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The VAT briefing for November 2012

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Key recent developments in VAT are as follows: in Daimler and Widex, the CJEU confirmed that existence of taxable output transactions in the Member State of refund is the determining factor for excluding Directive 2008/9 claims; in Isle of Wight, the FTT decided that there would be significant distortions of competition if off-street car parking provided by local authorities was not subject to VAT; the European Commission has issued a consultation paper, reviewing existing EU legislation on reduced VAT rates; and, in Totel, the Court of Appeal held that hardship decisions of the FTT may still be appealed, despite legislative provision to the contrary.

Fixed establishment: Daimler and Widex

On 25 October, the CJEU gave judgment in Daimler AG (C-318/11) and Widex A/S (C-319/11) on article 1 Eighth VAT Directive (now article 3(a) Directive 2008/9/EC), which provides that no intra-community VAT refund is available where a taxpayer has a ‘fixed establishment from which business transactions are effected’ in the Member State in which the refund is sought. Both Daimler and Widex had testing and research facilities in Sweden, and also temporarily imported employees there. Daimler also had a Swedish subsidiary whose primary purpose was to supply Daimler with services to support its testing programme. The Swedish authorities denied both companies a refund on VAT they incurred in Sweden because they had ‘fixed establishments’ in Sweden, but the CJEU disagreed with this, holding that the right to a refund will only be excluded where the ‘fixed establishment’ actually makes taxable output transactions in the Member State of refund and that a mere ability to carry out such transactions was insufficient. The conditions for a VAT refund were, therefore, met and the existence of Daimler's Swedish subsidiary did not change the analysis, as it did not incur the VAT in question.

Why it matters: The fact that output transactions are the determining factor in excluding VAT refunds clearly mirrors the legislative intention behind the Directive. If the Swedish authorities had been correct, this would give rise to the strange result that companies with a fixed establishment in a Member State that does not make supplies would suffer irrecoverable VAT, whereas those with no fixed establishment or those with a fixed establishment that makes supplies (and so is entitled to register for VAT) would not. This judgment should ensure that the presence of simple testing or research facilities will not result in a refund being denied. However, the CJEU did not expand on its existing case law on what actually constitutes a fixed establishment, as some commentators had hoped.

Case updates

In the ongoing Littlewoods compound interest case, a ten day High Court hearing has been scheduled for October 2013. The High Court will need to apply the judgment of CJEU to determine whether the claimants are entitled to compound interest on the VAT they overpaid. The long hearing suggests this will be a hard fought case and it is likely to be appealed further; there may even need to be a further reference to the CJEU before it is finally resolved. It is likely that taxpayers will need to wait for some time yet before knowing whether they are entitled to compound interest on their VAT overpayments.

GMAC v HMRC concerns the compatibility with EU law of the UK's historic regime for VAT relief on bad debts in the context of hire-purchase agreements. Following its decision on the substantive issues in August, the Upper Tribunal (UT) has decided to refer one issue (whether EU law prevents GMAC from obtaining a ‘windfall’ by relying on a combination of the direct effect of EU law and wrongly transposed domestic law) to the CJEU. The UT also decided that the time limits for appealing the other issues in the case should be extended until after the reference is decided. It therefore seems that this case will remain unresolved for some time.

A new lead case (Zipvit Ltd and Harrier LLC) has appeared on the tax tribunal's website. The common issues of fact and law relate to whether taxpayers are entitled to input VAT credit where they received supplies from Royal Mail which were treated as exempt at the time, but which should properly have been chargeable to VAT under the VAT Directives. In other words, can taxpayers rely on the Directives to say that the price was theoretically inclusive of VAT and so reclaim input VAT which was never actually invoiced or accounted for by the supplier when it should have been? Many taxpayers could bring similar claims, and this principle is also important in other contexts where a supply has been incorrectly treated as exempt by HMRC.

