Indirect Tax Forum Case Law Update

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Georgiana Shelton
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1 Case Law Update David Anderson and Claire Millard 7

Agenda 1. Introduction 2. London Borough of Ealing v HMRC (C-633/15) 3. The Commissioners for HMRC v The Investment Trust Companies (in liquidation) [2017] UKSC 29 4.

2 Agenda 1. Introduction 2. London Borough of Ealing v HMRC (C-633/15) 3. The Commissioners for HMRC v The Investment Trust Companies (in liquidation) [2017] UKSC RGEX GmbH (C-374/16) and Butin (C-375/16) 5. Finanzamt Bingen-Alzey v. Boehringer Ingelheim Pharma GmbH & Co. KG (C-462/16) 6. National Car Parks Limited v HMRC [2017] UKUT PayPoint Collections Ltd and PayPoint Network Ltd v HMRC [2017] UKFTT Look ahead Slide 2

3 London Borough of Ealing v HMRC (C-633/15) VAT exemption for leisure services 1 Slide 3

4 London Borough of Ealing Background The leisure exemption: Supplies of services closely linked with and essential to sport or physical education made by an eligible body to an individual are exempt (Item 3, Group 10, Schedule 9 VATA 1994) Note (3) to Group 10 excludes local authorities from being an eligible body. LB Ealing: accounted for VAT on admission charges to its sports facilities on the basis that it was excluded from the leisure exemption by Note (3). then sought to reclaim this VAT on the basis that its supply fell within the exemption provided for by the PVD (Article 132(1)(m)) HMRC rejected the taxpayers reclaim on the basis that Article 133(1)(d) permitted Member States to set conditions on the scope the exemption for non-public law bodies provided that those conditions must not be likely to cause distortion of competition to the disadvantage of commercial enterprises subject to VAT (the Competition Condition ). The 6th Directive also included a derogation: it allowed Member States a transitional period in which to introduce the leisure exemption. The UK exempted entry into sports competitions but relied upon the derogation so as to delay introducing the exemption in respect of all other leisure supplies. With effect from 1990, the 18th Directive abolished the derogation but permitted Member States to apply the Competition Condition to bodies governed by public law where they had previously applied this to bodies not governed by public law. Slide 4

5 London Borough of Ealing Questions referred to the CJEU by the FTT 1. Is the UK entitled to impose the Competition Condition on bodies governed by public law (i) where those transactions were treated by the UK as taxable on 1 January 1989, but other Sporting Services were exempt on that date, and (ii) in circumstances where those transactions had not first been granted exemption under national law before the UK sought to impose the condition contained in article 133(d) of the Directive? 2. If yes, is the UK entitled to impose the Competition Condition on non-profit making bodies governed by public law without also applying that condition to non-profit making bodies that are not governed by public law? 3. If yes, is the UK permitted to exclude all public non-profit making bodies from the benefit of the exemption contained in Article 132(1)(m) without having considered in each individual case whether the granting of such exemption would likely cause a distortion of competition to the disadvantage of commercial enterprises subject to VAT?" Slide 5

6 London Borough of Ealing The CJEU s Decision 1 The UK was not prevented from applying the Competition Condition by the fact that on 1 January 1989 it had exempted some supplies of sporting services (entries into sporting competitions) and had taxed others (all other leisure supplies). UK legislation which applied the Competition Condition to bodies governed by public law but not to other non-profit making organisations was not permissible. The intention of the Directive was to permit Member States that applied the Competition Condition to other non-profit making organisations (i.e. who were not governed by public law) also to apply it to bodies governed by public law. 2 3 As the answer to the second question was yes, it was not necessary for it to consider the third question. Slide 6

7 London Borough of Ealing Implications This is a decision which will be of significant interest to local authorities. The CJEU's judgment, in which Note (3) was held to be ultra vires the Directive, finally places local authorities on the same footing as other non-profit making organisations supplying the same sporting services. Although technically the FTT has yet to apply the CJEU s decision, in practice the CJEU s decision appears to determine the case. It seems likely that the same analysis will apply to supplies of cultural services, where the Item 1, Group 13, Schedule 9 VAT Act 1994 exemption for admission to cultural events granted by a local authorities is subject to the Competition Condition (contained in Article 133(d)), whilst the Item 2 exemption for the same supplies by other types of bodies is subject to the conditions set out in Articles 133(a) to (c), but not Article 133(d). Slide 7

8 The Commissioners for HMRC v The Investment Trust Companies (in liquidation) [2017] UKSC 29 Customer High Court claims for overpaid VAT 2 Slide 8

