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EY VAT News – week to 15 May 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: The transfer of ownership of land by a taxable person, in settlement of tax arrears, does not constitute a taxable supply for VAT purposes Referrals Calendar update
Upper Tribunal
Payment of disputed VAT assessment is not required before the appeal, claim of hardship accepted
First-tier Tribunal
Regulator would not have depressed infrastructure charges because of the incidence of VAT, unjust enrichment defence applied
HMRC Material
VAT Notes 2017 Issue 1
EY Global Tax Alerts
US – Report on recent US international tax developments UAE – Implementation of Excise Tax by the end of 2017 Bermuda – Plans to consider Goods and Service Tax
Court of Justice of the European Union Judgment: The transfer of ownership of land by a taxable person, in settlement of tax arrears, does not constitute a taxable supply for VAT purposes C36/16 Posnania Investment SA On 11 May 2017, the Court of Justice of the European Union (CJEU) released its decision in this 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 taxable supply for VAT purposes. Posnania Investment SA's (PI) business consisted, inter alia, of dealing with real estate and in order to settle tax arears it entered into an agreement with the relevant municipality for the transfer of ownership of a plot of unbuilt land. This resulted in a partial discharge of PI's tax debt. The Ministry of Finance concluded that the transfer of ownership constituted a supply,
which in principle should be subject to VAT. The Regional Administrative Court allowed PI's appeal, holding that VAT may be due on the transfer of ownership in property on condition that such a transfer is effected in return for consideration. As that was not the position in the present case, the Court held that the transfer was not a transaction subject to VAT. The Ministry of Finance appealed to the Supreme Administrative Court which referred the case to the CJEU for further consideration. In agreement with Advocate General (AG) Kokott the CJEU accepted that PI had the status of a taxable person for VAT purposes and entered in a contract with the municipality which resulted in the transfer of ownership of immoveable property in Poland. However, in determining whether the transfer could be deemed to have been made for consideration, the Court noted that a supply is made for consideration within the meaning of Article 2(1)(a) of the VAT Directive, only if there is a legal relationship between the supplier and purchaser entailing reciprocal performance. Whilst there was a legal relationship between PI and the municipality as debtor and creditor it was unilateral in nature in as much as the payment of the tax, albeit by the transfer of the property, resulted only in a statutory discharge of a tax debt. As tax is a compulsory charge for services in the public interest, such a charge does not result in a legal relationship entailing reciprocal performance and therefore cannot be subject to VAT. Also in agreement with the AG the Court held that whilst a supply in these circumstances does not constitute a supply of goods for consideration that is subject to VAT, where a deduction of input tax has been made in relation to the transferred property, this must be corrected in accordance with Article 16 of the VAT Directive which imposes an output tax charge on a ‘deemed supply’. Comment: This case concerns a procedure allowed under Polish law. HMRC has the power to “take control of goods” to settle tax debts and indeed has reported that it seized assets to recover £42.6m of outstanding debt in 2016. These powers are generally enforcement actions to collect taxes that are owed, rather than agreements to transfer assets in lieu of tax due. On that basis this scenario is unlikely to arise in the UK but any businesses which may have settled taxes in the form of an asset transfer may wish to consider the implications of the CJEU judgment.
Referrals The CJEU website shows the following new referral:
A Portuguese referral - C-615/16 Kerr asking whether the provisions under Articles 135(1)(f) and 15(2) of Directive 2006/112/EC, only applies to services provided by parties to contracts for the marketing of rights to use property or whether it applies equally to promotional services supplied to the underlying contracting parties?
