and charitable
buildings and the supply of the materials themselves when supplied by the person
installing them. The European Commission felt that the UK's interpretation of the
Directive was too wide and began proceedings against the UK in 2011.
In essence, the CJEU has agreed with the Commission and has dismissed the UK's
reasons for the application of the reduced rate. According to the Commission, the
UK's policy of promoting the use of energy saving materials in the general housing
stock is aimed at environmental objectives and does not, therefore, constitute a
relevant social policy for the purposes of the application of reduced rates. Accordingly,
the CJEU has ruled that the Commission's case against the UK on this point was well
founded. It is the provision of the housing that must be the social policy in question
and not the environmental objectives. The application of reduced rates to all housing is
therefore contrary to the provisions of the Directive.
The CJEU has also agreed with the Commission on the second point concerning the
supply of energy saving materials by the person installing them. The VAT Directive
only allows the reduced rate to apply on condition that the materials being supplied do
not account for a significant part of the value of the service (of installation) supplied.
UK law makes no reference to this condition and, as such, the CJEU confirmed that
the UK's law is defective.
In the light of its findings, the CJEU has declared that the UK has failed to meet its
obligations under the VAT Directive.
Issue17/2015
UK infracted over reduced rates
Indirect Tax Update

2. © 2015 Grant Thornton UK LLP. All rights reserved.
‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms
provide assurance, tax and advisory services to their clients and/or refers to one or
more member firms, as the context requires.
Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL).
GTIL and the member firms are not a worldwide partnership. GTIL and each member
firm is a separate legal entity. Services are delivered by the member firms. GTIL does
not provide services to clients. GTIL and its member firms are not agents of, and do not
obligate, one another and are not liable for one another’s acts or omissions.
This publication has been prepared only as a guide. No responsibility can be accepted
by us for loss occasioned to any person acting or refraining from acting as a result of
any material in this publication.
grant-thornton.co.uk
GRT100456
Upper Tribunal
Avoidance scheme not 'abusive'
In a long running case concerning the establishment of a VAT planning scheme, the Upper Tribunal
has dismissed HMRC's appeal from the First-tier Tribunal. In the case of Paul Newey t/a Ocean
Finance, the First-tier Tribunal concluded that, whilst the VAT scheme was designed to give the
trader a tax advantage, the scheme was not 'abusive' in that the arrangements that were put in place to
give effect to the scheme were not contrary to the purpose of the VAT Directive.
HMRC appealed but, in a 124 page judgment, Justice Warren has agreed with the findings of the
First-tier and has dismissed HMRC's appeal. The case centres around whether a Jersey company
provided financial brokerage services and whether it was the recipient of advertising services. HMRC
contended that in reality, the brokerage services were undertaken by Mr Newey in the UK and that it
was he, rather than the Jersey company, that incurred the advertising costs. Without the scheme, Mr
Newey incurred a large cost in the UK. VAT was chargeable on the advertising services he received.
The arrangements that were put in place were intended to remove that cost.
As an appeal from the First-tier Tribunal, HMRC case could only succeed if the Tribunal had made
an error of law. In Justice Warren's judgment, the First-tier was entitled to make the decision that it
did and there was no such error of law. Accordingly, HMRC's appeal was dismissed.
Comment
It has taken over six
years for this case to
reach this stage. The
Upper Tribunal found
it necessary to refer
questions to the Court
of Justice before it
could make a judgment.
Justice Warren has
confirmed that,
although the scheme
was intended to create
a tax advantage (over
£10 million), the
scheme was not
abusive.
First-tier Tax Tribunal (FTT)
Comment
Had the construction
of phase II being
undertaken with (say)
18 months of the
construction of phase I,
the taxpayer here may
have convinced the
Tribunal to treat the
two phases as a single
construction qualifying
for zero-rating.
Unfortunately, the
seven year gap between
the two phases was too
long and phase II could
only be regarded as an
extension to phase I
York University Property Company
UK VAT law provides that the construction of a building intended for use for a relevant charitable
purpose can be zero-rated. However, the construction of an extension to a building cannot qualify
and is subject to VAT at the standard rate. In this case, (Case number TC04417), the company
constructed a building in two phases. Phase I qualified as the construction of a relevant charitable use
building and was, accordingly, zero-rated. However, as the University did not have sufficient funds at
the time, the second phase – which was intended to double the size of the original phase I building –
was not started for a further seven years. The company argued that the construction of the second
phase should also qualify for zero-rating. However, HMRC contended that, as there had been a seven
year gap between the phases, the construction of phase II could only be regarded as the extension of
the phase I building and could not qualify for zero-rating.
Unfortunately for the University, the First-tier Tribunal agreed with HMRC. Weighing the relevant
factors, the Tribunal found that phase II of the building was an enlargement of or an extension to
phase I rather than a continuation of the original development of the building.
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
Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170