9 The Investment Trust Companies Background This case concerns the ability of business customers to recover law directly from HMRC irrecoverable VAT levied in breach of EU. The ITCs had paid VAT on investment management fees in breach of EU law. The ITCs suppliers (managers) had reclaimed a proportion of the unlawfully levied VAT from HMRC and repaid these sums to the ITCs. The ITCs however remained out of pocket in respect of two amounts: 1. the 25s ; and 2. the dead period VAT The 100 = the full amount of the unlawfully charged VAT paid by the ITCs. The 75s = the net VAT paid over by the suppliers to HMRC after the crediting of their input VAT and which had been refunded to the ITCs following section 80 claims made by their suppliers The 25s = the value of the suppliers input VAT The dead period VAT = the 100 of VAT paid by the ITCs but which the suppliers were time-barred from claiming under section 80 The ITCs claimed in the High Court directly against HMRC for the 25s and the dead period VAT The claim was: 1. a common law claim in the English law of unjust enrichment; and 2. in EU law relying on the ITCs San Giorgio right to reimbursement. Slide 9

10 The Investment Trust Companies Judgments of the High Court and Court of Appeal 1 The High Court 2 The Court of Appeal The ITCs claim against HMRC in the law of unjust enrichment succeeded in principle The ITCs claim against HMRC in the law of unjust enrichment succeeded in principle However, it was excluded by statute (section 80(7)) However, it was limited to the 75s The ITCs had an EU law right to recover the 100 To give effect to that right, section 80(7) had to be disapplied The claim however was capped by the section 80(4) time bar Section 80(7) did not exclude the claimants High Court claim Section 80(4) time bar did not apply The ITCs could recover the 75s in the dead period but not the 25s in any period The ITCs were entitled to recover the 25s but not the dead period VAT Slide 10

11 The Investment Trust Companies The Supreme Court The ITCs claim was dismissed. On the law of unjust enrichment: The ITCs had no direct claim in the law of unjust enrichment against HMRC because: HMRC was not enriched by the 100 it was only ever enriched by the 75s; any enrichment of HMRC was not at the expense of the ITCs; and section 80(7) excluded such claims in any event. In EU law: The ITCs had an EU law right to reimbursement of the 100. Obtaining reimbursement must not be impossible or excessively difficult. Reimbursement was achieved: of the 75s - from HMRC via the suppliers section 80 claims; of the 25s - from the suppliers. No recovery in the dead period against because of the section 80(4) time bar. Recovery of the 25s from suppliers was limited to 4 years where suppliers had relied on direct effect (by making a section 80 claim) and so reversed the tax treatment of the supply from taxable to exempt (with no input VAT recovery). There may be circumstances where it was not possible to claim against supplier e.g. insolvent supplier Slide 11

12 The Investment Trust Companies Implications Customers in such circumstances are required to have an effective remedy under EU law i.e that is not practically impossible or excessively difficult The remedy is for the 100 of the unlawfully levied tax There are circumstances where bringing a claim against a supplier might prove practically impossible or excessively difficult - an insolvent supplier is just one example What remains to be seen: What the other circumstances might be where a claim against a supplier is practically impossible or excessively difficult? What if HMRC rejects section 80 claims on the basis that they consider domestic law compatible with EU law? How the Supreme Court s application of their test of coordinated transactions applies to the VAT system in light of recent CJEU cases which makes clear that a supplier is merely a collector of VAT on behalf of the tax authority (e.g. Di Maura)? Unlikely to be the end of the road for customer claims. Slide 12

13 RGEX GmbH (C-374/16) and Butin (C- 375/16) Which address should be included on a supplier invoice? Due diligence requirements for input VAT 3 recovery. Slide 13

14 RGEX and Butin Background Which address should be listed on the invoice to allow input VAT recovery? What obligations are there on a taxpayer to verify supplier information? Links to the case law on MTIC RGEX and Butin: motor vehicles traders. input VAT deductions denied tax authority objected to the addresses stated on their suppliers invoices RGEX s supplier: alleged to be a ghost company no establishment at address shown letterbox address Butin s supplier: internet trader no car dealership operated at the trader s registered address RGEX: appealed and the Federal Finance Court decided to refer questions to the CJEU Butin : court of first instance found in favour of the taxpayer tax authority appealed and the appeal court decided to refer questions to the CJEU Slide 14

15 RGEX and Butin Questions referred to the CJEU 1. In order to exercise the right to deduct, which address should be used? Is a letterbox address sufficient? Does the supplier have to carry out an economic activity at that address? And what about internet traders? 2. If a taxpayer passes the Kittel test (i.e. did not know, and could not have known, of fraud in the supply chain) but the formal invoicing requirements are not met are they able to deduct? Does meeting the Kittel test mean that a taxpayer has done everything he could have to verify the accuracy of the invoice? 3. Does the legal system of a Member State which only considers the good faith of the taxpayer in a separate procedure to the tax adjudication procedure breach the principle of effectiveness? Slide 15