Calendar update Thursday 18 May 2017 Judgment - C-624/15 Litdana - Lithuanian referral asking whether a taxable person may be prevented from applying the VAT margin scheme in circumstances where the invoices issued by the taxable person’s supplier state that the goods were purchased exempt from VAT or supplied under the margin scheme, but it subsequently transpires that this information was incorrect. Hearing - C-273/16 Federal Express Europe - Italian referral asking whether under EU law, the only condition in order for connected services relating to the importation of goods not to be liable to VAT is that their value is included in the taxable amount, regardless of whether or not the goods in question were in fact subject to customs duties, at the time of their importation; and is it therefore incompatible with EU law if domestic rules provide that in every case, and therefore also in the case of imports that are not liable to VAT, that there has to be compliance with the additional requirement that those imports must in fact be liable to VAT (and customs duty must in fact be paid) at the time of the importation of such goods? Wednesday 31 May 2017 Opinion – C-101/16 Paper Consult – Romanian referral, continuing a long-running theme of referrals from Eastern European EU Member States, concerning the right of input tax deduction in respect of transactions considered by the tax authorities to be suspicious, in the presence of irregular conduct on the part of the supplier (specifically, on this occasion, where the supplier has been declared inactive by the tax authorities). Opinion – C-164/16 Mercedes Benz Financial Services UK - UK referral from the Court of Appeal concerning the VAT treatment of a specific motor vehicle finance product offered by the taxpayer, specifically whether for VAT purposes it falls to be treated as a supply of services (as contended by the taxpayer) or a supply of goods (as contended by HMRC), with resulting cash flow implications. For further information please contact Jamie Ratcliffe.
Hearing – C-305/16 Avon Cosmetics - UK referral from the First-tier Tribunal in relation to the Avon Cosmetics case (TC03311), concerning the UK's direct selling or 'party plan' derogation. Specifically, the case concerns a failure of the UK derogation, which deals with retail sales made through non-registered representatives, to provide for any VAT deduction in respect of costs borne by sales representatives, whilst considering the taxpayer (on selling to those representatives) liable to VAT by reference to the retail open market selling price received by the representatives. The First-tier Tribunal referred the case to the CJEU on the question of whether the derogation was lawful in this respect, and expressed its own opinion that it was not. For further information please contact Andy Richardson or Simon Baxter. Thursday 1 June 2017 Judgment - C-571/15 Wallenborn Transports - German referral concerning the VAT treatment of imported goods within free ports/zones and the chargeable event for customs duty and VAT purposes. Thursday 8 June 2017 Opinion - C-246/16 Di Maura – An Italian referral regarding limits applied to the application of Bad Debt Relief. Hearing - C-387/16 Nidera - Lithuanian referral asking whether Article 183 of Council Directive 2006/112 read in conjunction with the principle of fiscal neutrality, should be interpreted as precluding a reduction in the interest that is normally payable under national law on a VAT overpayment (excess) which was not refunded (set off) in due time? Wednesday 14 June 2017 Judgment - C-26/16 Santogal – Portuguese referral concerning the scope of the exemption with credit (zero-rating) under Article 138(2)(a) of the VAT Directive for the intra-Community supply of a new means of transport. Judgment - 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. Thursday 15 June 2017 Opinion - C-574/15 Scialdone - Italian referral, made in criminal proceedings, concerning the compatibility with EU law of national provisions relating to penalties for non-payment of VAT and the interaction with national provisions relating to penalties for non-payment of income tax. Opinion - 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).
Upper Tribunal Payment of disputed VAT assessment is not required before the appeal, claim of hardship accepted HMRC v Elbrook (Cash and Carry) Limited The Upper Tribunal (UT) has released its decision in this appeal by HMRC against the First-tier Tribunal’s (FTT) decision released on 21 March 2016. HMRC denied Elbrook (Cash and Carry) Limited (Elbrook) credit for input tax and assessed accordingly. Elbrook sought relief from any requirement to pay the VAT assessed on the grounds of hardship. The FTT allowed Elbrook’s appeal, holding that payment was not required before its appeal against the assessment could be entertained. Dismissing HMRC’s appeal, the UT held that the FTT had fairly resolved all of the issues that were material for its determination. There is no requirement for the FTT to undertake a lengthy investigation of assets and liabilities but it remains necessary for the FTT to clearly identify and record those matters which were critical to its decision. The UT considered that the FTT complied in this regard, was entitled to reach the conclusion it did on the evidence before it and made no error in law.
