EY VAT News - Week to 8 June 2015

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1 Click here to view online EY VAT News - Week to 8 June 2015 Welcome to the latest edition of EY VAT News. Headlines include the following: In the case of Paul Newey t/a Ocean Finance, the Upper Tribunal held that a structure to avoid irrecoverable VAT on supplies of advertising services to a loan broking business did not constitute an abusive practice liable to redefinition under the Halifax doctrine. Please contact Mitchell Moss for further information. In infringement proceedings brought by the European Commission against the UK, the Court of Justice of the European Union (CJEU) held that the application of a reduced rate of VAT to the supply and installation of energy-saving materials in residential accommodation was not allowed under EU law. Please contact Ali Anderson for further information. The Supreme Court will deliver its judgment in HMRC's appeal from the Court of Appeal in the case of Pendragon plc and others on Wednesday, 10 June Please contact Mitchell Moss for further information. If you would like to discuss any of the articles in this week's edition of EY VAT News in more detail, please speak with your usual EY indirect tax contact or one of the people below. In this edition: First Tier Tribunal : Construction of building in two phases : Whether second phase zero-rated First Tier Tribunal : Deduction of input tax on retail and wholesale purchases of mobile phones First Tier Tribunal : VAT case management : Application for addition of second Respondent First Tier Tribunal : Importation of US Silver Eagle Dollar coins : Whether exempt from VAT First Tier Tribunal : Extra-statutory concession : Apportionment of membership subscriptions First Tier Tribunal : Leasing of residential caravans : Whether zero-rated or exempt from VAT Upper Tribunal : Decision : Structure to avoid irrecoverable VAT on advertising costs : Abuse Upper Tribunal : Decision : NHS Fleming claim to recover input tax paid on capital expenditure Court of Appeal : Latest appeal updates : Huddersfield, Westinsure, Whistl and Longridge Supreme Court : Pendragon : Structure for sale of ex-demonstrator vehicles : Whether abusive CJEU : Judgment : UK : Reduced rate : Energy-saving materials in residential accommodation CJEU : Judgment : Poland : Reduced rate : Medical equipment and pharmaceutical products CJEU : Calendar update Puerto Rico : Latest proposal for implementation of VAT approved

2 First Tier Tribunal Summaries of a selection of the latest First Tier Tribunal decisions to be released. Decision : Construction of university building in two phases : Whether second phase zero-rated TC04417 York University Property Company Ltd (formerly York Science Park (Innovation Centre) Ltd) In circumstances where a university building was constructed in two phases, the Tribunal held that the second phase of construction was an enlargement of or extension to the first phase of construction (rather than a continuation of the first phase of construction) and, therefore, standard-rated for VAT purposes. An appeal against HMRC's decision that construction services provided by the Appellant in relation to the second phase of construction of a building at the University of York were standard-rated supplies. The Appellant was a subsidiary company of the University. In 2003, the University obtained planning permission for the construction in two phases of a research building to be used by its chemistry department. The phase 1 works were completed in August 2004, and the building was occupied and used by the chemistry department from September The wall on one side of this building was designed to be easily removable when the time came to undertake the phase 2 works (referred to as a sacrificial wall). In 2011, after additional funds had become available, the University commissioned the Appellant to undertake the works for phase 2 of the construction. The sacrificial wall was removed and phase 2 connected to phase 1 where the sacrificial wall had previously been located. The phase 2 works, which were completed in 2013, essentially doubled the size of the building. There were exchanges of correspondence between HMRC and the Appellant in relation to the VAT treatment of the supply of the phase 2 constructions services. The Appellant contended that the supply should be zero-rated under Item 2(a) of Group 5 of Schedule 8 to the VAT Act There was no dispute between the parties that both the phase 1 and phase 2 works related to a building intended for use solely for a relevant charitable purpose within the meaning of this provision, and HMRC accepted that the phase 1 works fell to be zero-rated on this basis. However, HMRC ultimately concluded that phase 1 had produced a complete building, which was used as a fully functioning stand-alone facility for some seven years before the phase 2 works were undertaken. On this basis, the phase 2 works were an extension to an existing building which fell to be standard-rated by virtue of Note 16 to Group 5. The Tribunal observed there was no suggestion that the phase 1 construction could not function and be used for chemistry research until phase 2 was completed. Phase 1 did so function for some nine years until phase 2 was completed in The Tribunal found that there was no reason why phase 1 could not have continued to so function indefinitely, without phase 2. The fact that the phase 1 construction contained a sacrificial wall in anticipation of the phase 2 works was of marginal relevance. Weighing the relevant factors in the present case, the Tribunal found that the phase 2 works were an enlargement of or extension to phase 1, rather than a continuation of the original development of the building. Appeal dismissed. Please contact Ali Anderson