In Larentia and Marenave, the CJEU considered the recoverability of VAT on acquisition and capital raising costs by holding companies. In Intelligent Managed Services, the UT held that a business purchased by a VAT group could be a TOGC, even though the transferee company subsequently only made intra-group supplies. In Rank, the Supreme Court held that all relevant gaming machines should historically have been treated as standard-rated, so that there was no exempt comparator on which a fiscal neutrality argument could be based. In Hedqvist, the AG opined that the exchange of Bitcoins for national currency amounted to a supply of services for consideration which was exempt from VAT.
In Larentia + Minerva (C-108/14) and Marenave Schiffahrts (C-109/14), the CJEU considered the VAT recovery position of holding companies. Larentia provided taxable administrative and consultancy services to its subsidiary companies for remuneration. It had claimed a deduction of the VAT it incurred in raising capital from a third party, which was used to fund its acquisition of its shareholdings in those subsidiaries. Similarly, Marenave claimed a deduction of the VAT it had incurred in increasing its capital by issuing shares, which was used to fund its acquisition of shares in limited partnerships to which it provided management services for remuneration. The German referring court had asked how in these circumstances the VAT incurred should be apportioned between a holding company’s economic and non-economic activities.
The CJEU has followed the AG’s opinion, and held that the holding of shares in a company accompanied by involvement in the management of that company (by making supplies to it for consideration) constitutes an economic activity. This meant that input VAT incurred by a holding company on expenditure connected with the acquisition of a shareholding in such a company is wholly attributable to the holding company’s economic activity, and so fully deductible (unless any of the holding company’s supplies are exempt from VAT). This appears to mean that, provided a holding company makes supplies to a subsidiary for consideration, none of the VAT on expenditure relating to its acquisition should be attributed to a non-economic activity.
However, the CJEU held that apportionment would be necessary where a holding company actively manages some subsidiaries (and so carries out an economic activity in relation to them) but not others. The determination of the methods and criteria for apportioning input VAT between economic and non-economic activities is at the discretion of the Member States, which must have regard to the aims and broad logic of the VAT Directive.
The CJEU also held that member states are prevented from restricting the right to form a VAT group solely to entities with legal personality, except where this is necessary in order to achieve the objectives of preventing abusive practices or combating tax evasion or avoidance (which was for the referring court to determine). However, the CJEU held that art 4(4) of the Sixth VAT Directive (now art 11 of the Principal VAT Directive) does not have direct effect, and so taxpayers may not rely on this directly before national courts.
Why it matters: This decision could have a very significant impact as it differs from HMRC’s guidance on the issue, and holding companies that make supplies to their subsidiaries may be entitled to significant amounts of VAT recovery on the costs connected with acquiring their subsidiaries (and related capital raising). The UK will also need to reconsider its VAT grouping rules which at present only allow bodies corporate to join VAT groups.
In Intelligent Managed Services Ltd v HMRC [2015] UKUT 341 (TCC), the Upper Tribunal (UT) considered the VAT treatment of the transfer by Intelligent Managed Services Ltd (IMSL) of its banking support services business to Virgin Money Management Services Ltd (VMMSL), a member of the Virgin Money VAT group. VMMSL used the assets transferred solely to provide services to another member of the VAT group, Virgin Money Bank Ltd (VMBL).
The First-tier Tribunal (FTT) had held that, following the transfer, IMSL’s business had effectively ceased, because the only supplies made by VMMSL itself fell to be disregarded under the VAT grouping rules, and VMMSL was not the representative member of its VAT group (which is treated as carrying on the business of other group members as well as its own). As such, the FTT concluded that VMMSL could not be said to operate the same kind of business as that undertaken by IMSL prior to the transfer. This had the effect that TOGC treatment was unavailable, even though it was accepted that had VMMSL been a stand-alone company, rather than being VAT grouped with VMBL, the transfer would have been a TOGC.
The UT noted that, following the CJEU’s judgment in Skandia (C-7/13), it was clear that the acquirer of IMSL’s business for VAT purposes was the single taxable person, namely the Virgin Money VAT group, and not VMMSL itself. The relevant question was therefore whether the VAT group could be said to operate the same kind of business as that undertaken by IMSL prior to the transfer.
In this respect, the UT held that it would be wrong in principle to seek to identify the nature of the group’s activity as a whole by reference solely to the external supplies it made. Even though the banking engine services of VMMSL were provided internally within the group, they still formed an integral part of the retail banking services provided by the group, which contributed directly to the economic activity of the group as a whole. The single taxable person fiction, as applied by VATA 1994 s 43(1), meant that the group should be treated as carrying on all the businesses carried on by its members (including VMMSL’s banking engine services), but did not change the nature of those businesses, which remained separate businesses as a matter of fact. The UT therefore held that the Virgin Money VAT group could be said to carry on IMSL’s business and that the transfer was a TOGC.
