VAT and free employee incentives

The CJEU has held that the transfer of retail vouchers by a company to its employees in recognition of and to reward performance is excluded from the scope of Article 26(1)(b) of the Principal VAT Directive (2006/112/EC): GE Aircraft Engine Services Ltd v HMRC (Case C 607/20). The intention to incentivise employees as a means of improving the performance and profitability of the business constituted a sufficient business purpose to take the supply outside the scope of the deemed supply rule in Article 26(1)(d).

Background

GE operated an employee awards system under which a nominee for an award would be sent a link to a website on which the successful employee could select a retail voucher from a range of listed (and participating) retailers. Once selected, the voucher could only be redeemed at the selected retailer.

HMRC took the view that this represented a gift of awards which, for VAT purposes, fell within the scope of Article 26(1)(d) which deems “the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business” to be a supply of services for a consideration. As such, HMRC required GE to account for output VAT on the vouchers. GE argued that the gift of the vouchers to employees did not fall within the scope of this provision as the vouchers were provided for business purposes in order to incentivise employees. The FTT referred the matter to the CJEU.

AG opinion

The AG opined that Article 26(1)(d) did, in principle, apply to this type of award, despite the business motivations of GE in providing the award. Based on the earlier caselaw of the CJEU (including Fillibeck (Case C-258/95) and Danfoss and AstraZeneca (Case C-371/07)), the AG considered that, to constitute a business purpose, the service provided should be ‘necessary’ in the light of that particular taxable person’s business. Necessity in this context required the existence of a link between a service provided free of charge and the taxable person’s economic activity and the presence of control over the use of that service to ensure that it is used in relation to or in furtherance of the taxable person’s economic activity.

However, the AG went onto suggest that a proper view of the nature of the transaction involving the grant of the voucher may well lead to the conclusion that it did not involve a chargeable transaction for VAT purposes at all. In particular, the AG noted that if Article 26(1)(d) did apply in such circumstances, this would lead to VAT being charged twice on essentially the same sum and that would very much go against the underlying principles of the VAT system.

Decision of the CJEU

The CJEU has, unusually, ignored the advice of the AG and held that the grant of retail vouchers to incentivise employees does not fall within the scope of Article 26(1)(d). Less unusually, the Court has provided very limited analysis of its reasons.

The Court noted that the purpose of the deemed supply rule in Article 26(1)(d) is to ensure equal treatment between a taxable person who applies goods or services for their own private use (or their staff), on the one hand, and a final consumer who acquires goods or services, on the other. Article 26(1)(a) prevents a taxable person who has been able to deduct VAT on the purchase of goods on the basis that they are to be used for their business from escaping payment of VAT when they apply those goods for their own private use or those of their staff.

Determining whether Article 26(1)(d) applied on the facts depended on assessment of all the circumstances in which the incentive programme took place and, in particular, the nature and objectives of that programme. In the present case, the Court noted that the rewards were designed by GE with the aim of improving the performance of its employees and, therefore, of contributing to the better profitability of the business. The setting up of that programme was dictated by business considerations and the pursuit of additional profits, the advantage for employees being merely incidental to the needs of the business.

Whilst it was clear that, if account had to be taken only of the use made of them, the retail vouchers would have to be regarded as being for the employees’ private use, that was not the correct question. The award of those vouchers did not take place for the employees’ private use. The award free of charge of the retail vouchers to employees was intended to increase the performance of employees and, therefore, lead to the proper functioning and profitability of the business, with the result that the Court held that the supply of services is not carried out for purposes other than those of the business and, therefore, does not fall within the scope of Article 26(1)(b).

In addition, the Court noted that since, in these circumstances, retailers in receipt of vouchers would account for output VAT on the value of the retail vouchers redeemed, the principle of fiscal neutrality was not infringed by holding that Article 26(1)(d) did not apply in these circumstances.

Comment

The decision is clearly welcome and, in the circumstances, prevents a potential double charge to VAT occurring. However, the lack of any meaningful analysis of the particular provision is disappointing and may leave room for further disputes in future.

In particular, as the AG pointed out, the EU law wording of Article 26(1)(b) does appear to start from the premise that all supplies of services free of charge by a taxable person to their staff should be treated as a deemed supply of services for consideration and then “more generally, for purposes other than those of his business”. The assumption made by the CJEU appears to be that the first part of Article 26(1)(d) also assumes that those supplies to employees must be for non-business purposes, but this is not expressly made clear. Equally, the failure to clearly distinguish earlier caselaw in Fillibeck and Danfoss and AstraZeneca and rebut the analysis of the AG’s interpretation of those decisions will continue to create uncertainties in this area.

From a UK perspective at least, the decision does suggest that the UK has correctly implemented this provision in the Supply of Services Order 1993/1507 where the drafting removes any prima facie assumption with regard to supplies to staff and instead refers to the use of the services “for a purpose other than the purpose of the business”.

Businesses which may have accounted for output VAT on free goods or services provided to employees in the past should consider whether this decision of the CJEU requires a reconsideration of that past treatment.