for further information. Decision : Deduction of input tax on retail and wholesale purchases of mobile phones TC04418 Global Cellular Ltd The Tribunal considered whether the Appellant was entitled to deduct input tax on retail and wholesale purchases of mobile phones. An appeal against HMRC's denial of the Appellant's input tax claims relating to the supplies which the Appellant claimed were made to it of mobile telephones by both retail and wholesale suppliers. As regards the retail supplies, the Appellant employed individuals (referred to as runners ) to buy the phones on its behalf from various retail stores, which provided printed retail receipts. The Tribunal held that the VAT agency provisions in section 47(2A) of the VAT Act 1994 had the effect that the phones were supplied by the various retail stores to the runners, who then supplied the phones to the Appellant. Further, the Appellant failed to show in respect of any purchase by an individual runner that the purchase resulted in a taxable supply to it. Even if section 47(2A) did not apply so that any supplies by the retail stores were to the Appellant directly rather than to the runners, the Appellant failed to establish to the Tribunal's satisfaction that the goods were supplied to it in accordance with the receipts. The appeal in relation to the retail supplies/receipts was therefore dismissed. However, the Tribunal held that the relevant wholesale supplies, for which the Appellant received valid VAT invoices from its suppliers, did take place. Accordingly, the Tribunal allowed the appeal in relation to the wholesale supplies/invoices. Appeal allowed in part.

3 Decision : VAT case management : Application for addition of second Respondent TC04421 Bradonbay Ltd HMRC successfully applied for a second Respondent to be added to this appeal concerning a claim for repayment of overpaid VAT on supplies which were properly outside the scope of VAT. A case management decision concerned with an application by HMRC to have another taxpayer added as second Respondent to this VAT appeal. The Appellant opposed the application. The underlying appeal relates to a claim by the Appellant for recovery of overpaid VAT on supplies made to, what was at the time, an associated company, in circumstances where (i) the supplies were properly outside the scope of VAT, (ii) the business and VAT registration number of that associated company were subsequently transferred to the proposed second Respondent, and (iii) because of a dispute that arose after the sale, the Appellant contended that it had effectively repaid the overcharged VAT to the proposed second Respondent under the terms of a settlement agreement, such that repayment would not unjustly enrich it. Faced with the possibility of losing the present appeal, HMRC sought to protect its position by assessing the proposed second Respondent to recover the input tax claimed by the associated company. But HMRC did not consider that this assessment fully protected its position. The risk that HMRC perceived was that it might lose the present appeal and the proposed second Respondent might, in separate restitution proceedings, seek to recover the overpaid VAT directly from it. Given the risk of inconsistent findings of fact being made in any potential separate proceedings, the Tribunal allowed HMRC's application and directed that the taxpayer in question should be joined as second Respondent to this appeal. Decision : Importation of US Silver Eagle Dollar coins : Whether exempt from VAT TC04431 Antonio Savidis The Tribunal held that the importation of US Silver Eagle Dollar coins, which were legal tender, failed to qualify for exemption under Article 135(1)(e) of the VAT Directive. An appeal against HMRC's refusal to repay VAT charged on the importation by the Appellant of 1000 US Silver Eagle One Dollar coins, each worth more than $20. The Appellant submitted that the coins he imported were exempt from VAT under Article 135(1)(e), which covers transactions concerning bank coins used as legal tender, with the exception of collectors' items (that is, gold, silver or other metal coins which are not normally used as legal tender or coins of numismatic interest). The Appellant argued that the silver dollar coins he imported were in fact legal tender and, therefore, they were not collectors' items within the meaning of Article 135(1)(e) and were exempt from VAT. HMRC submitted that the coins fell outside the exemption as they were not normally used as legal tender. HMRC further argued that it was not relevant whether the coins in question were in fact legal tender. Instead, HMRC pointed to the fact that the customs declarations showed that the coins were worth more than 20 times their face value, so it was inconceivable that they would normally be used as legal tender. The Tribunal agreed with HMRC that it was simply not conceivable that someone would normally use a coin worth more than $20 to purchase something worth $1. The Tribunal therefore held that the importation of the coins was not exempt from VAT as they fell within the exception to the exemption given by Article 135(1)(e). Appeal dismissed. Please contact Andrew Bailey for further information. Decision : Extra-statutory concession : Apportionment of membership subscription income TC04433 The Reform Club The Tribunal considered the application of an extra-statutory concession which enables non-profit making organisations to apportion subscription income in order to reflect the value and VAT liability of the various different benefits provided to members in return for their subscriptions. The Appellant was a private members social club. It operated as a non-profit making organisation and was owned by its voting members. The Appellant charged its members an annual subscription, which conferred upon each member a basket of benefit