16 RGEX and Butin The Advocate-General s opinion Principles for input VAT recovery: claimant must be a taxable person; goods / services must be used for onward taxable supply; and supplier must be another taxable person. Clear that deduction must not be systematically denied if a formal condition is not satisfied followed PPUH Stehcemp (C-277/14). In any case, a taxpayer may rely on good faith if deduction is systemically denied. Full name and address requirement in Article 226(5) PVD should include any address at which the issuer of the invoice can be contacted. Additional checks, however, would be required where a person finds concrete indications which appear to point to fraud A taxpayer can be denied deduction for acting recklessly But due diligence should not be excessive or overly complex The length, complexity and costs associated with a special judicial procedure may create disproportionate difficulties for the taxpayer e.g. two or more sets of judicial proceedings for the same/related legal issues Slide 16

17 RGEX and Butin Key messages A taxpayer loses the right of deduction where he knew or should have known, that the transactions were connected with fraud (Kittel). Taxpayer has a legitimate expectation to deduction provided the Kittel test is met. Expectation is: identify those transactions where there is something evident that might give rise to suspicion that something is not quite right and to perform reasonable checks that are intended to confirm or allay those suspicions. The tax authority cannot expect the taxpayer to carry out the extensive and complex types of check that the tax authority itself would conduct. It is sufficient that the supplier may be promptly and effectively contacted at that address. Important not to lose sight of what we call the big picture AG s opinion offers some comfort but we still need to be vigilant. A tick box exercise is still not sufficient but technicalities should not be a barrier on their own. Slide 17

18 Finanzamt Bingen-Alzey v. Boehringer Ingelheim Pharma GmbH & Co. KG (C-462/16) AG Opinion Discounts reduce the taxable amount 4 Slide 18

19 Boehringer Background German manufacturer of pharmaceutical products Supplies products to pharmacies Where products are purchased from pharmacies by people with public insurance a discount is provided by the pharmacies to the insurers The pharmaceutical companies, including the taxpayer, are required to reimburse the discount to the pharmacies The German tax authority treats the discount paid to pharmacies by the taxpayer as a reduction in consideration Different VAT position for those with private medical insurance Same supply chain but the discount is instead given by the pharmaceutical companies (not the pharmacies) These discounts are NOT treated as a reduction in consideration The taxpayer paid the discounts and then adjusted for the reduction in consideration and the tax authority raised an assessment Question referred to the CJEU: Is a pharmaceutical company that supplies medical products entitled to a reduction of the taxable amount? Slide 19

20 Boehringer Public Health Insurance Private Health Insurance Discount reimbursed Pharmaceutical co. Pharmacies Reduction in consideration allowed for VAT Supply German Tax Authority Discount required to be granted even though not in chain of supply Pharmaceutical co/appellant Supply Reduction in consideration not allowed for VAT Discount Public Health Insurance Funds Supply Treated as purchasing products from pharmacies Treated as supplied to the public Insurance co not treated as purchasing products from pharmacies Insurance Co. Not treated as supplied to the public from insurance co simply reimburse the insured Pharmacies Insured Supply Public Slide 20

21 Boehringer The Advocate-General s Opinion 1 The absence of a contractual link between the taxpayer and the private insurance funds receiving the discount was irrelevant to the application of Article 90 PVD. The taxpayer was a mere temporary custodian of the part of the amount received that it was obliged to pay later to the funds as a rebate. 2 Looking at the economic reality was fundamental to the VAT systems 3 4 The fact that the insurance fund was not the direct beneficiary of the medical products supplied by the taxpayer did not break the direct link between the supply of those goods and the consideration received. 5 The VAT treatment of pharmaceutical supplies to publicly and privately insured persons are comparable situations that were being treated differently and there was no apparent objective justification (the principle of fiscal neutrality). VAT should be applied in relation to the actual value finally received by the supplier 6 Slide 21

22 Boehringer Implications There are a number of grounds on which suppliers paying away discounts to recipients other than those in the chain of supply should be permitted to reduce their output VAT Wide application of Elida Gibbs Focus on the economic reality of the supply chain Represents a departure from both HMRC's well-established policy on rebates in the pharmaceutical sector and also the position adopted by a number of other EU tax authorities. HMRC actively supported the German tax authority's position which is consistent with the increased attention HMRC has paid to the VAT treatment of such rebates in recent months. The question that remains is: whether the fact that the discount in this case was a statutory discount restricts its scope? See next case Slide 22

