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VAT briefing for February 2015

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In Royal College of Paediatrics, the UT held that the sale of a freehold property to the college was not a TOGC. In Colaingrove, the UT held that the principles in Card Protection Plan should always be used to distinguish between single and multiple supplies, even where zero rating provisions are involved. In GMAC, the UT followed the judgment of the CJEU and affirmed its earlier decision in 2012 in relation to the UK’s historic bad debt relief rules. In Luc Varenne, the CJEU considered the VAT treatment of the letting of a football pitch along with the provision of other facilities in a sports stadium.

Royal College of Paediatrics: TOGCs

In HMRC v Royal College of Paediatrics and Child Health [2015] UKUT 38 (TCC), the Upper Tribunal (UT) disagreed with the First-tier Tribunal (FTT) that the sale of a property to the college by a property development company, Coleridge, was a transfer of a going concern (TOGC).

The college wished to move to new premises and identified a vacant building owned by Coleridge which it was willing to sell (the property). A tenant of the college in its existing building, the British Association of Perinatal Medicine (BAPM), wanted to move with the college to the new building and remain its tenant.

In November 2007, Coleridge and BAPM entered into an agreement for lease for a single room in the property, which was conditional on Coleridge exchanging an unconditional contract for the sale of the property with the college. Later on the same day, Coleridge and the college exchanged contracts for the sale of the property with the benefit of the agreement for lease with BAPM.

The FTT held that there was a TOGC of a property rental business from Coleridge to the college, and that in any event HMRC’s assessment was time-barred.

In the UT, Birss J upheld the decision of the FTT on the ground that the assessment was time-barred and so dismissed HMRC’s appeal. However, he disagreed that the transfer was a TOGC, taking the earlier tribunal decision in Dartford Borough Council [2007] Decision No 20423 to be correct but holding that the FTT was wrong not to distinguish it on its facts. Taking what was effectively a substance over form approach, he reasoned that because BAPM only entered into the agreement for lease with Coleridge because of its pre-existing relationship with the college, the agreement for lease and the sale of the freehold were part and parcel of the same arrangement. Accordingly, there was no TOGC because the lease did not truly form part of the seller’s business. The fact that BAPM could have compelled Coleridge to grant a lease before the sale of the property to the college was complete did not change this conclusion.

Why it matters

This case suggests that it is necessary to consider the substance of a transfer rather than the form and precise terms of an agreement in determining whether there has been a TOGC. HMRC did not object to TOGC treatment on the grounds that the agreement for lease only covered a single room in the property.

[The authors’ firm, Hogan Lovells, acted for the College in this case.]

Colaingrove: single and multiple supplies

In Colaingrove v HMRC [2015] UKUT 2 (TCC), the UT applied the Card Protection Plan (C-349/96) (CPP) principles on single and multiple supplies to find in the taxpayer’s favour that there was a single zero rated supply.

Colaingrove sold residential caravans, the supply of which was zero rated under VATA 1994 Sch 8 Group 9. The issue before the UT was whether that zero rating extended to verandahs sold with and affixed to the caravan, which are standard rated when sold on their own. The parties were in agreement that if the CPP principles applied, the sale of a caravan with a verandah would be a single supply, the caravan being the principal element of that supply and the verandah the ancillary element.

HMRC argued that the effect of the CJEU judgment in Talacre (C-251/05) was that Colaingrove could not rely on the CPP principles to extend the scope of the zero rating to the verandahs. However, having considered Talacre, Commission v France (C-94/09) and the earlier UT decision in Wm Morrison Supermarkets v HMRC [2013] STC 2176, the UT found that the CPP principles should always be used to distinguish between single and multiple supplies.

It then went on to consider whether the ancillary element of a single supply can fall under a zero rating covering the principal element of the supply, which is permitted by way of the derogation in art 110 of the Principal VAT Directive. Disagreeing with the FTT’s interpretation of Talacre, the UT held that the zero rating should extend to the entire single supply. Although it is possible for national legislation to exclude part of a supply from being zero rated, such a limitation must be both particular and specific. This was present in Talacre (where the removable contents of a caravan were specifically excluded from the UK zero rating provision) but not in the present case. In the UT’s view, the FTT misinterpreted what the CJEU in Talacre meant by Article 110 being a ‘stand-still provision’. This should not be read as freezing the effect of national rules on zero rating, but instead meant that no new zero rating could later be introduced.