4 and privileges some of which, if supplied individually, would be zero-rated for VAT purposes or VAT exempt; others of which would be standard-rated. HMRC operated an extra-statutory concession which provided that non-profit making organisations supplying a mixture of zero-rated, exempt and/or standard-rated benefits to their members in return for their subscriptions could apportion such subscriptions to reflect the value and VAT liability of those individual benefits, without regard to whether there was one principal benefit. The Appellant had benefitted from that concession, having previously agreed a floor space based apportionment method with HMRC. In this appeal, the Appellant contended that the previously agreed method of apportionment did not, or had ceased to, provide a fair and reasonable apportionment of the proportion of the annual subscription that was subject to VAT at the standard rate and the part that should be zero-rated or exempt. The Appellant proposed to HMRC that it should change the methodology so as to exclude from the overall floor area, the floor areas occupied by the restaurant and the bedrooms (on the basis that they generated fee income on which VAT was charged separately). According to the Appellant, the basis for this was that those areas of the club which were used only (or mainly) by members who made further payments whilst using those facilities (e.g. the restaurant and bedrooms) resulted in the use of those parts of the premises giving rise to double taxation unless they were excluded from the floor space calculation. By excluding those floor areas, the percentage of the subscription that would not be subject to the standard rate of VAT would increase significantly. The Tribunal disagreed with the Appellant's submission. The fact that payment was made for the use of bedrooms and/or for food and drink did not give rise to double taxation. The subscription fee was a payment made by each member in exchange for that member being given the right to access and use the various facilities offered by the Appellant. The ability to use the various and differing facilities (whether free at the point of supply or involving further payment) arose from the rights and privileges of membership. The subscription purchased those rights and privileges. The fact that accessing a particular facility (e.g. the taking of meals in the restaurant) involved further payment (for the food and beverages consumed) confused the issue. The subscription was paid in exchange for the right to access the other facilities which, if a member chose to access and use any of them, required the payment of an additional sum of money. That was not double taxation, rather it was separate taxation for separate identifiable supplies. Appeal dismissed. Decision : Leasing of residential caravans : Whether zero-rated or exempt from VAT TC04434 C Jenkin & Son Ltd The Tribunal considered whether the leasing of residential caravans was zero-rated or exempt from VAT, in circumstances where the occupier concluded a separate pitch agreement with the owner of the site on which the caravan was placed. The Appellant supplied caravans, used as mobile homes, to members of the travelling community eligible for housing benefit for use as their homes and to be sited on pitches provided, in general, by local authorities. It was common ground that the caravans fell within the definition of a caravan for the purposes of zero rating under Item 1 of Group 9 of Schedule 8 to the VAT Act The caravans were the subject of leasing agreements made between the traveller and the Appellant, and there were separate pitch agreements made between the traveller who had leased a caravan and the owner of the site on which it was placed. The leasing agreement for the caravan made between the Appellant and the traveller, which had an average duration of over five years, was couched in terms of a tenancy of real property, although no interest in land was created. HMRC assessed the Appellant to recover over-claimed input tax. The input tax had been reclaimed by the Appellant on the basis that its supplies of the caravans to the travellers were zero-rated, whereas HMRC considered that they were exempt. Item 1 of Group 9 zero-rated the supply (including lease) of qualifying caravans, but Note (b) to Group 9 excluded the supply of accommodation in a caravan. The Appellant submitted that the disputed supplies were essentially those of zero-rated caravans within Item 1. As regards the exclusion of accommodation by Note (b), the Appellant submitted that the caravan itself did not amount to accommodation, but it was the caravan in situ on the local authority pitch which, in total, provided the traveller with accommodation and the licence to occupy a particular pitch given by the local authority was a necessary element of that. The Appellant further submitted that, in any event, it was not making an exempt supply of an interest in land since that was covered by the pitch agreement with the local authority. With that in mind, the assessments to recover input on that basis could not therefore be well-founded. HMRC accepted that the disputed supplies were not supplies of an interest in or right over land and, therefore, could not be exempt from VAT. However, HMRC submitted that Note (b) clearly excluded the supplies at issue from zero rating. The supply of accommodation in a caravan referred to the possibility of a caravan being used as accommodation. In view of the terms of the leasing agreement between the Appellant and the traveller, it was unarguable that the purpose for which the caravan was to be used was not the accommodation of persons using it as their home. That was clearly the intention of the agreement which explicitly envisaged such use.