Why it matters: This case is the first time that the interaction of this element of the TOGC rules with the VAT grouping rules has been considered by the courts, and so will be useful for taxpayers contemplating similar transactions. The decision appears to mean that, where all other relevant conditions are met, TOGC treatment should apply equally to transfers to VAT group members and to companies not in VAT groups.
In HMRC v The Rank Group plc [2015] UKSC 48, the Supreme Court (SC) considered the historic VAT treatment of slot machines, which were controlled using a ‘random number generator’ (RNG), which served a number of playing terminals. The question before the SC was whether, under the then VAT rules, the provision of such machines should be exempt as facilities for the playing of games of chance or taxable under the carve-out for gaming machines. In particular, the SC was asked to consider whether the element of chance in the game could be said to be provided by means of such machines (as this was one of the conditions which needed to be satisfied for the carve-out to apply), given that the RNG was located externally for multi-terminal systems.
HMRC’s historic policy had been to allow exemption for machines where the RNG was located externally. Rank had argued that this breached the principle of fiscal neutrality, which required that gaming machines which had an internal RNG should also be afforded exemption as the supplies were ‘similar’ to those with an external RNG, because the location of the RNG had no bearing on the customer’s experience.
The SC upheld the Court of Appeal’s approach that the multi-terminal machines were ‘gaming machines’ for the purposes of the relevant carve-out, on the basis that the natural meaning of ‘machine’ was broader than a single item of equipment. The element of chance could, therefore, be said to be provided by the machine in all cases and, as a result, their income should be standard-rated.
Why it matters: Given that all the gaming machines should have been standard-rated under the relevant law, there was no exempt comparator on which Rank could base its fiscal neutrality argument. It did not matter that there had been a breach of fiscal neutrality in practice due to the way in which HMRC had (incorrectly) historically interpreted the law, by giving exemption to some machines and not to others.
In Skatteverket v David Hedqvist (C-264/14), Advocate General (AG) Kokott has opined that transactions in the virtual currency (or ‘cryptocurrency’) Bitcoin should receive the same VAT treatment as transactions in traditional currencies.
The taxpayer, David Hedqvist, was proposing to start a business that would buy and sell Bitcoins in exchange for Swedish kronor, while adjusting the exchange rate between Bitcoins bought and sold by the business as a fee for the transaction.
AG Kokott considered that the VAT treatment of Bitcoin trading should be consistent with trading in national currencies, which was addressed by the CJEU in First National Bank of Chicago (C-172/96). In that case, the CJEU held that the exchange of currency was a supply of services for consideration for VAT purposes, and that the taxable amount was the ‘spread’ between the relevant exchange rates, i.e. the net result of the transactions of the supplier over a given period of time. AG Kokott drew a distinction between Bitcoins and goods – such as gold, or cigarettes – that have also been used as a medium of exchange, on the basis that Bitcoins are (like legal tender) useful only as a medium of exchange.
The AG went on to consider that the supply was exempt under art 135(1)(e) of the VAT Directive, which exempts ‘transactions, including negotiation, concerning currency, bank notes and coins used as legal tender’. The AG noted that it was unclear, from the different language versions of the VAT Directive, whether it is sufficient that only one rather than both of the means of payment constitute legal tender. Given these differences, the AG considered the purpose of the exemption, which is to allow the free conversion of means of payment (including foreign currencies that are not legal tender in the EU). Bitcoin has the same function as other means of payment, and it should therefore be taxed, or not, in the same way as them in line with the principles of fiscal neutrality and equal treatment.
Why it matters: Given the increasing prevalence of Bitcoins and other virtual currencies in some industry sectors, this opinion represents a welcome clarification. It would have been unfortunate if a disparity in the VAT treatment between Bitcoins and normal currencies meant that this new technology could not be embraced. The treatment is consistent with the guidance given by HMRC in Revenue and Customs Brief 9/2014.
[Note that the AG’s opinion was not released in English; this summary is based on an unofficial translation]
Updates on the proposed legislation announced in the March 2015 Budget restricting deduction of foreign branches’ VAT, which is being deferred and not implemented in August as originally announced.
