The VAT briefing for October 2014

Recent developments in VAT that matter include the following:

In Skandia America Corporation (C-7/13), the CJEU has held that supplies of services from a head office in a non-EU country to its branch in a member state are subject to VAT when the branch belongs to a VAT group.

 

The case concerned the recharge by Skandia America Corporation (Skandia) in the USA of externally purchased IT services to its Swedish branch. 

The CJEU had previously held (in FCE Bank (C-210/04)) that transactions that take place between a  head office and its branches are outside the scope of VAT (because they are part of the same legal entity), and it had been widely assumed that this also applies where the branch is a member of a VAT group. However, the CJEU distinguished FCE Bank on the basis that a VAT group constitutes a separate single taxable person, and so the Swedish branch of Skandia was part of a different taxable person to its head office in the USA. There was therefore a taxable supply of services from Skandia in the USA to the Swedish VAT group, on which the VAT group was required to apply the reverse charge in Sweden.

 

 

The Skandia case is most likely to be of concern to the insurance and financial services industries, which commonly use these kinds of arrangements and are generally unable to recover all the VAT that they incur. However, the judgment could also have ramifications for all businesses that have VAT group arrangements in any member state that includes a branch or head office, as the division of head office costs between branches in this manner is a standard arrangement.

 

While Skandia resupplied externally purchased services to its Swedish branch, the judgment should arguably apply also to services created ‘internally’ by the head office (like R&D) and recharged to the branch. Further, while the CJEU did not consider the position where a head office in a member state (as opposed to a non-EU country) provides services to its branch in another member state (or vice versa), there seems to be no reason in principle why these would not also be subject to VAT where the branch or head office belongs to a VAT group in its member state.

 

Unfortunately, the CJEU did not grapple with how supplies between head offices and their branches should be valued for VAT purposes. Given that they are part of the same legal entity, contracts will not be in place between them. There may be scope for avoidance and uncertainty if the amount of internal invoices is used as the basis for the charge.

In HMRC v GMAC UK (C-589/12), the CJEU has ruled in favour of the taxpayer on a reference from the Upper Tribunal (UT).

 

The case related to supplies of cars made by GMAC under hire purchase agreements between 1978 and 1997. In this period, UK VAT law did not permit GMAC to apply an adjustment to the taxable amount of its supplies in respect of bad debt relief where the customer defaulted on payment under the agreement. The UT held that this was contrary to GMAC’s directly effective rights under Article 11C(1) of the Sixth VAT Directive (now Article 90 Directive 2006/112/EC). However, under the provisions of the VAT (Cars) Order 1992 and its predecessor legislation, GMAC was allowed to de-supply the sale of a car repossessed from a customer. This legislation incorrectly implemented the Sixth VAT Directive to the advantage of GMAC, as these transactions should have been subject to VAT.

 

HMRC argued that allowing GMAC to rely on the directly effective EU provisions in relation to one of its supplies and on the incorrectly implemented domestic rules in relation to another supply would lead to GMAC obtaining a ‘windfall’. HMRC’s contention was that such a result would be inconsistent with the purpose of article 11C(1), as the two supplies were ‘relevantly connected’.

 

The CJEU disagreed. After confirming that article 11C(1) was directly effective, the CJEU stated that taxpayers cannot be prevented from relying on it just because they could invoke a domestic provision in relation to a different supply of the same goods. It did not matter that the domestic provision incorrectly implemented the VAT Directive to GMAC’s advantage; or that the cumulative application of those provisions produced an overall fiscal outcome that neither national law nor the Sixth VAT Directive, applied separately, was intended to produce.

 

This means that GMAC is likely to succeed in its claims relating to the period between 1990 and 1997, but that the claims in relation to the earlier period will probably be time-barred following the Court of Appeal’s decision in BT PLC v HMRC [2014] EWCA Civ 433 (unless this is successfully appealed).