5 The Tribunal agreed that the supplies at issue were not exempt supplies within Group 1 of Schedule 9 to the VAT Act However, the Tribunal also held that the supplies at issue were excluded from zero rating by Note (b). Undoubtedly, these caravans were used, and intended to be used, as peoples' homes to live in as residential accommodation. The legislation did not address the question of where the caravans were used, but concerned itself only with their actual use as accommodation. Having concluded that the supplies at issue were neither exempt nor zero-rated, it appeared to the Tribunal that they were properly standard rated. However, in terms of the assessments under appeal, the only issue was whether they were good in law on the basis that the Appellant was making exempt supplies in respect of which it was not entitled to recover input tax. In this regard, the Tribunal held that the effect of HMRC classifying the Appellant's supplies as exempt was in this instance to impose a liability which was not authorised by law. Lacking any legal basis, the assessments therefore failed. Appeal allowed. Upper Tribunal Decision : Structure to avoid irrecoverable VAT on advertising costs : Whether abusive HMRC v Paul Newey t/a Ocean Finance The Upper Tribunal held that a structure to avoid irrecoverable VAT on supplies of advertising services to a loan broking business did not constitute an abusive practice liable to redefinition under the Halifax doctrine (which addresses the scope of the EU principle of abuse of rights in the context of VAT). The Upper Tribunal released its decision on 2 June 2015 in this appeal by HMRC against First Tier Tribunal decision TC00487 concerning a loan broking business and a structure to avoid irrecoverable VAT on supplies of advertising services by basing the loan broking business in Jersey, with loan processing services provided by a UK business. Following an earlier reference to the CJEU (C-653/11), the Upper Tribunal has now dismissed HMRC's appeal. This appeal concerns the effect for VAT purposes of a scheme designed to obtain a tax advantage. It involved the creation of a company in Jersey (Alabaster), the share capital of which was beneficially owned by the taxpayer, to which the taxpayer transferred a loan broking business previously carried on by him in the UK. Alabaster did not itself process the loan applications, but used the taxpayer's services for that purpose, which were provided by his employees in the UK. The services which the taxpayer provided essentially covered all the processing tasks for the loan broking business. Alabaster also engaged an advertising agency in Jersey to provide it with advertising services which were intended to attract potential borrowers. The taxpayer's position was that, after the transfer, it was Alabaster, rather than he himself, which made supplies of loan brokerage services to various third party lenders in the UK and that it was Alabaster, rather than he himself, which received the supplies of advertising services. The advertising services were not subject to UK VAT because they were treated as supplied in Jersey and the loan brokerage services were treated as supplied in the UK and were exempt. This was so even though all the loan applicants and lenders were UK resident, all the advertising took place in the UK media and all the contact from potential applicants was handled by the taxpayer in the UK with only the final approval being made in Jersey. The questions in the appeal before the First Tier Tribunal were (i) who made the supplies of loan brokerage services and, correspondingly, who received the supplies of advertising services for VAT purposes (i.e. was it Alabaster or the taxpayer), and (ii) if Alabaster was the recipient, whether the structure constituted an abusive practice for the purposes of the Halifax doctrine and the transactions should be redefined so as to remove the VAT advantage by treating the taxpayer as receiving the supplies of advertising services and using those services to make exempt supplies of loan brokerage services in the UK, with the consequence that the VAT incurred on the advertising services would not be recoverable as input tax. In its decision, the First Tier Tribunal held that it was Alabaster, and not the taxpayer, which made the supplies of loan brokerage services and received the supplies of advertising services. Further, while holding that the essential aim of the structure involving Alabaster was to obtain a tax advantage, there was no abuse as neither the scheme nor any of the arrangements involving Alabaster were contrary to the purposes of EU law. HMRC subsequently appealed to the Upper Tribunal, which referred a number of questions to the CJEU. Before the Upper Tribunal, HMRC contended that the CJEU provided new guidance when it said that the correct approach was to assess the economic and commercial reality of the transactions at issue and that the contractual arrangements were a factor, but only a factor, to be taken into account. HMRC contended that the First Tier Tribunal was in error because it did not apply that approach but instead assigned decisive importance to the contractual structure which had been brought about solely for the purpose of obtaining a tax advantage rather than for any commercial reason. The taxpayer contended that the CJEU did no more that to restate existing established principles and that the First Tier Tribunal applied those principles correctly. The

