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EY VAT News – week to 13 February 2017 Welcome to the latest edition of EY VAT News, which provides a roundup of indirect tax developments. If you would like to discuss any of the articles in more detail, please speak with your usual EY indirect tax contact or one of the people below. Previous editions of EY VAT News can be found here. In this edition: Court of Justice of the European Union
Judgment: An intra-community supply of goods can qualify as zero rated in circumstances where the customer is not registered in VIES or for intracommunity acquisitions of goods Calendar update
Court of Appeal
The free supply of vouchers as part of a business promotion scheme is not subject to VAT; input tax on those vouchers is recoverable unless the vouchers have been directly issued by the retailer
EY Global Tax Alerts
Mauritius, Chad, UK
Legislation
SI/Draft The Enactment of Extra-Statutory Concessions Order 2017
House of Commons
Briefing Paper –Tax after the EU referendum
Court of Justice of the European Union Judgment: An intra-community supply of goods can qualify as zero rated in circumstances where the customer is not registered in VIES or for intra-community acquisitions of goods C-21/16 Euro Tyre On 9 February 2017, the Court of Justice of the European Union (CJEU) released its decision in this Portuguese referral. Euro Tyre (ET) is a Portuguese branch of a Dutch company which imports and exports tyres for retailers based in Portugal and Spain. ET made a number of supplies to a Spanish distributor which, at the time of the supplies, whilst registered as a taxable person for VAT purposes in Spain, it was not subject to the system of taxation on intra-community acquisitions or registered in the VAT Information Exchange System (VIES). It was however subsequently granted the status of intracommunity operator and registered in VIES by the tax authorities. ET treated its supplies to Spain as ‘exempt’ (zero rated) intra-community supplies which the tax authorities denied. The CJEU held that VAT exemption in respect of the intra-community supply of goods is applicable when the right to dispose of the goods as owner has been transferred to the purchaser, the vendor establishes that those goods have been dispatched or transported to another Member State and, as a result of that dispatch or that transport, they have physically left the territory of the Member State of supply. ET was denied exemption solely on the grounds that the purchaser was neither registered for
intra-community transactions in Spain nor entered in VIES. The purchaser only possessed, in that Member State, a VAT identification number valid for transactions within Spain. The CJEU considered that the definition of ‘taxable person’ set out in Article 9(1) of the VAT Directive covers a person who independently carries out in any place an economic activity, whatever the purpose or results of that activity. It does not make the capacity of taxable person either subject to that person possessing a VAT identification number specific for carrying out intra-community transactions, or subject to that person being registered in VIES. Accordingly, neither constitute substantive conditions for exemption from VAT of an intra-community supply. Those are merely formal requirements which cannot undermine the vendor's entitlement to exemption from VAT where the substantive conditions are satisfied. The CJEU confirmed that the principle of fiscal neutrality requires that exemption from VAT be allowed if the substantive conditions are satisfied, even if the taxable person has failed to comply with some of the formal requirements. However, there are two situations in which the failure to meet a formal requirement may result in the loss of entitlement to an exemption from VAT; the principle of fiscal neutrality cannot be invoked for the purposes of an exemption from VAT by a taxable person who has intentionally participated in tax evasion and non-compliance with a formal requirement may lead to the refusal of an exemption from VAT if that non-compliance would effectively prevent the production of conclusive evidence that the substantive requirements have been satisfied. In conclusion, the CJEU held that whilst it is for the referring court to verify that the substantive conditions have been met, where there is no sound evidence pointing to the existence of fraud, the VAT Directive must be interpreted as precluding the tax authority of a Member State from refusing to exempt an intra-community supply from VAT if the only grounds for doing so are that formal conditions regarding registration for intra-community transactions and registration in VIES have not been met. The principle of proportionality, also precludes such refusal where the vendor was aware of the circumstances of the purchaser with regard to the application of VAT and was convinced that subsequently the purchaser would be registered as an intra-community operator with retroactive effect. Comment: This judgment follows a number of similar CJEU cases and provides further support that meeting the substantive conditions should be sufficient to allow the zero-rated movement of goods. Businesses which have had zero-rating challenged in similar circumstances may wish to consider revisiting the decision.
