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The VAT briefing for August 2011

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Key recent developments in VAT include the following: In Nordea Pankki Suomi Oyj, ECJ holds that SWIFT electronic messaging is not an exempt financial service. In ADV Allround Vermittlungs AG, Advocate General says that supply of self-employed persons is a ‘supply of staff’. In Car Factors and Gardner, the Tribunal held that even minimal preparatory acts constitute economic activity entitling the person to be registered for VAT. Saint-Gobain and Total Technology show that default surcharges can be disproportionate w here there is a short delay, a large penalty and some mitigation. RCB 24/11 clarifies how taxpayers should deal with changes in HMRC's interpretation of the law. RCB 28/11 announces new VAT treatment of salary sacrifice schemes from 1 January 2012.

Lee Squires Lee Squires Greg SinfieldSWIFT electronic messaging service

In Nordea Pankki Suomi Oyj (Case C-350/10), the ECJ held that the SWIFT electronic messaging service, which is used in the transfer of funds between banks and financial institutions and for transactions in securities, is not an exempt financial service within Article 13B(d)(3),(5) of the Sixth VAT Directive (now Article 135(1)(d),(f) Principal VAT Directive).

 The ECJ held that an outsourced service such as SWIFT will only fall within the exemption if it fulfils the specific, essential functions of the financial transactions described in Article 13B(d)(3),  (5).

Even though the SWIFT messaging services were a constituent element that was essential for completing those exempt transactions, this did not mean that the SWIFT services were exempt.

The transfer of the funds or securities was effected by the financial institutions themselves, with the SWIFT services simply being the means by which data was transferred securely between them.

Why it matters: SWIFT is supplied by a co-operative society incorporated in Belgium, with subsidiaries and offices throughout the world, which is jointly owned by more than 2,000 financial institutions.

Most financial institutions throughout the EU are likely to suffer VAT on the provision of SWIFT services either:

  • by accounting for input VAT on the services themselves under the reverse charge procedure if the supplier does not belong in their country; or
  • by paying VAT directly to the supplier if it does so belong (although this depends on the terms of their agreement with the supplier).

They will normally be unable to recover this input VAT because it will be incurred in connection with their exempt supplies.

Supply of staff

In ADV Allround Vermittlungs AG (Case C-218/10), the Advocate General to the ECJ has opined that the supply of self-employed persons is a ‘supply of staff’ under Article 9(2)(e) of the Sixth VAT Directive, with the result that the place of supply of such a service was where the recipient belongs.

Why it matters: The Advocate General's opinion is contrary to HMRC guidance, which provides that a ‘supply of staff’ refers only to the supply of employees of the person providing the service.

The recipient's place of business would, in any case, normally be treated as the place of supply under the new rules in force since 1 January 2010.

However, it is possible that UK companies may have charged VAT on supplies of self-employed individuals to customers belonging outside the UK before that date.

The Advocate General's opinion is contrary to HMRC guidance, which provides that a ‘supply of staff’ refers only to the supply of employees of the person providing the service

If the ECJ's judgment follows the Advocate General's opinion, then that treatment was incorrect and the supplier may be entitled to claim a refund from HMRC.

The opinion also casts doubt on the analysis in Reed Employment Ltd v HMRC [2011] UKFTT 200 (TC) that supplies of temporary staff were supplies of introductory services (with VAT only being charged on the commission earned by Reed) rather than supplies of staff as principal.

VAT registration and economic activity

In two separate decisions, the First-tier Tribunal has confirmed that preparatory activities, even where quite minimal, are sufficient to constitute an economic activity that entitles the person to be registered for VAT.

In Car Factors Ltd ([2011] UKFTT 465 (TC)), the appellant intended to buy second hand cars in Spain and sell them to dealers in Germany and Italy.

A UK company was used to avoid the delay in recovering input tax in Spain.

HMRC refused the appellant's application for voluntary registration for VAT on the ground that it had not proved an intention to trade.

The Tribunal held, applying Rompelman (Case C-268/83 [1985] ECR 655, [1985] 3 CMLR 202), that negotiating very limited office space and making business contacts required to buy and sell cars was carrying on business for VAT purposes.

The Tribunal concluded that HMRC were wrong to refuse to register the appellant for VAT.

In Gardner & Co [2011] UKFTT 470 (TC), the Tribunal held that the appellant, who was bankrupt and had not traded for five years, should not have been compulsorily deregistered by HMRC.