6 parties argued the appeal by reference to, essentially, the same issues as were argued before the First Tier Tribunal, the issues identified by them being (i) whether the First Tier Tribunal erred in its approach to the characterisation of the supplies of loan broking services as made by Alabaster and the advertising services as received by Alabaster (rather than the taxpayer in each case) by failing to have regard to the economic reality in contrast with the position as set out in the relevant contractual documentation (the characterisation of supplies issue), and (ii) whether the Tribunal erred in deciding that neither the arrangements as a whole nor any part of them produced a tax advantage which was contrary to EU law (the abuse issue). On the categorisation of supplies issue, the Upper Tribunal held that it is was implicit in the CJEU judgment that in order to depart from the contractual provisions in the present case, it was necessary to show an abusive practice and then to redefine the contractual terms. HMRC could only succeed if it established abuse. If HMRC failed on abuse, it could not succeed in establishing that the relevant supplies were made to and by the taxpayer for VAT purposes. However, in case that was wrong, the Upper Tribunal also held that, on the facts of the present case, the First Tier Tribunal was entitled to reach the conclusion that the relevant supplies were made to and by Alabaster and not the taxpayer. Similarly, the Upper Tribunal did not consider that the First Tier Tribunal's decision on the abuse issue could or should be overturned on a point of law. The Upper Tribunal did not accept HMRC's contention that abuse was to be found in the present case simply because (and without more) there was a supply in the UK of loan broking services to UK lenders who make loans to UK borrowers following on from introductions arising as result of advertising in UK media. On the First Tier Tribunal's findings of fact, the Alabaster arrangements were not wholly artificial, rather they reflected an economic and commercial reality which did not produce a result (the accrual of a tax advantage) contrary to the purposes of EU law. The Upper Tribunal therefore dismissed HMRC's appeal. Please contact Mitchell Moss for further information. Decision : Fleming claim by NHS body to recover input tax paid on capital expenditure Lothian NHS Health Board v HMRC The Upper Tribunal refused the taxpayer's claim for input tax paid on capital expenditure over the period from 1974 to 1997 on the basis that, whilst accepting there had probably been an under-recovery of input tax, the evidence was insufficient to establish a tolerably acceptable calculation of the amount paid and not recovered. The Upper Tribunal released its decision on 28 May 2015 in this appeal by Lothian NHS Health Board against First Tier Tribunal decision TC03397 concerning a Fleming claim to recover input tax paid on capital expenditure (referable to taxable supplies) during the 23-year period from 1974 to The claim was rejected by HMRC, and the taxpayer appealed to the First Tier Tribunal. The appeal was refused on the ground that the taxpayer had failed to prove, to an acceptable standard, what amount, if any, of unrecovered input VAT had been paid by it on capital expenditure over the 23-year period. The taxpayer appealed to the Upper Tribunal on the basis that the First Tier Tribunal erred in law in refusing the appeal on that ground. The Upper Tribunal held that the First Tier Tribunal committed no error of law. The onus of proving that an amount of input tax had been paid and not recovered rested upon the taxpayer. The standard of proof was the balance of probabilities. It was open to a Tribunal to hold that a claim failed for either of two reasons: (i) because it was not satisfied, on the balance of probabilities, that there was any unrecovered input tax, or (ii) because, although satisfied that there was unrecovered input tax, it was unable to find, on the balance of probabilities, that any particular (even a minimum) amount of input tax could be ascertained as having been paid and not recovered. In the latter alternative, the Tribunal did not function as a detective with a duty to fix a figure (even a minimum figure) for input tax paid but not recovered. In the present case, the First Tier Tribunal found against the taxpayer for the second of those two reasons. It proceeded on the basis that there had probably been an under-recovery by the taxpayer of input tax on capital expenditure. However, the First Tier Tribunal went on to hold that the evidence placed before it was insufficient to enable it to carry out even a tolerably acceptable calculation of the amount paid and not recovered, let alone a precise figure. The First Tier Tribunal gave reasons why it reached that conclusion, including contemporaneous book-keeping practices failed to identify whether expenditure was VAT-inclusive or exclusive, there were no reliable records of input tax recoveries contemporaneously made, the manner in which the contracted-out services scheme had been operated was uncertain, and the publicly available records upon which the taxpayer's quantification proceeded could not be linked to the evidence of the other witnesses regarding VAT recovery practices during the years to which the claim related. On that state of the evidence, the Upper Tribunal considered that the First Tier Tribunal was entitled to say that the taxpayer had failed to prove its case, and was not guilty of any error of law in holding itself unable to put a figure on the amount of unrecovered tax. On this basis, the Upper Tribunal dismissed the taxpayer's appeal.

