Indirect Tax Update

1. Indirect tax update
[06/2018]
04 MAY 2018
Summary
This week sees a flurry of activity
from the Court of Justice (CJEU)
and the UK Courts and Tribunals.
The Advocate General has issued
an interesting opinion in the long-
running case involving Volkswagen
Financial Services. The issue
referred to the CJEU concerned the
recovery of VAT on overheads.
VWFS argued that it should be
entitled to recover 50% of the VAT
incurred on the basis that for each
vehicle supplied, there are two
transactions. A taxable supply of the
car and a separate exempt supply of
credit.
HMRC argued that the overheads
were a cost component of the
exempt supply of credit and
precluded VWFS from any
entitlement to a claim.
The Advocate General has stated
that, in his view, there is, in fact, only
one supply – the taxable supply of a
car on hire purchase terms.
The Court of Appeal has also issued
a judgment in the long-running case
involving Wakefield College. The
College claimed that its activity of
providing education to students who
only paid partial fees due to their
socio-economic status was not an
‘economic activity’ in a VAT sense.
The Court of Appeal disagreed. The
partial fees must be regarded as
consideration for the supply of
education which made the activity an
economic or business activity for
VAT purposes.
Finally, the Upper Tribunal has
issued its judgment in the case of
Marriott Rewards / Whitbread. The
case concerned a business
promotion scheme where customers
earn and redeem points. The
Tribunal has ruled that the payments
made by Marriott Rewards was not
third party consideration for the
redeeming hotel’s supply of the stay
to the customer.
Court of Justice – Advocate General’s Opinion – Volkswagen Financial
Services (UK) Ltd (VWFS)
Advocate General Szpunar has issued his opinion in this long-running VAT case. An opinion
that will come as something of a shock to the asset finance sector. In simple terms, this case
concerned whether VWFS is entitled to reclaim VAT incurred on its overheads. Under general
principles, a business is only entitled to reclaim VAT incurred on the purchase of goods and
services if the goods and services in question are used or to be used by the business for the
purposes of its taxable activities. In this case, VWFS supplies motor cars on Hire Purchase
terms to customers. It takes legal title to a vehicle from a car dealer and re-supplies the car to
the customer at cost. It then provides finance to the customer.
For every car sold there are, thus, two transactions – the supply of the car (taxable) and the
supply of credit (VAT exempt). HMRC’s view is that as the car is sold at exact cost, any
overhead costs are borne by the profits made from the supply of credit and this means that,
under the general principle, VWFS is not entitled to reclaim any of the VAT incurred on its
overheads. VWFS, on the other hand, argue that some of the overheads are consumed in
making the taxable supply of the car. The UK’s Court of Appeal decided to refer the matter to
the CJEU for clarification on the input tax point.
Advocate General Szpunar has issued a somewhat controversial opinion which, in effect,
considers that the UK’s treatment of HP transactions as comprising two separate and distinct
transactions is contrary to EU VAT law. Even though the Court of Appeal did not ask the
CJEU for guidance on determining the nature of the supply, nevertheless, the Advocate
General considered it necessary to reformulate the question referred to enable him to provide
a meaningful answer. The AG considers that under principles set out in earlier case law,
looking at what is being supplied from the customer’s perspective, there is only a single
supply of a car to the customer. Whilst there maybe two transactions, what is being supplied
is a motor car on finance. That is a single supply that is liable to VAT at the standard rate, not
two separate supplies. The AG considers that the issue - of whether VWFS can reclaim input
tax on overheads - is clear. As the supply is a single taxable supply, it is entitled to full input
VAT recovery provided that Output VAT has been or is to be accounted for on the supply of
the vehicle.
The AG considered that the facts in VWFS were very similar to those in the case of Stock’94
which concerned the supply of farm machinery to farmers. In that case, the trader sold goods
to farmers and also provided loan finance to the farmer to pay for the goods. The CJEU
considered that, in such circumstances, the supply constituted a single transaction for VAT
purposes the taxable amount of that single transaction being made up of both the price of the
goods and the interest paid on the loans granted to the farmers.
The AG also considered the well-known case of Part Services. In that case, vehicles were
sold by one entity with finance provided by another but the Court again considered that there
was a single transaction which, together, constituted a single taxable supply of the vehicle.
The AG has confirmed that, in his view, the provisions of EU law are sufficiently clear and
precise for taxpayers to be entitled to rely on their direct effect. As a consequence, it is clear
that any input VAT incurred on overheads may be directly attributable to the single taxable
supply of the vehicle and maybe reclaimed in full provided that output VAT has been
accounted for on the supply of the vehicle (including on the element treated as finance).
Comment – This is not a good outcome for VWFS (or for any other finance company for
that matter) but we will need to wait a little longer before the full court issues its final
judgment. Assuming that the court agrees with AG Szpunar (and that is by no means
guaranteed), it seems that the UK’s VAT treatment of goods sold on HP terms is
incorrect from a VAT standpoint.
