Reverse charge and services received for a non-economic activity

The ECJ has followed the AG opinion in the Wellcome Trust case and held that a taxable person receiving supplies of services from outside the EU for the purposes of a non-economic activity is nevertheless required to account for VAT under the reverse charge mechanism in relation to those services: HMRC v Wellcome Trust Ltd (Case C‑459/19). The Court rejected the contention that the recipient of the supply was not a "taxable person acting as such" in those circumstances within the meaning of Article 44 of the Principal VAT Directive (PVD). As such, the place of supply was the UK.

The Court held that the deeming provisions in Article 43 of the PVD override the more straightforward interpretation of that phrase when applied to a taxable person acting solely in relation to its non-economic activities and that such an interpretation is in line with the intention of the legislation to apply the "destination principle" very widely in this context.

Background

The decision is the latest development in a long running series of cases between HMRC and Wellcome Trust Ltd (WLT) concerning the investment activities of WLT. WLT is the trustee of a charitable trust, the Wellcome Trust, which makes grants for medical research. It receives income from its investments and it also has a number of comparatively minor activities including sales, catering and rental of properties in respect of which it is registered for VAT. The investment income it receives is predominantly from overseas investments in relation to which WLT utilises the services of investment managers from both within and outside the EU.

In the earlier decision in Wellcome Trust (Case C‑155/94), the ECJ held that an activity consisting in the purchase and sale of shares and other securities by a trustee in the course of the management of the assets of a charitable trust did not amount to an economic activity - it was not a "taxable person acting as such" for the purposes of Article 2(1) of the PVD. As a result of that decision, WLT was denied input tax recovery in respect of the entirety of the investment management service costs incurred in relation to its non-EU portfolio.

As a result of that decision, WLT sought to recover the VAT it had accounted for under the reverse charge mechanism on the basis that the place of supply of those services was not in the UK. Article 44 of the PVD provided that the place of supply of services "to a taxable person acting as such" is the place where that person has established his business. WLT contended that, since it was not a taxable person acting as such for the purposes of Article 2(1) in relation to its investment activities, neither was it a taxable person "acting as such" for the purposes of the place of supply rules in Article 44 when receiving supplies for those activities.

It was agreed that when WLT purchased investment services from non-EU suppliers it did so exclusively for the purposes of its non-economic business activity. It was also agreed that WLT is a taxable person within the meaning of Articles 2 of the VAT Directive and that its non-economic activities are not private activities, but rather business activities.

WLT succeeded in its argument before the FTT, but the Upper Tribunal decided to refer questions over the correct interpretation of Article 44 to the ECJ. The Advocate General opined that the correct interpretation of Article 44 in these circumstances was that WLT was a "taxable person acting as such" and the place of supply was the UK.

Decision of the Court

The central question raised by the referral is essentially whether Article 44 of the PVD must be interpreted as meaning that a taxable person such as WLT which carries out a non-economic business activity must be regarded as 'a taxable person acting as such' when it acquires services from outside the EU for the purposes of that activity.

WLT essentially argued that the phrase "taxable person acting as such" should be construed in the same way in Article 2(1) and Article 44. That terminology presupposes a distinction between taxable persons acting in an economic capacity and a non-economic capacity.

The Court, however, agreed with the AG's analysis and has rejected that seemingly attractive argument. In particular, the Court noted that Article 43 specifically provides that, for the purpose of applying the rules concerning the place of supply of services, a taxable person who carries out both taxable supplies of services and activities that are not considered to be taxable supplies "shall be regarded as a taxable person in respect of all services rendered to him". It was clear therefore that the legislation included an "extended and derogating definition of the concept of 'taxable person' solely for the purpose of applying the rules concerning the place of supply of services". It was clear from Article 43 that the expression 'taxable person acting as such' within the meaning of Article 44 carried a different, and wider, meaning from that which it has under Article 2(1).

Therefore, the ECJ concluded that a taxable person may be acting as such, within the meaning of Article 44, even when he is acting for the purposes of his non-economic activities.

However, it was not the case that Articles 43 and 44 required taxable persons always to be treated as such. Where a taxable person receives services 'for his own personal use or for that of his staff' (rather than non-taxable business purposes), then it would not be the case that they were acting as a taxable person for the purposes of Article 44. The use of the term 'acting as such' in Article 44 serves to exclude services supplied to a taxable person private purposes.  The term 'acting as such' does not exclude from Article 44 taxable persons in receipt of services for non-economic business purposes, however.

The ECJ concluded therefore that where WLT received services from outside the EU for the purposes of its business (but non-taxable) activities, it was treated as a taxable person acting as such for the purposes of Article 44 and that those supplies of services were deemed to be supplied in the UK where WLT was established.

Comment

It is perhaps rather surprising that the exact same wording in two parts of the PVD should bear different meanings and one can certainly sympathise with WLT and their argument that if they were not a "taxable person acting as such" in relation to their investment activities then they should be treated in the same way in relation to the services they receive for those activities.

However, the Court has held that the deeming provisions in Article 43 override that simple and attractive argument - which is perhaps an argument as to why deeming provisions (which so often appear to create confusion in interpretation) should be avoided in legislation wherever possible.