7 Please contact Audrey Fearing for further information. Court of Appeal Latest appeal updates : University of Huddersfield, Westinsure Group, Whistl UK and Longridge The latest appeal updates are as follows: The Court of Appeal will hear the appeal by University of Huddersfield Higher Education Corporation against the Upper Tribunal's decision in favour of HMRC on April This case concerns whether a tax mitigation (lease and lease-back) scheme entered into by the taxpayer, a partially exempt university, intended to secure the recovery of VAT on costs incurred in connection with the refurbishment of a property, constituted an abusive practice under EU law. The Upper Tribunal reversed the First Tier Tribunal's decision and allowed HMRC's appeal, holding that the tax mitigation scheme constituted an abusive practice in so far as it entitled the taxpayer to claim a greater deduction of input tax paid on the refurbishment work than it otherwise would have been entitled to. The Upper Tribunal's decision (released on 2 October 2014) can be accessed by clicking here. Please contact Ali Anderson for further information. The Court of Appeal will hear the appeal by Westinsure Group Ltd against the Upper Tribunal's decision in favour of HMRC on 1-2 March This case concerns whether the services provided by the taxpayer to insurance brokers in return for membership fees qualified for exemption from VAT as the provision of the services of an insurance intermediary. The First Tier Tribunal held that the taxpayer's services were not services related to insurance transactions which were performed by an insurance broker or insurance agent. Accordingly, the exemption was not available to the taxpayer in respect of those services. The Upper Tribunal upheld this decision. The Upper Tribunal's decision (released on 13 October 2014) can be accessed by clicking here. Please contact David Bearman for further information. The Court of Appeal will hear the appeal by Whistl UK Ltd (formerly TNT Post UK Ltd) against the High Court's judgment in favour of HMRC on April This case concerns an application by the taxpayer for judicial review challenging the lawfulness of the UK VAT exemption for postal services. Following previous judicial review proceedings brought by the same taxpayer, the CJEU confirmed that the scope of the UK postal services exemption was wider than allowed under EU law. In 2011, UK VAT legislation was amended to reflect the CJEU judgment. The result of these changes was that VAT at the standard rate applied to certain Royal Mail postal services that had previously been treated as exempt. These latest judicial review proceedings were brought by the taxpayer on the basis that the legislative changes made in 2011 did not go far enough. The High Court concluded that, following the CJEU judgment, the UK amended the relevant VAT legislation in a way that was compatible with EU law, and the current UK VAT exemption was likewise compatible with EU law. The High Court's judgment (released on 23 October 2014) can be accessed by clicking here. Please contact Damian Shirley for further information. The Court of Appeal will hear HMRC's appeal against the Upper Tribunal's decision in favour of Longridge on the Thames on April This case concerns whether construction services supplied to a charity in relation to the construction of a new building qualified for zero-rating. The Upper Tribunal held that the construction of the new building qualified for zero-rating as the building was intended for use solely for a relevant charitable purpose (i.e. a non-business activity), notwithstanding the fact that the charity charged fees for the facilities it provided in pursuing its objects. The Upper Tribunal's decision (released on 11 November 2014) can be accessed by clicking here. Please contact Ali Anderson for further information. Supreme Court Pendragon : Structure for sale of ex-demonstrator vehicles : Whether abusive The Supreme Court will deliver its judgment in HMRC's appeal from the Court of Appeal in the case of Pendragon plc and others on Wednesday, 10 June This case concerns a complex financing structure entered into by a major car dealership group, one outcome of which was intended to be the ability to sell ex-demonstrator cars (i.e. cars on which input tax deduction was initially available) under the margin scheme rather than having to charge VAT on the full selling price. In