Why it matters

Following a number of cases on this issue, it is helpful that the UT has clarified that the CPP principles are of general application when deciding on the nature of composite supplies, including where zero ratings are involved.

GMAC: old bad debt relief regime

In HMRC v GMAC UK Plc [2015] UKUT 4 (TCC), the UT followed the judgment of the CJEU arising from the UT’s reference (see our VAT briefing for October 2014, Tax Journal, 9 October2014) and affirmed its earlier decision in August 2012.

The case concerned the ‘old’ regime for bad debt relief (BDR) in VATA 1983 s 22 as it applied to defaults under hire purchase arrangements. The relevant supplies took place between 1978 and 1997 (when the current regime was introduced). In the 2012 case heard jointly with British Telecommunications (BT), the UT found in favour of GMAC that the historic BDR regime was incompatible with EU law and that its claim was not time-barred. It referred what it described as the ‘windfall’ issue to the CJEU. The CJEU answered this question in favour of the taxpayer, allowing GMAC to rely on a directly effective EU law provision regarding one supply and on domestic law in relation to another supply involving the same goods, which gave GMAC an unintended advantage.

Earlier last year, in the BT appeal not involving the windfall issue, the Court of Appeal (CA) upheld the UT’s decision on most issues, but held that BT’s claim in respect of supplies made before 31 March 1989 was time-barred (see the VAT briefing for May 2014). This led HMRC to argue that GMAC’s claim should also be time-barred, while GMAC contended that the facts in its case were materially different.

The UT could not reach a clear conclusion on this issue, having only considered the parties’ written submissions. It therefore affirmed its 2012 decision and discussed the likely approach it would take to HMRC’s application for permission to appeal. It was described as ‘uncontroversial’ that HMRC would be unlikely to succeed in challenging the decisions on the windfall issue (which had been decided by the CJEU) and the matters already considered by the CA in BT. The UT therefore seemed inclined to limit permission to appeal to the time-bar issue and the issue of the compatibility of the historic BDR regime with EU law.

Why it matters

The decision represents a step forward in resolving the long running GMAC litigation on the UK’s historic BDR regime, in relation to which a number of taxpayers have made claims which are standing behind GMAC. A further appeal by HMRC seems likely.

Luc Varenne: letting of immoveable property

In the case of Régie communale autonome du stade Luc Varenne (RCA) (C-55/14), the CJEU considered the extent of the exemption for the letting of immoveable property.

RCA owned the Luc Varenne football stadium. In 2003, it entered into a contract with Royal Football Club de Tournai ASBL (RFCT) under which RFCT used, for consideration, the facilities of the stadium. Under the terms of the contract, RFCT was allowed to use the football pitch and other facilities (such as changing rooms) for 18 days a year; and RCA took charge of the supervision, management, maintenance and cleaning of the facilities.

It had been agreed by the parties that 20% of the consideration was for the right to use the football pitch and 80% was for the other services provided by RCA.

The Belgian tax authorities ruled that RCA was making a mixture of taxable and exempt supplies, because only some of its supplies amounted to the letting of immovable property, which was exempt from VAT under art 13B(b) of the Sixth VAT Directive (now art 135(1)(l) of the Principal VAT Directive).

Noting that the exemption in art 13B(b) should be construed strictly, the CJEU suggested that the transaction should be considered as a whole to determine its essential characteristics in order to classify it for VAT purposes.

It held that RCA seemed to be supplying a complicated service consisting of the provision of access to sporting facilities, along with taking charge of the supervision, management, maintenance and cleaning of those facilities. This suggested that the transaction, considered as a whole, should not be classified as a letting of immoveable property. The apportionment of 80% of the consideration to these additional services was evidence which supported this conclusion.

While the CJEU left the final determination to the referring court in light of its assessment of the facts, the strong suggestion was that the transaction in this case did not amount to the letting of immovable property.

Why it matters

This is an example of a case where a supply involving some letting of immoveable property was not within the exemption, because the provision of the additional facilities by the supplier effectively predominated. Interestingly, while the CJEU said that the transaction must be viewed as a whole, it did not refer to the cases on single and multiple supplies that are normally referred to in these kinds of cases.

What to look out for

  • The Supreme Court has refused BT permission to appeal (in relation to whether its claims in respect of bad debt relief were time-barred) but has given permission in Shop Direct Group (on the direct tax treatment of VAT repayments).
  • On 26 February, the CJEU will hear the Commission’s infraction proceedings against the UK in relation to its application of the reduced rate to energy saving materials.