Distortion of competition: Isle of Wight

On 12 October, the First-tier Tribunal (FTT) gave its decision in Isle of Wight Council v HMRC [2012] UKFTT 648 (TC), concerning whether local authorities should charge VAT on off-street parking. Under article 4(5) Sixth VAT Directive (now article 13(1) Principal VAT Directive), public bodies are not regarded as taxable persons when making supplies, unless ‘their treatment as non-taxable persons would lead to significant distortions of competition.’

At an earlier stage, the High Court referred the interpretation of article 4(5) to the CJEU, which held in 2008 that (i) the question of whether ‘significant distortions of competition’ would arise is to be examined as a matter of general principle, without evaluating the situation in any particular local market; (ii) ‘would lead to’ encompasses potential, as well as actual, distortions of competition; and (iii) ‘significant’ means ‘more than negligible’.  The case came back to the FTT, which needed to determine whether, if local authority off-street parking were not taxable, there would be in the UK as a whole a degree of distortion of competition that was not negligible. It decided that distortion of competition had to be shown and could not simply be presumed because commercial operators also made similar supplies of off-street parking. This left it with a complex fact-finding exercise. The FTT reached the (intuitively correct) conclusion that distortion of competition would be likely, because local authorities would charge lower prices if their supplies were not subject to VAT, which would have an impact on commercial operators' pricing, and could also lead to fewer commercial car parks opening or remaining open.

Why it matters: This case provides useful guidance on how the FTT will approach an enquiry into whether treating a public body as non-taxable will give rise to distortions of competition, which will be relevant to other quasi-commercial activities performed by such bodies.

Review of reduced VAT rates

On 8 October, the European Commission issued a consultation reviewing reduced VAT rates across the EU, emphasising that the review is predicated on the following guiding principles:

  • Abolition of reduced rates which constitute an obstacle to the proper functioning of the internal market, as reduced rates justified in the past may now have distorting effects as a result of changes in economic, business and legal environments;
  • Abolition of reduced rates on goods and services whose consumption is discouraged by other EU policies, notably where they are harmful to the environment, health or welfare; and
  • Ensuring that similar goods are subject to the same VAT rate, taking into account technological advances and convergence between the on-line and physical environments.

Why it matters: Although the Commission emphasises that the consultation is essentially of a technical nature and that no decisions have yet been taken, the possibility of future changes to reduced rates, including the UK's 5% reduced rate and zero-rating, may lead to uncertainty for businesses currently benefitting from such rates.

Right to appeal hardship decisions: Totel

On 31 October, the Court of Appeal gave judgment in R (Totel) v First-tier Tribunal and HMRC [2012] EWCA Civ 1401, holding that taxpayers may appeal hardship decisions from the FTT to the UT despite legislative provision to the contrary.

In Totel, HMRC considered that the right of appeal under the Tribunals, Courts and Enforcement Act 2007 s 11 had been removed by VATA 1994 s 84(3C), which had purportedly been enacted by a Treasury Order in 2009 pursuant to a power in FA 2008 s 124 for the Treasury to make, by statutory instrument, provision amending primary legislation ‘in connection with appeals against HMRC decisions’. Totel argued, however, that the enabling power in FA 2008 was not sufficiently clear to include the power to revoke the right of appeal in question, relying on the principle that an enabling power ‘should not receive anything but a narrow and strict construction and any doubts about its scope should be resolved by a restrictive approach.’ The Court of Appeal agreed with Totel, holding that a provision revoking a right of appeal did not fall within FA 2008 s 124.

Why it matters: It seems that hardship decisions can still be appealed, despite the attempted abolition of this right under the 2009 Order. This case demonstrates some of the limitations of secondary legislation. It is not clear whether the government will now introduce further primary legislation to achieve the same result.

What to look out for

  • On 26 November, the CJEU will hear X BV (C-651/11) on whether a transfer of shares can qualify as a TOGC where the transferor has supplied services to the company in question.
  • On 27 November, opinions of the Advocate General will be released in some of the VAT grouping infraction cases brought by the Commission concerning, among other things, the inclusion of non-taxable persons in VAT groups (Commission v Ireland C-85/11 and Commission v Sweden C-480/10).
Issue: 1147
Categories: Analysis , Indirect taxes , VAT