 

 

The CJEU acted on the general principle that VAT must be applied on a supply-by-supply basis, rejecting HMRC’s ambiguous idea of a ‘relevant connection’. Although made in the context of a historic regime, this confirmation is relevant for taxpayers seeking to rely on directly effective VAT rules.

In Bookit Ltd [2014] UKFTT 856 (TC), the First-tier Tribunal (FTT) considered the VAT treatment of card handling fees charged by Bookit to customers making advance bookings for cinema tickets at Odeon Cinemas. Bookit, a member of Odeon’s corporate group, but not part of its VAT group, sold the cinema tickets as agent for Odeon and charged the customer the card handling fee as principal.

 

The facts of the case were broadly similar to those in the earlier case of Bookit Ltd v HMRC [2006] EWCA Civ 550 (in which the Court of Appeal (CA) found that the card handling fees were VAT exempt), save that Bookit did not obtain authorisation codes directly from the card issuers but via a merchant acquirer and Datacash (a bank card services provider). 

 

The first question considered by the FTT was whether the card handling fees fell within the scope of the VAT exemption for ‘transactions concerning payments’ (under article 135(1)(d) Directive 2006/112/EC). HMRC argued that: (i) the fact that Bookit no longer obtained authorisation codes directly meant that this case could be distinguished on the facts from the previous CA case; and (ii) CJEU case law had developed such that the CA’s decision was no longer binding. Although the FTT disagreed with both arguments, it accepted that the scope of the exemption could not be identified with complete confidence and that it was not clear, as a matter of principle, what factors distinguish: (a) the provision of financial information without which a payment would not be made but which is not exempt (Nordea Pankki (C-350/10)); and (b) data handling services that have the effect of transferring funds which are exempt (SDC (C-2/95)). The FTT, therefore, decided to refer questions to the CJEU on this point. 

 

The FTT also considered that the card handling services were not within the exclusion to the exemption for ‘debt collection’, because the service was provided to the customer (the debtor) rather than to Odeon (the creditor). The FTT further held that the supplies were not abusive under the Halifax test, as there was nothing artificial about the arrangements and there was no value shifting.

 

 

It is to be hoped that the CJEU will clarify, once and for all, the VAT position of card handling fees, given the prevalence of such payments in the leisure and tourism industry.

In Taylor Clark Leisure [2014] UKUT 396 (TCC), the UT clarified the position on repayment of overpaid VAT for VAT groups. Taylor Clark (TC) had operated a number of businesses, which it had subsequently transferred (including all related assets and liabilities) to its subsidiary, Carlton. Between 1973 and 2009, TC was the representative member of a VAT group (of which Carlton was also a member between 1990 and 1998). For part of this time, TC had overdeclared output tax on supplies made by members of the VAT group. Carlton made in-time Fleming claims for output tax overpaid by TC, most of which were rejected by HMRC. Subsequently, after the expiry of the time-bar period, TC made claims for repayment of the same overpaid output tax.

 

The UT agreed with the FTT that the claims were time-barred, as such claims must be made by the person that accounted for the VAT (namely, TC, as representative member of the VAT group). TC could not rely on the claims made by Carlton, as they were not made on TC’s behalf.

 

The UT did not, however, agree with the FTT that TC had assigned its right to recover overpaid VAT to Carlton. While the business transfer agreement between them had assigned all sums owed to TC, the UT emphasised that the VAT debt was due by HMRC to the VAT group as a single taxable person (in relation to which TC, as representative member, was the legal emanation), rather than to TC in its individual capacity. Had an effective assignment been made, the UT considered obiter that this would have given Carlton the right to enforce a specific right of TC as representative member (although it agreed with the FTT in Standard Chartered [2014] UKFTT 316 (TC) that where a company leaves its VAT group, the right to claim will remain with the representative member).

 

 

The case confirms (albeit obiter) that the right to reclaim overpaid VAT remains with the representative member of the VAT group, even where the company that made the relevant supplies has left the group, although this right may be assigned to another person.