Calendar update Wednesday 15 February 2017 Hearing – C-616/15 Commission v Germany - Action brought by the European Commission against the Federal Republic of Germany. The applicant claims that the Court should declare that, by restricting, to groups whose members exercise a limited number of professions, the exemption from VAT for the supply by independent groups of persons carrying on an activity which is exempt from VAT, or in relation to which they are not taxable persons, of services to their members for the direct purposes of the exercise of that activity where those groups merely claim from their members exact reimbursement of their share of the joint expenses, the Federal Republic of Germany has failed to fulfil its obligations under Article 132(1)(f) of the VAT directive. Please contact Simon Harris for further details. Judgment - C-592/15 British Film Institute - UK referral from the Court of Appeal asking whether the cultural services exemption under Article 13A(1)(n) of the Sixth Directive (now Article 132(1)(n) of the VAT Directive) has direct effect, so as to exempt the taxpayer's supplies (admission to showings of films), in the absence of any domestic implementing legislation. The referral also asks whether any discretion is given to Member States to discriminate between cultural services in their application of the exemption. This case may be of interest to any eligible bodies which supply cultural services, but have been denied exemption by HMRC on the ground that the services in question are not listed in UK law. Please contact Dermot Rafferty for further information. Thursday 16 February 2017 Opinion - C-36/16 Posnania Investment - Polish referral asking whether the transfer of ownership of land by a taxable person to the Government or a local authority, in settlement of tax arrears, constitutes a supply of goods for VAT purposes. Wednesday 1 March 2017 Opinion - C-326/15 DNB Banka – Delayed from 6 October 2016, Latvian referral asking various questions concerning the application of the VAT cost-sharing exemption. This exemption, which is provided for under Article 132(1)(f) of the VAT Directive, applies when two or more organisations (whether businesses or otherwise) with exempt and/or non-business activities join together on a co-operative basis to form a separate, independent entity - a cost sharing group (CSG) - to supply themselves with certain qualifying services at cost and exempt from VAT. The referral addresses various issues, including the
consequences where the members of a CSG are established in separate EU Member States in which the exemption has been implemented differently, whether the fact that transactions may be subject to transfer pricing rules for direct tax purposes precludes the application of the exemption, and whether the exemption applies to services received from third countries. Please contact Simon Harris for further details. Opinion - C-605/15 Aviva – Polish referral concerning the EU VAT cost-sharing exemption and the criteria that should be applied in assessing whether the ‘distortion of competition’ condition laid down in Article 132(1)(f) of the VAT Directive is fulfilled. Please contact Simon Harris for further details. Thursday 2 March 2017 Opinion – C-38/16 Compass Contract Services – UK referral from the First-tier Tribunal asking whether the different treatment of output tax and input tax Fleming claims (where the former could be made for periods ending before 4 December 1996 and the latter for periods ending before 1 May 1997) breaches any principles of EU law. Hearing - C-90/16 The English Bridge Union - UK referral from the Upper Tribunal asking, in the context of the VAT exemption for services closely linked to sport within Article 132(1)(m) of the VAT Directive, whether the activity must have a significant physical element of performance or whether a game, such as contract bridge, with a predominantly mental element of performance, falls within the meaning of a ‘sport’ (in other words, whether contract bridge is a sport for VAT purposes). Tuesday 7 March 2017 Judgment - C-390/15 Rzecznik Praw Obywatelskich - Polish referral challenging the validity of EU law insofar as it excludes books published in digital format and other electronic publications from the reduced rate of VAT.
Court of Appeal The free supply of vouchers as part of a business promotion scheme is not subject to VAT; input tax on those vouchers is recoverable unless the vouchers have been directly issued by the retailer Associated Newspapers Limited On 10 February 2017 the Court of Appeal released its judgment in the case of Associated Newspapers Limited (ANL). The appeal concerns the VAT treatment of high street retailer vouchers given away to participants in ANL's sales promotion schemes. In the first of two connected decisions, the First-tier Tribunal (FTT) held that no output tax was due on vouchers given away by ANL in its sales promotion schemes. In the second the FTT held that ANL incurred input tax on its purchase of the vouchers, both direct from the retailers and from an intermediate supplier, and that ANL was entitled to recover this input tax. HMRC appealed both decisions. The Upper Tribunal (UT) dismissed HMRC's appeal on the output tax issue, confirming that ANL was not obliged to account for output tax on the vouchers when they were given away. On the input tax issues, the UT endorsed the FTT's conclusion that input tax charged by intermediaries involved in the supply of vouchers to ANL was deductible. However, the UT allowed HMRC's appeal in so far as it related to the purchase of vouchers directly from the retailers, holding that no input tax arose on such supplies and consequently ANL was not entitled to a deduction in that respect. In this latest decision and allowing the appeal, the Court of Appeal has agreed with the UT in both appeals. The Court has held that the free of charge supply of the vouchers should not be subject to output tax and that input tax should be recoverable on vouchers purchased from intermediaries. The Court has further held that there was no VAT incurred on vouchers issued directly by retailers and hence any notional VAT could