In Larentia and Marenave, the CJEU considered the recoverability of VAT on acquisition and capital raising costs by holding companies. In Intelligent Managed Services, the UT held that a business purchased by a VAT group could be a TOGC, even though the transferee company subsequently only made intra-group supplies. In Rank, the Supreme Court held that all relevant gaming machines should historically have been treated as standard-rated, so that there was no exempt comparator on which a fiscal neutrality argument could be based. In Hedqvist, the AG opined that the exchange of Bitcoins for national currency amounted to a supply of services for consideration which was exempt from VAT.
In Larentia + Minerva (C-108/14) and Marenave Schiffahrts (C-109/14), the CJEU considered the VAT recovery position of holding companies. Larentia provided taxable administrative and consultancy services to its subsidiary companies for remuneration. It had claimed a deduction of the VAT it incurred in raising capital from a third party, which was used to fund its acquisition of its shareholdings in those subsidiaries. Similarly, Marenave claimed a deduction of the VAT it had incurred in increasing its capital by issuing shares, which was used to fund its acquisition of shares in limited partnerships to which it provided management services for remuneration. The German referring court had asked how in these circumstances the VAT incurred should be apportioned between a holding company’s economic and non-economic activities.
The CJEU has followed the AG’s opinion, and held that the holding of shares in a company accompanied by involvement in the management of that company (by making supplies to it for consideration) constitutes an economic activity. This meant that input VAT incurred by a holding company on expenditure connected with the acquisition of a shareholding in such a company is wholly attributable to the holding company’s economic activity, and so fully deductible (unless any of the holding company’s supplies are exempt from VAT). This appears to mean that, provided a holding company makes supplies to a subsidiary for consideration, none of the VAT on expenditure relating to its acquisition should be attributed to a non-economic activity.
However, the CJEU held that apportionment would be necessary where a holding company actively manages some subsidiaries (and so carries out an economic activity in relation to them) but not others. The determination of the methods and criteria for apportioning input VAT between economic and non-economic activities is at the discretion of the Member States, which must have regard to the aims and broad logic of the VAT Directive.
The CJEU also held that member states are prevented from restricting the right to form a VAT group solely to entities with legal personality, except where this is necessary in order to achieve the objectives of preventing abusive practices or combating tax evasion or avoidance (which was for the referring court to determine). However, the CJEU held that art 4(4) of the Sixth VAT Directive (now art 11 of the Principal VAT Directive) does not have direct effect, and so taxpayers may not rely on this directly before national courts.
Why it matters: This decision could have a very significant impact as it differs from HMRC’s guidance on the issue, and holding companies that make supplies to their subsidiaries may be entitled to significant amounts of VAT recovery on the costs connected with acquiring their subsidiaries (and related capital raising). The UK will also need to reconsider its VAT grouping rules which at present only allow bodies corporate to join VAT groups.
In Intelligent Managed Services Ltd v HMRC [2015] UKUT 341 (TCC), the Upper Tribunal (UT) considered the VAT treatment of the transfer by Intelligent Managed Services Ltd (IMSL) of its banking support services business to Virgin Money Management Services Ltd (VMMSL), a member of the Virgin Money VAT group. VMMSL used the assets transferred solely to provide services to another member of the VAT group, Virgin Money Bank Ltd (VMBL).
The First-tier Tribunal (FTT) had held that, following the transfer, IMSL’s business had effectively ceased, because the only supplies made by VMMSL itself fell to be disregarded under the VAT grouping rules, and VMMSL was not the representative member of its VAT group (which is treated as carrying on the business of other group members as well as its own). As such, the FTT concluded that VMMSL could not be said to operate the same kind of business as that undertaken by IMSL prior to the transfer. This had the effect that TOGC treatment was unavailable, even though it was accepted that had VMMSL been a stand-alone company, rather than being VAT grouped with VMBL, the transfer would have been a TOGC.
The UT noted that, following the CJEU’s judgment in Skandia (C-7/13), it was clear that the acquirer of IMSL’s business for VAT purposes was the single taxable person, namely the Virgin Money VAT group, and not VMMSL itself. The relevant question was therefore whether the VAT group could be said to operate the same kind of business as that undertaken by IMSL prior to the transfer.
In this respect, the UT held that it would be wrong in principle to seek to identify the nature of the group’s activity as a whole by reference solely to the external supplies it made. Even though the banking engine services of VMMSL were provided internally within the group, they still formed an integral part of the retail banking services provided by the group, which contributed directly to the economic activity of the group as a whole. The single taxable person fiction, as applied by VATA 1994 s 43(1), meant that the group should be treated as carrying on all the businesses carried on by its members (including VMMSL’s banking engine services), but did not change the nature of those businesses, which remained separate businesses as a matter of fact. The UT therefore held that the Virgin Money VAT group could be said to carry on IMSL’s business and that the transfer was a TOGC.
