The VAT briefing for January 2013

VAT grouping infraction proceedings: Commission v Ireland

The Advocate General (AG) has published his opinion in European Commission v Ireland (CJEU Case C-85/11), on whether the inclusion of non-taxable persons in VAT groups infringes EU law.

The Commission brought infraction proceedings before the CJEU against the UK, Ireland, the Czech Republic, Denmark, Finland and the Netherlands, arguing that the VAT grouping rules in those Member States infringed EU law because they allowed non-taxable persons (i.e. persons not carrying on an economic activity) to join VAT groups. The Commission was concerned that this could give rise to potential abuse and breach of fiscal neutrality because the advantages of VAT registration would be available to non-taxable persons in a VAT group while not to non-taxable persons outside a VAT group.

The AG considered that the EU legislature did not intend to exclude non-taxable persons from membership of a VAT group. He said that the inclusion of non-taxable persons did not lead to an anomaly, because a separately registered taxable person could engage in activities both within and outside the scope of VAT. This was no different to a VAT group with a member that had no business activities being treated as a single taxable person.

Why it matters: Even though the opinion was produced in the case against Ireland, this was heard at the same time as the similar proceedings brought against the UK and other countries, and the CJEU asked for only one AG’s opinion to be prepared because the same issue arises in each case. The opinion is therefore relevant to the position in the UK too.

Group holding companies are often non-taxable persons, and so businesses were concerned that the UK would need to amend its rules so that many holding companies would be unable to join VAT groups, preventing them from recovering input VAT. The opinion will therefore come as a relief to these businesses, although obviously we need to see if the judgment of the CJEU follows the opinion.

Adjustments to taxable amount: Grattan

The CJEU has given judgment in Grattan v HMRC (CJEU Case C-310/11), concerning VAT on supplies by Grattan between 1973 and 1977 to ‘agents’ who bought mail-order goods for themselves and for on sale to others, following which they received ‘commission’ from Grattan, which Grattan said constituted a partial repayment of the purchase price for the goods.

The CJEU, following the AG’s opinion, held that Grattan did not have a directly effective right to treat the taxable amount for its supply as retrospectively reduced by the amount of the commission paid to the agent under the provisions of the Second VAT Directive or the principles of fiscal neutrality or equal treatment.

It said that no provision of the Second Directive could be interpreted as requiring Member States to permit an adjustment to the taxable amount after the time of supply. Further, fiscal neutrality is not a rule of primary law which can compensate for the fact that the Second Directive does not include a provision comparable to article 11C(1) of the Sixth Directive (which requires the taxable amount to be reduced where the consideration is reduced after the supply takes place). The degree of harmonisation under the Second and Sixth Directives is not comparable, and the principle of equal treatment does not require equal treatment over time under the provisions of different directives.

Why it matters: A number of taxpayers brought similar claims under Fleming, and it seems that these are now likely to fail. Following Grattan and other recent cases (such as Deutsche Bank), it seems that the principle of fiscal neutrality is only an aid to interpretation whose authority does not transcend the legislation and may not extend or restrict the provisions of the applicable directive.

Fund management services: GfBk

The AG has delivered his opinion in GfBk (C-275/11), which concerned specific recommendations made to a fund manager by an investment adviser, GfBk, on the purchase and sale of securities. The manager, whilst retaining decision-making power, would subsequently implement such recommendations, subject to checking compliance with statutory limits.

Outsourced services will only constitute the exempt ‘management of special investment funds’ under article 13B(d)(6) of the Sixth VAT Directive (now article 135(1)(g) of Directive 2006/112/EC) where they form a distinct whole and fulfil the specific, essential functions of such management services (Abbey National, C-169/04). On the facts, the AG opined that GfBk’s advisory service was intrinsically connected to the core of the fund’s activities, even though such a service is not listed in annex II to the UCITS Directive (85/611/EEC), and that outsourced services of this nature should, therefore, be exempt, provided that the service is found to be autonomous and continuous in respect of the manager’s activities (which was a matter for the national court to verify). For these purposes, it was irrelevant that GfBk did not directly bring about a change in the legal and financial position of the fund and that there was no authorisation for management to be delegated to GfBk.

Why it matters: Whilst fund managers may already have structured their operations to benefit from exemption, if the CJEU follows the approach of the AG, GfBk would potentially result in a relaxation of the terms of the exemption which may enable some VAT reclaims. It would, however, be helpful to have further guidance on the distinction between advice and management.

TOGC treatment of some property transfers

In Robinson Family Ltd (RFL) [2012] UKFTT 360 (TC), RFL had a 125-year lease for a plot and granted a sub-lease of 125 years less three days to a purchaser subject to and with the benefit of a proposed letting, claiming TOGC status for the grant. HMRC disputed this, arguing (in line with its previous guidance) that retention of an interest in the land meant RFL had created a new asset rather than transferring an existing asset used in its business. The Upper Tribunal disagreed with HMRC, holding that the interest retained was insufficient to prevent TOGC treatment.

HMRC has now issued Revenue & Customs Brief 30/12, stating that it will not appeal the RFL case. It accepts that the retention of a small reversionary interest in a property by the transferor of a property rental business will not prevent TOGC treatment provided the interest retained is small enough not to disturb the substance of the transaction (which will be the case provided it does not exceed 1% of the value of the property).

Why it matters: The new treatment will enable some transferors of opted property to grant a long lease where this is commercially preferable to transferring their existing interest, while still benefitting from TOGC treatment. Brief 30/12 also acknowledges the possibility of VAT reclaims in relation to previous transactions that should have qualified as TOGCs under the new guidance. HMRC is still considering whether overpaid SDLT could also be refunded, and whether the new policy should extend to properties that are used in a business other than property letting.

Principal or agent: Secret Hotels2

The Court of Appeal has given judgment in Secret Hotels2 Ltd v HMRC [2012] EWCA Civ 1571 (Medhotels), concerning whether an arrangement in the online travel sector was one of principal or agent for VAT purposes.

Medhotels operated a website marketing holiday accommodation worldwide. It negotiated rates with hotels but charged customers a higher rate, making a profit on the margin. Medhotels argued that it was acting as disclosed agent for the hotels, and its margin was commission for a service supplied to the hotels, which was not subject to UK VAT unless the hotel was situated in the UK. HMRC said that Medhotels was acting in its own name as principal in supplying accommodation to its customers. Under the tour operators’ margin scheme (TOMS), Medhotels should therefore have accounted for UK VAT on its margin as it was established in the UK.

The Upper Tribunal had focused on the terms of the contracts which it said supported a disclosed agency relationship. In contrast, the Court of Appeal emphasised the importance of commercial realities, and held that the ‘whole facts of the case’ must be examined to determine the VAT treatment. In reality, Medhotels supplied customers in its own name and some of its dealings with hotels were inconsistent with an agency relationship.

Why it matters: This is an important case for the travel sector, but is of wider significance because it emphasises that the ‘whole facts of the case’, and not just any contractual terms, must be considered in order to determine the classification of an activity for VAT purposes.

What to look out for

• The judgment of the Court of Appeal in BAA v HMRC (recoverability of input VAT on takeover fees by an SPV) is expected in the near future.
• On 17 January, the CJEU gave its judgment in BGZ Leasing (C-224/11) on whether leasing with insurance for the leased item is a single or multiple supply.