The document summarizes several indirect tax cases from the UK. The first case discusses an Advocate General's opinion in a case referred to the Court of Justice by the Irish Supreme Court involving Ryanair's attempt to reclaim VAT fees from an unsuccessful takeover bid of Aer Lingus. The Advocate General believes Ryanair is entitled to reclaim the VAT. The second case discusses a First-Tier Tax Tribunal case involving Marks & Spencer's "Dine In for £10 with free wine" promotion. The tribunal agreed with HMRC that VAT was due on the wine as customers paid for a package including the wine. The third case discusses a First-Tier Tax Tribunal case involving a Guern

1. Indirect tax update
[07/2018]
11 MAY 2018
Summary
This week’s edition of Indirect Tax
Update looks at the Advocate
General’s opinion in a referral to the
Court of Justice from the Irish
Supreme Court.
In 2006, Ryanair Ltd, the well-known
Irish airline launched a take-over bid
for Ireland’s recently privatised
national carrier Aer Lingus.
Unfortunately, the European
Commission blocked the bid on
competition grounds. However,
Ryanair had incurred considerable
costs on advisory fees during the
course of the bid and it sought to
claim the VAT on those fees as input
tax on the basis that it had intended
to provide taxable management
services to Aer Lingus after the take-
over.
The Irish Revenue refused the claim
on the basis that, as the bid
ultimately failed, Ryanair did not
provide any management services.
The Advocate General disagrees
with the Irish Revenue and would
allow the claim.
This week also sees another
household name – Marks & Spencer
PLC at the First-tier Tax Tribunal.
The issue in this case was whether
M&S should account for VAT on
wine supplied with its promotional
offer of “Dine In for £10 with free
wine”. M&S considered that no VAT
was due but HMRC took the
opposite view.
The Tribunal agreed with HMRC and
dismissed M&S’ appeal.
The First-tier Tax Tribunal has also
issued an interesting decision in the
case of Healthspan Ltd – a
Guernsey based distributor of non-
prescription health products via a
warehouse in The Netherlands to
UK retail customers. The case
related to determining the correct
place of supply and whether that
place was the UK making the
companies supplies subject to UK
VAT.
Court of Justice – Advocate General’s Opinion – Ryanair Ltd
Advocate General (Kokott) has issued her opinion in this referral to the Court of Justice by the
Irish Supreme Court. The case involves the well-known Irish air carrier Ryanair which, in 2006
mounted a take-over bid for its recently privatised rival carrier Air Lingus. Ryanair incurred
considerable fees in relation to the bid and sought to reclaim the VAT on those fees. Ryanair
argued that it was entitled to reclaim this VAT on the basis that it had intended to provide
management services to Aer Lingus after the take-over. However, ultimately, the bid was
blocked by the European Commission on competition grounds and, as a result, Ryanair did
not acquire the whole of the share capital of Aer Lingus and did not provide any management
services either. The Irish Revenue considered that, in such circumstances, there was no
direct or immediate link between the costs incurred by Ryanair and any taxable supply made
by Ryanair.
During the subsequent litigation between the parties, the Circuit court made a binding finding
of fact that Ryanair had an intention to provide management services to Aer Lingus after the
company’s share capital had been acquired. Nevertheless the Irish High Court found against
Ryanair and it appealed to the Irish Supreme Court which, in turn, decided to refer the matter
to the Court of Justice. The Supreme Court referred two questions. Firstly, whether an
intention to provide management services to a take-over target is sufficient to establish that
the bidder company is engaged in an economic activity and secondly, whether there is a
sufficient direct and immediate link between the costs incurred in relation to the take-over and
the intended provision of management services to the target?
Advocate General Kokott is of the view that the answer to both of those questions is yes. A
pure holding company that acquires shares in a target will only be able to reclaim VAT on
associated costs if it can establish that, on an objective basis, there is an intention to supply
management services to the target. In the absence of such an intention, the Court has
previously held that the VAT would not be reclaimable as the mere holding of the shares in
the target company is not regarded as an economic activity. However, in Ryanair’s case, it is
not simply a pure holding company. Ryanair is a trading company (the supply of air
passenger transport services) and its acquisition of the share capital of Aer Lingus was
intended to further that activity on a much larger scale. As a result, the Advocate General
considers that the intended provision of management services to Aer Lingus by Ryanair is
something of a red herring. In circumstances where a trading company acquires the shares in
a target in order to expand its own trading activities, there is no requirement for it to provide
management services to the target (although it may well do). What matters from an input VAT
recovery perspective is whether there is a direct and immediate link with the trading activities
of the business after the shares have been acquired. On the evidence in this case that is
exactly what was intended. In the circumstances, the Advocate General considers that
Ryanair is a taxable person with a taxable economic activity which it sought to expand by the
acquisition of Aer Lingus. That status is sufficient to allow recovery of the VAT incurred on the
take-over costs even though, ultimately, the takeover did not occur. The case law of the
CJEU has held that the neutrality of the VAT system would be at risk if fully taxable entities
were precluded from recovering VAT incurred on costs. Had the bid been successful, and
assuming that Ryanair traded profitably, the costs of the take-over would have been reflected
in the price of its taxable outputs (air-fares). As such, the costs of the take-over would have
become cost components of Ryanair’s taxable outputs and that is a sufficient direct and
immediate link to give Ryanair entitlement to recover the VAT on the associated acquisition
costs as input VAT.