For HP companies supplying goods to other taxable persons, the judgment will have
neutral effect. For companies supplying vehicles and other goods on HP terms to
consumers or to businesses that are not entitled to a VAT refund, the cost of the goods
to the customer has just increased.

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Contacts
Comment
This judgment is the first UK
judgment to identify the different
interpretation of the two concepts of
consideration and remuneration
from a VAT perspective. The issue
in this case was whether the
College was entitled to have the
construction of a new teaching block
zero-rated. The College argued that
it did not have an ‘economic’ activity
because what the students paid to it
was not consideration.
The Court has stated that that is the
wrong test. What matters is whether
the college receives remuneration.
The Court concluded that, on thje
facts and evidence the provision of
courses by the College to students
paying subsidised fees was an
economic activity and was therefore
a "business" within the note in
schedule 8 to the 1994 Act, with the
result that the construction services
for the new building were not zero-
rated.
Comment
This is another example of a
business promotion scheme causing
issues from a VAT accounting
perspective. The case concerned
the operation of points based
reward scheme operated by the
well-known Marriott group of hotels.
HMRC’s argument that the payment
made by Marriott to the redeeming
hotel was third party consideration
was dismissed on the facts and
based on the evidence of the
agreements between the parties.
Unfortunately though, neither
Marriott nor Whitbread could
convince the Tribunal that the place
of supply was the UK (in Marriott’s
case) or in the USA (in
Whitbread’s).
The case demonstrates the
importance of understanding the
complex place of supply rules and
the need to ensure their correct
application.
Stuart Brodie
Scotland
T +44 (0)14 1223 0683
E stuart.brodie@uk.gt.com
Karen Robb
London & South East
T +44 (0)20 772 82556
E karen.robb@uk.gt.com
Vinny McCullagh
London & South East
T +44 (0)20 7383 5100
E vinny.mccullagh@uk.gt.com
Court of Appeal
Wakefield College v HMRC
This is also a long-running case. Essentially, the College provides further education
to students. Its provision of such education to students under the age of 19 (18 in
Scotland) is a statutory obligation and, as such, the funding provided by the
Government to pay for that education is outside the scope of VAT. For older
students, fees are payable but, in the majority of cases, the fees are either waived
or are substantially reduced based on the student’s socio-economic circumstances.
The College argued that, following the judgment of the Court of Justice in the case
of EC Commission v Finland, its supplies of education to these students should not
be regarded as a business activity on the basis that the payments made did not
constitute consideration. The First-tier Tribunal agreed with the College but that
decision was overturned by the Upper Tribunal and the College appealed to the
Court of Appeal. Unfortunately, the Court disagreed with the College.
From an EU VAT law perspective, there is a difference between ‘consideration’ and
‘remuneration’. Consideration is that which is given in return for a supply of goods
or services (and can be monetary or non-monetary) ie it involves obligations of
reciprocal performance. Remuneration, on the other hand, connotes a degree of
regularity of transactions for the purposes of deriving income. In a VAT sense there
can, therefore, be a supply of goods or services for consideration without there
necessarily being remuneration. If there is no remuneration, there is no ‘economic
activity’ for VAT purposes. Here, the Court of Appeal was clear that the College
expected to be paid the fees (albeit partial) and that constituted supplies for both
remuneration and consideration. Accordingly, its activity was an economic activity
for VAT purposes.
Marriott Rewards LLC / Whitbread PLC
Upper Tribunal
This case concerns the operation of a business promotion scheme by Marriott Rewards
LLC (Marriott) which is a US Corporation. In simple terms, Marriott operated a points
scheme. A customer staying at a participating hotel could earn points based on the
value of the stay. Marriott issued the points to the customer and charged the
participating hotel for the value of those points. When a customer had collected sufficient
points, he could redeem them at a participating hotel. The customer is entitled to free
accommodation and on redeeming his points, the redeeming hotel would invoice
Marriott for the value of the points redeemed.
There were two issue in the case. Firstly, HMRC argued that the payment made by
Marriott to the redeeming hotel was third party consideration paid by Marriott for the
supply of accommodation by the redeeming hotel to the customer. The Tribunal
disagreed. The agreements between Marriott and the participating hotels was for the
hotels to provide accommodation free of charge to customers redeeming points. That
was a ‘redemption’ service to Marriott and was not third party consideration for the
customer’s stay.
Secondly, Marriott argued that the redemption service was a service relating to land
and, as the hotels were situated in the UK, the service was subject to UK VAT giving rise
to an entitlement to a VAT refund in excess of £83 million. Whitbread, as a participating
hotel argued that the redemption service was not a land related service but was more
akin to an advertising service which, at the material time, took place where the customer
(Marriott) belonged (ie the USA). In that case the supply would not be subject to UK VAT
giving rise to a claim for overpaid output VAT. The Court disagreed with both Marriott
and Whitbread. The supply was, simply a redemption service the place of supply of
which was the UK prior to 1 January 2010 and the USA after that date. Neither Marriott
nor Whitbread’s claims would be paid. Appeals dismissed