The appellant had an agreement with a client to supply labour in relation to a building project at the time of deregistration.

The Tribunal held that, applying Rompelman, even though the project had not started, the preparatory acts were an economic activity.

Accordingly, the appellant was carrying on business and was entitled to be registered for VAT.

Why it matters: These cases show that economic activity begins when a business takes its first steps and long before any supplies are made.

This is important as voluntary registration and an intention to make taxable supplies should allow the business to recover input tax incurred in the start-up phase.

Surcharges and proportionality

The First-tier Tribunal reached different conclusions in two appeals against surcharges on the ground of proportionality.

In Saint-Gobain Building Distribution Ltd [2011] UKFTT 461 (TC), the company incurred a 2% surcharge of £50,089 for paying £2,504,498 VAT eleven days late.

In Total Technology (Engineering) Ltd [2011] UKFTT 473 (TC), a 5% default surcharge of £4,260.26 was imposed when the company paid £85,205 one day late.

In both cases, the ground of appeal was that the surcharge was disproportionate and should be cancelled on the basis of the principles set out in Enersys Holdings UK Ltd [2010] UKFTT 20 (TC).

Enersys (which HMRC initially appealed, but later withdrew their appeal) makes it clear that an individual surcharge may be struck down by the Tribunal as disproportionate if it is found to be ‘not merely harsh but plainly unfair’.

Enersys concerned a penalty of £131,000 for inadvertently paying £2.63 million one day late.

In Saint-Gobain, the Tribunal found that the penalty was not plainly unfair and dismissed the appeal.

In Total Technology, the Tribunal found that the penalty was not only harsh but plainly unfair and allowed the appeal.

Why it matters: Proportionality is a popular defence in penalty cases and these cases are good examples of how the Tribunals approach the issue.

Saint-Gobain contains a useful table summarising the key features of other cases on proportionality.

Total Technology has a concise and careful review of the principles from earlier cases.

On the basis of these cases, it seems that a penalty is only likely to be held to be disproportionate where the delay in payment is very short (eg, one day), the amount of the penalty is high relative to the business's profits and, while it may not have a reasonable excuse, the business has some mitigation (eg, inadvertent error, generally good compliance).

Correcting VAT liability errors

HMRC have issued Revenue & Customs Brief 24/11, which announced that item 2 of BB 28/04, which dealt with VAT liability errors arising from incorrect HMRC advice, was withdrawn from 1 August 2011.

This was on the basis that the circumstances in which HMRC will be bound by their incorrect advice are now set out in HMRC's guidance: When you can rely on information or advice provided by HMRC (

RCB 24/11supplements that guidance by setting out the effect of changes in HMRC's interpretation of the law. It confirms that:

  • taxpayers will usually only be required to apply the new interpretation from a current or future date that HMRC will announce when advising on the correct interpretation; and
  • if a business nevertheless chooses to correct historical errors, HMRC will accept the corrections providing all the following conditions are met:
    • all past errors are corrected;
    • the neutrality of the tax is respected; and
    • the business is no better off and the Exchequer no worse off than they would have been if the mistaken interpretation had not been made.

Why it matters: This is a helpful clarification of taxpayers’ position when HMRC change their interpretation of the law, and removes any uncertainty caused by the withdrawal of ESC 3.5 by RCB 15/09.

In relation to the last bullet point above, it should be noted that any repayment claim in respect of overpaid output VAT will be subject to the taxpayer not being unjustly enriched (VATA 1994 s 80(3)).

Salary sacrifice

On 28 July 2011, HMRC issued RCB 28/11 on changes to the VAT treatment of salary sacrifice schemes following the ECJ's decision in Astra Zeneca UK Ltd (Case C-40/09).

There is no longer any distinction between the VAT treatment of supplies of goods and services to employees by a deduction from salary, and those provided under a salary sacrifice arrangement.

From January 2012, employers will be required to account for VAT on taxable benefits provided under salary sacrifice schemes.

Why it matters: An annex to RCB 28/11 contains useful guidance on the VAT treatment of different salary sacrifice schemes.

There has been uncertainty over this issue since the Astra Zeneca case came out at the end of 2010.

The uncertainty has been removed and it seems that salary sacrifice schemes involving taxable benefits may have become much more costly. 

Greg Sinfield, Tax Partner, Hogan Lovells

Lee Squires, Senior Associate, Hogan Lovells