Why it matters: This case is the first time that the interaction of this element of the TOGC rules with the VAT grouping rules has been considered by the courts, and so will be useful for taxpayers contemplating similar transactions. The decision appears to mean that, where all other relevant conditions are met, TOGC treatment should apply equally to transfers to VAT group members and to companies not in VAT groups.
In HMRC v The Rank Group plc [2015] UKSC 48, the Supreme Court (SC) considered the historic VAT treatment of slot machines, which were controlled using a ‘random number generator’ (RNG), which served a number of playing terminals. The question before the SC was whether, under the then VAT rules, the provision of such machines should be exempt as facilities for the playing of games of chance or taxable under the carve-out for gaming machines. In particular, the SC was asked to consider whether the element of chance in the game could be said to be provided by means of such machines (as this was one of the conditions which needed to be satisfied for the carve-out to apply), given that the RNG was located externally for multi-terminal systems.
HMRC’s historic policy had been to allow exemption for machines where the RNG was located externally. Rank had argued that this breached the principle of fiscal neutrality, which required that gaming machines which had an internal RNG should also be afforded exemption as the supplies were ‘similar’ to those with an external RNG, because the location of the RNG had no bearing on the customer’s experience.
The SC upheld the Court of Appeal’s approach that the multi-terminal machines were ‘gaming machines’ for the purposes of the relevant carve-out, on the basis that the natural meaning of ‘machine’ was broader than a single item of equipment. The element of chance could, therefore, be said to be provided by the machine in all cases and, as a result, their income should be standard-rated.
Why it matters: Given that all the gaming machines should have been standard-rated under the relevant law, there was no exempt comparator on which Rank could base its fiscal neutrality argument. It did not matter that there had been a breach of fiscal neutrality in practice due to the way in which HMRC had (incorrectly) historically interpreted the law, by giving exemption to some machines and not to others.
In Skatteverket v David Hedqvist (C-264/14), Advocate General (AG) Kokott has opined that transactions in the virtual currency (or ‘cryptocurrency’) Bitcoin should receive the same VAT treatment as transactions in traditional currencies.
The taxpayer, David Hedqvist, was proposing to start a business that would buy and sell Bitcoins in exchange for Swedish kronor, while adjusting the exchange rate between Bitcoins bought and sold by the business as a fee for the transaction.
AG Kokott considered that the VAT treatment of Bitcoin trading should be consistent with trading in national currencies, which was addressed by the CJEU in First National Bank of Chicago (C-172/96). In that case, the CJEU held that the exchange of currency was a supply of services for consideration for VAT purposes, and that the taxable amount was the ‘spread’ between the relevant exchange rates, i.e. the net result of the transactions of the supplier over a given period of time. AG Kokott drew a distinction between Bitcoins and goods – such as gold, or cigarettes – that have also been used as a medium of exchange, on the basis that Bitcoins are (like legal tender) useful only as a medium of exchange.
The AG went on to consider that the supply was exempt under art 135(1)(e) of the VAT Directive, which exempts ‘transactions, including negotiation, concerning currency, bank notes and coins used as legal tender’. The AG noted that it was unclear, from the different language versions of the VAT Directive, whether it is sufficient that only one rather than both of the means of payment constitute legal tender. Given these differences, the AG considered the purpose of the exemption, which is to allow the free conversion of means of payment (including foreign currencies that are not legal tender in the EU). Bitcoin has the same function as other means of payment, and it should therefore be taxed, or not, in the same way as them in line with the principles of fiscal neutrality and equal treatment.
Why it matters: Given the increasing prevalence of Bitcoins and other virtual currencies in some industry sectors, this opinion represents a welcome clarification. It would have been unfortunate if a disparity in the VAT treatment between Bitcoins and normal currencies meant that this new technology could not be embraced. The treatment is consistent with the guidance given by HMRC in Revenue and Customs Brief 9/2014.
[Note that the AG’s opinion was not released in English; this summary is based on an unofficial translation]
Updates on the proposed legislation announced in the March 2015 Budget restricting deduction of foreign branches’ VAT, which is being deferred and not implemented in August as originally announced.
In Larentia and Marenave, the CJEU considered the recoverability of VAT on acquisition and capital raising costs by holding companies. In Intelligent Managed Services, the UT held that a business purchased by a VAT group could be a TOGC, even though the transferee company subsequently only made intra-group supplies. In Rank, the Supreme Court held that all relevant gaming machines should historically have been treated as standard-rated, so that there was no exempt comparator on which a fiscal neutrality argument could be based. In Hedqvist, the AG opined that the exchange of Bitcoins for national currency amounted to a supply of services for consideration which was exempt from VAT.