8 reversing the First Tier Tribunal's decision, the Upper Tribunal concluded that the relevant transactions involved an abuse of law. However, the Court of Appeal held that the First Tier Tribunal was entitled to come to the conclusion that no element of the arrangement was inserted artificially and that the arrangements were not abusive or artificial, and that the Upper Tribunal was wrong to reverse the decision. The Court of Appeal therefore allowed the taxpayers' appeal and restored the First Tier Tribunal's decision. Further details (including the Court of Appeal's judgment) can be accessed by clicking here. Please contact Mitchell Moss for further information. Court of Justice of the European Union (CJEU) Judgment : UK : Reduced rate of VAT for energy-saving materials in residential accommodation C-161/14 European Commission v UK The CJEU held that the application by the UK of a reduced rate of VAT to the supply and installation of energy-saving materials in residential accommodation was not allowed under EU law. On 4 June 2015, the CJEU delivered its judgment in infringement proceedings brought by the European Commission against the UK for applying a reduced rate of VAT to the supply and installation of energy-saving materials in residential accommodation (as specified in Group 2 of Schedule 7A to the VAT Act 1994). This case proceeded to judgment without a written Advocate General's opinion. Article 98(2) of the VAT Directive provides that Member States may only apply reduced VAT rates to the limited categories of goods and services set out in Annex III. Categories 10 and 10a of Annex III refer, respectively, to the provision, construction, renovation and alteration of housing, as part of a social policy and renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied. The Commission contended that the relevant UK legislation was contrary to EU law as it did not fall within either of these categories. The UK maintained that its legislation complied with EU law, following the withdrawal in August 2013 of the reduced rate of VAT applied to the supply and installation of energy-saving materials in charitable buildings. As regards Category 10, the CJEU held that by providing for the application of the reduced rate of VAT to all residential property, irrespective of the housing concerned and with no differentiation among people living in that housing (in terms of levels of income, age or other criteria designed to give an advantage to those who have more difficulty in meeting the energy needs of their accommodation), the relevant UK legislation could not be regarded as having been adopted for reasons of exclusively (or even principally) social interest, within the meaning of EU law. As regards Category 10a, the parties accepted that the failure of the relevant UK legislation to exclude materials which account for a significant part of the value of the service supplied failed to comply with EU law. However, the CJEU further held that the relevant UK legislation went beyond the scope of the renovation and repair of private dwellings for the purposes of Category 10a. The CJEU therefore upheld the Commission's action in its entirety. The full judgment can be accessed by clicking here. The CJEU has also issued a press release on this judgment which can be accessed by clicking here. Comment: In light of this judgment, the UK will need to make provision for the withdrawal of the reduced rate of VAT for the supply and installation of energy-saving materials in residential accommodation. Please contact Ali Anderson for further information. Judgment : Poland : Reduced rate of VAT for medical equipment and pharmaceutical products C-678/13 European Commission v Poland The CJEU held that the application by Poland of a reduced rate of VAT to the supply of a range of medical equipment and pharmaceutical products was, in the majority of cases, permitted by EU law.