Comment – The recovery of VAT on take-over costs is an issue that has rumbled along
for many years. Since the Polysar case, we have known that the acquisition of shares
for the purpose of simply receiving dividend income is not regarded as an economic
activity for VAT purposes. Later case law has established that where there is an
acquisition of shares but also a supply of management services by the acquiring
company to the target company, the supply of management services is considered to
be an economic activity which gives rise to the right of deduction.
This case now identifies that an acquiring company is entitled to recover VAT incurred
on acquisition costs even if it does not provide any management services. This is the
case provided that, on an objective, functional analysis, it is demonstrated that, by its
acquisition, the acquirer is seeking to further its own existing economic activity. The
Advocate General confirms that, even if the acquisition is aborted, there would, in such
circumstances, be a sufficient direct and immediate link between the acquisition costs
and the intended taxable activity to enable the input VAT to be reclaimed.

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Contacts
Comment
Promotional offers and business
promotion schemes can cause great
difficulty in relation to VAT
accounting. There have been many
cases over the years which serve to
highlight these complexities
including Kuwait Petroleum,
Naturally Yours Cosmetics, LMUK
(the Nectar Scheme) and more
recently, Marriott Rewards.
The Supreme Court’s judgment in
LMUK determined that in the
absence of a written contract, the
courts will look to the economic
reality of the bargain when
determining the nature of a supply
for VAT purposes. In this case, on
the evidence before it, the FTT
found that the economic reality was
that the customer was not given the
wine in the sense of a free gift, but
that he paid £10 for the whole deal
including the items of foods and the
bottle of wine. VAT was therefore
due on the wine element of the
supply.
Comment
The issue in this case is one of
historic liability only as the company
has changed the way it does
business. This followed the
publication in 2015 of the VAT
Committee’s working paper on
distance selling which intimated that
in the circumstances where goods
are delivered by a separate party, it
would still be regarded as having
been delivered “by or on behalf of “
the supplier of the goods.
Healthspan had always accounted
for Dutch VAT on the supplies but,
following the VAT Committee paper,
the Dutch authorities changed their
view about the correct place of
supply – accepting that the correct
place of supply was the United
Kingdom.
In due course, the Court of Justice
will deliver a judgment that will,
hopefully, settle this long-running
dispute.
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
First-tier Tax Tribunal
Marks & Spencer PLC
The well-known High Street retailer Marks & Spencer is in dispute with HMRC in
relation to its promotional offer “Dine in for £10 with free wine”. Essentially, M&S
considers that it should not be required to account for output VAT as the wine is
supplied free of charge whereas HMRC take the view that customers are, in fact,
purchasing a package of four items for £10, not three items of food for £10 with a
bottle of wine for nil consideration.
The First-tier Tax Tribunal (FTT) was not persuaded by M&S’ arguments. The
economic reality of the offer was that a customer could only obtain the bottle of wine
if he paid £10 for the food (a starter, a main and a dessert). Accordingly, the wine
was not free but was part of the package of four items. M&S were required,
therefore, to account for output VAT on the part of the consideration that was
attributable to the value of the wine.
M&S had previously run a similar promotion (Dine in for £10) which included the
bottle of wine where it accepted that the £10 needed to be apportioned. HMRC
argued that, in reality, nothing had materially changed with this promotion other
than the marketing and the use of the phrase “with free wine”. The FTT agreed. In
the context of this promotion, M&S used the word ‘free’ in a marketing sense but, in
reality, a customer clearly paid for the four items as a single package at a
substantial discount to their individual shelf prices. M&S must, therefore account for
VAT on the value attributable to the supply of the wine.
First-tier Tax Tribunal
Healthspan Ltd
The FTT has issued a decision in this case which relates to the VAT rules in connection
with Distance Selling.
Healthspan Limited (“Healthspan”) sells non-prescription health products to retail
customers, who place their orders using either the internet, telephone or mail order.
Between 1 April 2012 and 31 January 2016, the overwhelming majority of Healthspan’s
products were despatched from a warehouse in the Netherlands and delivered to
customers in the UK. Most of the goods were delivered by post but some were delivered
by courier. The question to be resolved was whether, during the relevant period, the
goods hade been ‘delivered by or on behalf of Healthspan’. If they had been so
delivered, then the supply of the goods would be deemed to be the UK and Healthspan
would be liable to register for UK VAT and account for UK VAT on these supplies
running to circa £27 million.
The Tribunal (Judge Redston) determined that, on the evidence, as far as telephone
sales and goods delivered by courier were concerned, the goods were delivered on
Healthspan’s behalf and fell to be treated as supplied in the UK. As far as internet and
mail order sales were concerned, the Tribunal considers that, looking at the economic
reality of the sales process, they were also ‘delivered’ on Healthspan’s behalf making
them liable to UK VAT. However, the Tribunal has some doubt as to the correct
interpretation of EU law on the point and has decided to make a reference to the Court
of Justice for clarification of EU VAT law relating to distance sales. The Tribunal is
unsure whether, in situations where the customer negotiates a separate contract for
delivery of the goods with a third party provider, the goods can still be said to have been
delivered “by or on behalf of the supplier”. In the FTT’s view, the answer to that
question, based on the economic reality is “yes” but the issue is not clear.