23 National Car Parks Limited v HMRC ([2017] UKUT 0247 (TCC)) Pay and display overpayments were liable to VAT 5 Slide 23

24 National Car Parks Background Case concerns the VAT treatment of amounts paid by NCPs customers in pay and display car parks which are in excess of the advertised hourly charge. NCP argued that the amounts overpaid were not consideration for the purpose of the taxable amount. The FTT found that: the overpayment by the customer was not voluntary; when cash was inserted and the button pressed, the customer knew what he was paying for; and there was a direct link between what the customer paid and what the customer received. The taxable amount was the full amount received. The taxpayer appealed to the UT. Before the UT the taxpayer argued that: the EU law concept of consideration had to be applied to the contract to determine the nature of the supply and price agreed; there was no direct link between the amount paid and the supply so the amount paid was not the consideration; and HMRC argued that the only test for consideration is whether there is a direct link. Any overpayment, they argued, was the agreed charge for the supply. the EU law concept of consideration also required quantitative connection. It did not exist because the same supply was made notwithstanding the excess or the amount of it. The excess payment was voluntary. Slide 24

25 National Car Parks The Upper Tribunal s decision 1 Article 73 PVD provides that the taxable amount is everything which constitutes consideration obtained for the supply. The question was what was paid not what could have been paid Consideration for VAT purposes did not bear the same meaning for the purposes of English contract law. What was printed on the ticket had limited value 2 The service and the value given are determined by the legal relationship between the supplier and the customer The contract was formed when the customer inserts money into the ticket machine and receives a ticket. The ticket grants the customer the right to park for one hour in return for paying not less than If the customer wishes to park for up to 3 hours, the customer must pay not less than The Appellant agrees to let the customer park for one hour for consideration ranging from 1.40 to 2.09, and whatever the customer pays within that range is consideration for VAT purposes. 3 The taxpayer s appeal was dismissed. Slide 25

26 National Car Parks Implications The UT looked to the EU VAT law, rather than the English contract law, concept of consideration. Overrules Kings Lynn Although it appears to follow the position adopted by the AG on Boehringer by focusing on the consideration actually received, it appears to depart with the contractual analysis favoured by the Supreme Court in Airtours and Secret Hotels2 by disregarding the express contractual terms However, it arguably aligns with the principles underpinning the bad debt relief scheme and cash accounting This case is likely to have wide impact in circumstances where a customer makes a voluntary overpayment to a machine e.g. vending machines which do not refund change Slide 26

27 PayPoint Collections Ltd and PayPoint Network Ltd v HMRC [2017] UKFTT 424 (TC) Scope of the money transfer exemption 6 Slide 27

28 PayPoint Background The taxpayer operates the Paypoint system - payment terminals which enable customers to pay utility bills and to purchase credit top-ups for utilities. PayPoint is comprised of two companies: Collections: collects the cash from the machines and sends it on to its clients (utility companies, e.g.). Network: provides the infrastructure the terminals, the software, branding, a call centre for help, etc; and is responsible for most of the Paypoint operations The dispute concerns the VAT liability of Paypoint s supplies. Item 1, Group 5, Schedule 9 exempts: The issue, transfer or receipt of, or any dealing with, money Note 1A excludes a supply of services which is prepatory to the carrying out of such a transaction HMRC considered that postpayment services provided by Network were exempt which the taxpayer disputed The services involved the polling of information from the PayPoint terminals each day and transmitting it to clients to enable them to adjust their customer accounts. Netting off was undertaken by the client and not Network Network simply provided the payment system and the network of agents to operate it. Receiving, collecting or transferring payments was provided by Collections. Slide 28

29 PayPoint The FTT s decision Network essentially ensured that the PayPoint system operated correctly. The Agent received the cash on behalf of the client. Netting off was undertaken by the client and not Network Network did not provide the service of receiving, collecting or transferring payments. There was a change in the legal position between the customer and the client. The question was whether Network s service had the effect of transferring funds from a customer to a client via an Agent. The location of the Paypoint terminals within the Agents premises and the transmission of the information to an Agents clients could not fall within the exemption. The appeal was allowed the services were standard-rated. Slide 29

30 PayPoint Implications Continuation of Axa, Bookit/NEC, etc The UT reviewed the case law and set out some key principles for the exemption, including: exemptions must be constructed narrowly; the services must have the effect of transferring funds and entail a change in the legal and financial situation; be not just a physical or technical supply; netting off an account is the same as a transfer; electronically transmitting information is not sufficient; and sums involved is not important. Careful analysis of the contractual terms, the money flows and the legal position re the ownership of the money. In particular, Network was never seen as being in possession of the money on its own behalf. Slide 30

31 The look ahead Slide 31

32 Any Questions? ITX Forum Slide 32

33 Contact details David Anderson T: +44 (0) E: Claire Millard T: +44 (0) E: Slide 33

34 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to the UK member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details CR-OS

Indirect Tax Forum Case Law Update

Indirect Tax Forum Case Law Update www.pwc.co.uk Case Law Update Prinal Nathwani and Holly Grantham Agenda 1. Introduction 2. National Roads Authority (C-344/15) 3. MVM Magyar Villamos Művek Zrt. (C-28/16) 4. DPAS Ltd (C-5/17) 5. Cost sharing