First-tier Tribunal Regulator would not have depressed infrastructure charges because of the incidence of VAT, unjust enrichment defence applied Anglian Water Services Limited The First-tier Tribunal (FTT) has released its decision in this appeal concerning whether Anglian Water Services Limited (AWSL) would be unjustly enriched by the repayment of VAT in excess of £12 million accepted as incorrectly charged on ‘infrastructure charges’. AWSL, a water and sewerage undertaking raised infrastructure charges for the first time connection to the water supply and sewerage infrastructure of premises used for ‘domestic purposes’. This included residential properties and commercial and industrial premises where the purpose of the connection to the mains was for domestic use, such as providing cooking, washing and toilet facilities to workers. AWSL's permitted charging levels were regulated initially by the Secretary of State for the Environment and then by Ofwat. HMRC accepted that the charge should not have been subject to VAT but refused to make a repayment on the basis of the unjust enrichment defence per s80(3) VATA94. The FTT held that AWSL is entitled to recover from HMRC, VAT which it overpaid unless HMRC is able to show that the repayment would lead to AWSL’s unjust enrichment. The burden of proof in this regard rests with HMRC. AWSL accepted that it did not suffer economic loss from the addition of VAT to infrastructure charges due to a loss of sales as it had a regional monopoly in this regard. Customers had to buy from AWSL regardless of the charge to VAT. Consequently AWSL and HMRC were in agreement that the only question of fact for the FTT was whether it could be proved that AWSL’s net charge was not reduced because of the incidence of VAT. Considering that AWSL charged the maximum level permitted by the regulator, was that charge less than it would have been but for the imposition of VAT at the standard rate? In dismissing the appeal, the FTT accepted evidence presented to the FTT by an expert in economic regulation which AWSL failed to rebut. There was sufficient evidence for HMRC to make out its prima facie case that the maximum infrastructure charge set by the regulator was not affected by the charge to VAT. The regulators had a statutory framework and would have taken into account economic theory when setting the levels for charges. The FTT found that the charges more likely than not would have been set at the level at which they were irrespective of the incidence of VAT, as the standard of proof is only one of a balance of probability HMRC had therefore proved its case. Comment: Whilst the burden of proof rests with HMRC to show that a business will be unjustly enriched, this case does highlight the importance of demonstrating and evidencing pricing strategy to support a claim for repayment of VAT incorrectly charged and to rebut a s80(3) claim by HMRC.
HMRC Material VAT Notes 2017 Issue 1 HMRC has issued VAT Notes 2017, Issue 1 which explains recent changes to VAT for businesses. The notes include details regarding:
Alcohol Wholesaler Registration Scheme
overseas businesses selling goods online in the UK
Machine Games Duty returns
Machine Games Duty for Agents
Raw Tobacco Approval Scheme
EY Global Tax Alerts US – Trump Administration officials this week went to Capitol Hill to discuss tax reform with Republican Senate Finance Committee members as Administration and Congressional Republicans work to craft a unified tax reform plan. A Finance Committee member described the discussions with Treasury Secretary Steve Mnuchin and White House economic adviser Gary Cohn as productive, with some agreement on general principles. Finance Committee Chairman Orrin Hatch later was
quoted as saying that both Administration officials oppose the House Tax Reform Blueprint’s border adjustability proposal. The Chairman also said he thought a border proposal would be difficult to pass in the Senate. UAE - On 10 May 2017, the United Arab Emirates (UAE) Ministry of Finance (MoF) held a briefing session on the new Excise Tax Law. Implementation of the UAE Excise Tax Law follows the Gulf Cooperation Council (GCC) Minister of Finance approval in principle, of a unified agreement, in June 2016, for the development of national regimes for Excise Tax. Under the umbrella of the unified agreement, Excise Tax is to be introduced in the UAE by the fourth quarter (Q4) of 2017. The other GCC Member States also aim to implement Excise Tax by the end of 2017. The UAE Tax Procedures Law, which sets out the general rules and procedures relating to all taxes in the UAE, was approved by the UAE MoF in March, and will be issued shortly. The UAE Excise Tax Law is expected to be published by the third quarter (Q3) of 2017. Bermuda - The Bermuda Government has announced that they will discuss the plan to introduce a Goods and Services Tax (GST) in 2018. At this stage, it appears unlikely that the GST will be implemented before 2018.
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