not be recovered as input tax. The Court of Appeal considered the purpose of the VAT (Supply of Services) Order 1993 as part of the background of the case. These provisions require a company to charge itself output tax (equivalent to any input tax recovered on the purchase) on the use of goods for private use (or more generally for purposes other than those of its business). HMRC's primary argument throughout the judicial process has been that the Supply of Services Order applies. The Court stated that these provisions were not designed to deal with free promotions involving the supply of vouchers. The first question the Court posed is whether the purchase of the vouchers were cost components of a taxable supply. Where the vouchers are not cost components of a taxable supply, no input tax can be recovered and therefore no self-supply under the Supply of Services Order arises (or more specifically, the output tax due is nil). The Court considered the Midland Bank
case (C-98/98) where the decision confirmed that a direct and immediate link (required to recover input tax) should be with the whole of a taxable person's economic activity rather than being looked at on a strict transactional basis for a particular supply. The Court held that the fact that the vouchers were provided free of charge confirmed they were cost components of the business (i.e. the production and sale of newspapers). As a cost component of the taxable business, input tax incurred should be recoverable. The second question the Court considered is whether the supplies of the free vouchers were to be treated as made for consideration (i.e. does the Supply of Services Order apply and is output tax due). The key consideration is whether the vouchers were put to a use “other than a purpose of the business”. The Court held that the test as to whether the vouchers were used for a purpose of the business was that the vouchers should better fulfil the business purpose and fulfil no other purpose; rather than being strictly necessary for the achievement of the business purpose. The Court viewed that the provision of free vouchers as part of a commercial scheme designed to sell newspapers was for business purposes and for no other purpose. The final question the court considered was whether the application of paragraph 4(2) of Schedule 10A of the VAT Act precluded recovery of input tax on direct supplies of the retailer vouchers. Schedule 10A provides that any consideration for face value vouchers, issued by a retailer should be disregarded up to the face value of the voucher. The Court in this case agreed with the UT that the wording of the domestic legislation makes it clear that the taxable status of vouchers directly issued by a retailer has been removed and as such, there is no output tax charged by the retailers. ANL therefore had no right to deduct the input tax. Comment: This judgment will have wide reaching consequences for any businesses running business promotions providing vouchers free of charge as part of their wider business activities. It will also have an impact on the free provision of vouchers, tickets or other perks to members of staff. Businesses operating as voucher intermediaries will need to consider their supply chain where HMRC will not permit recovery on Schedule 10A invoices. Businesses should also consider the implications of the adoption of the EU Voucher Directive in Member States by 31 December 2018. For further information please contact Joanna Crookshank or Bryn Reynolds.
EY Global Tax Alerts Mauritius - The reverse charge provision under the Mauritian VAT system currently applies to services provided by nonresidents with no permanent establishment in Mauritius to registered persons. The provision was also scheduled to apply to services provided to non-registered persons as from 2 February 2017 as a result of the amendment made by the Finance (Miscellaneous Provisions) Act 2016 (FMPA 2016). However, on 31 January 2017, the Mauritius Revenue Authority (MRA) advised that the amendment made by the FMPA 2016 is being deferred until further notice. Chad - The Chadian National Assembly met in ordinary parliamentary session on 29 December 2016 to vote on the 2017 Finance Law. A number of indirect tax measures came into force on 1 January 2017:
Excise duty introduced on the turnover of mobile phone companies Replacement of the Gambling Activity Tax with Excise duty on gambling activity and entertainment, including gambling machines Introduction of withholding of VAT on public contracts Exemption from VAT on leasing activities and the purchase of fuel from the N'Djamena Refining Company Introduction of a new import tax on all imported goods into Chad for the benefit of the African Union Introduction of tax levied on air tickets for flights departing from Chad, called “Airport Infrastructure Modernisation Tax” Introduction of a special tax on petroleum products
UK - Tax Authorities publish response to Making Tax Digital consultations and set out draft legislation
Legislation SI/Draft The Enactment of Extra-Statutory Concessions Order 2017 HM Treasury has published this draft order which will enact three existing HMRC extra-statutory concessions with effect from 6 April 2017, one of which is VAT related. ESC 3.20 prevents the clawback of input tax for supplies made prior to insolvency. This draft order follows an HMRC consultation which ran from 4 November 2015 to 16 December 2015
House of Commons Briefing Paper –Tax after the EU referendum A House of Commons Library briefing, reports that whilst the tax implications of Brexit are likely to be less significant than other policy areas, the main exception will be indirect tax, primarily VAT for which there is a substantive body of EU law establishing common rules across Member States. Concerns have been raised regarding the UK's ability to maintain its existing range of VAT reliefs. Also there are a number of EU instruments relating to administrative cooperation to exchange information and help tackle tax evasion, the UK is expected to seek to maintain some form of bilateral agreement akin to these provisions.
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