9 On 4 June 2015, the CJEU delivered its judgment in infringement proceedings brought by the European Commission against Poland for applying a reduced rate of VAT to the supply of a range (15) of medical equipment and pharmaceutical products. This case proceeded to judgment without a written Advocate General's opinion. Article 98(2) of the VAT Directive provides that Member States may only apply reduced VAT rates to the limited categories of goods and services set out in Annex III. Categories 3 and 4 of Annex III refer, respectively, to pharmaceutical products of a kind normally used for health care, prevention of illnesses and as treatment for medical and veterinary purposes, including products used for contraception and sanitary protection and medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled. The Commission contended that the goods in question were not covered by either of these categories and, consequently, they were properly liable to the standard rate of VAT. The CJEU upheld the Commission's action insofar as it related to a small number (3) of the disputed items, but dismissed the Commission's action insofar as it related to the remaining (12) items. The full judgment (which is only available in French and Polish) can be accessed by clicking here. Calendar update Thursday 11 June Judgment C-256/14 Lisboagás GDL, Sociedade Distribuidora de Gás Natural de Lisboa SA - Portuguese referral asking whether a private company providing infrastructure (pipes) for the distribution of natural gas is required to account for VAT when it passes on to its customers (at cost) amounts relating to land use taxes paid to local authorities. In other words, the referral asks whether such recharges should be treated as part of the consideration for the company's taxable services, or as disbursements (case proceeding to judgment without a written Advocate General's opinion). Wednesday 17 June Hearing C-264/14 David Hedqvist - Swedish referral asking whether transactions involving the exchange of virtual currency for traditional currency and vice versa constitute supplies of services effected for consideration and, if so, whether such supplies are exempt from VAT. Please contact Andrew Bailey for further information. Thursday 25 June Opinion C-174/14 Saudaçor - Sociedade Gestora de Recursos e Equipamentos de Saúde dos Açores S.A. - Portuguese referral asking whether a specific state-owned entity in the Azores (treated as part of the VAT territory of Portugal), which is responsible for managing, developing and reorganising the public health service, is covered by the concept of a body governed by public law acting as a public authority within Article 13(1) of the VAT Directive, such that it should not be regarded as a taxable person. Tuesday 30 June Opinion C-276/14 Gmina Wrocław - Polish referral asking whether an entity of a local authority may be regarded as a taxable person for VAT purposes when it engages in activities other than as a public authority. Thursday 2 July Judgment C-334/14 Nathalie De Fruytier - Belgian referral asking whether the transportation of human samples and organs for the purposes of medical analysis or medical or therapeutic care qualifies for exemption under EU law as services closely related to medical care (case proceeding to judgment without a written Advocate General's opinion). Thursday 2 July Hearing C-463/14 Asparuhovo Lake Investment Company OOD - Bulgarian referral asking whether a retainer (or on-call) agreement for the provision of consulting services constitutes a supply of services for VAT purposes, what the tax point is for that supply (e.g. at the end of the period covered by the retainer) and whether such issues depend on the customer having made use of the consultant's services. Thursday 9 July Hearing C-332/14 Wolfgang und Dr Wilfried Rey Grundstücksgemeinschaft GbR - German referral concerning the calculation of the deductible proportion of input VAT paid in respect of the acquisition or construction and ongoing maintenance of a building used for both taxable and exempt purposes. Thursday 9 July Opinion C-335/14 Les Jardins de Jouvence SCRL - Belgian referral concerning the scope of the exemption for supplies closely linked to welfare and social security work under Article 132(1)(g) of the VAT Directive, specifically whether a commercial provider of serviced dwellings (and related services) for the elderly qualifies for this exemption. Puerto Rico Latest proposal for implementation of VAT approved

10 Last week's edition of EY VAT News reported that Puerto Rico, which was planning to replace its existing sales and use tax (SUT) system with a full VAT regime, had submitted a third proposal to the legislative assembly for approval. This proposal, which also provided for various changes to the SUT (currently set at 7% and composed of two portions, 6% at the state level and 1% at the municipal level), included: an increase in the state SUT from 6% to 10.5% with effect from 1 July 2015, resulting in a total combined central government and municipal SUT of 11.5% the introduction of VAT at 10.5% with effect from 1 April 2016 (in place of the state SUT), which will apply alongside the 1% municipal SUT. On 29 May 2015, this proposal was approved by the legislative assembly, making Puerto Rico the first US jurisdiction to adopt a VAT system. Our global tax alert provides further details. Further information: EY has a global indirect tax practice which is experienced in providing support in relation to technical VAT issues. If you would like to discuss any case generally or in relation to your own circumstances, please speak with your usual EY indirect tax contact. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transactions and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In doing so, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP Ernst & Young LLP Published in the UK. All Rights Reserved. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk Important commercial notice: This may constitute an advertisement or solicitation under US law, if its primary purpose is to advertise or promote Ernst & Young LLP s products or services. Our principal postal address is 1 More London Place, London SE1 2AF. Please click here to remove this from the subscription for this communication. Use the link below to opt-out if you would prefer not to receive any advertising or promotional from Ernst & Young LLP (except for EY Online and the ey.com website, which track preference through a separate process). Your address will be immediately removed from our central mailing list for newsletters and alerts, and all s from Ernst & Young LLP designated as advertising or promotional will be automatically blocked as soon as necessary. Click here to remove yourself from all Ernst & Young LLP commercial s.