Of all the topics that create difficulty and confusion in the world of VAT, perhaps the most notorious is the recovery of input VAT by a holding company. Despite cases at the highest level going back at least as far as the 1993 Polysar decision, there is still significant doubt about the principles to apply, particularly where they overlap with the VAT grouping rules.
If the holding company can neatly fit itself into the box for a holding company that intends to provide management services for consideration to its subsidiaries, then the position will generally be well settled. And if the holding company is a pure investment entity with no economic activities, then it is clear it cannot recover input VAT. But outside those scenarios lies a murky world of deeming provisions and uncertainty. What if the holding company joins the target’s VAT group? What if the time of supply of the received services is after it joins that group? To what extent can it rely on the taxable activities of the wider VAT group? The recent decision of the FTT in Ince Gordon Dadds deals with some of these issues, though whether the decision will hold up on appeal (if it is appealed) is an open question.
As well as looking the decision in Ince Gordon Dadds, in this edition we also cover the following recent VAT developments:
- The CJEU decision in Fenix confirming that the rules requiring platforms to account for output VAT on services provided by them is compatible with EU law
- The Court of Appeal decision in HMRC v Gray & Farrar International, that when seeking to characterise a single complex supply for VAT purposes, the primary test to apply is one based on the predominant element of the supply
- The FTT decision in Pavan Trading concerning the requirements to hold evidence of export (and a disappointing example of HMRC failing to correctly apply their own tertiary legislation)
- A CJEU decision on the extent to which services provided for a variable and uncertain amount are made for consideration
- Another CJEU decision, Euler Hermes, concerning the VAT implications where an insurer indemnifies bad debts
- Our response to HM Treasury’s consultation on the codification of the VAT exemption for fund management services.
We also have a number of updates from across our European network, including updates from the Netherlands.
In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with a link to our more detailed report.
If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch. Our contact details are at the bottom.
VAT groups, acquisitions and fund raising
The Ince Gordon Dadds case raises some important questions concerning the ability of a holding company to recover input VAT on the costs it incurs in acquiring subsidiaries. Though whether it satisfactorily answers those questions is less certain. In this case, Holdco had no independent economic activities, but argued that since it was joining the target’s active VAT group, the condition requiring economic activity was met. The FTT appears to have agreed with this proposition, holding that the Court of Appeal decision in BAA meant that economic activity of the VAT group and taxable supplies of the VAT group could be relied on as ‘downstream’ economic activities and supplies, in principle.
However, on the facts, the claim failed. Firstly, the FTT accepted HMRC’s argument that VAT grouping has the effect that all supplies are treated for VAT purposes as made to and by the representative member, but if a member of a VAT group incurs costs which it uses for non-economic activities, then the VAT on those costs still relates to the non-economic activities and VAT grouping does not change that. Secondly, to the extent that the costs in this case were used to raise funds, the use of those funds in acquiring further subsidiaries was too remote to meet the tests in Frank Smart to attribute the input VAT to future taxable activities.
Supplies of services via online platforms
The use of online platforms to deliver content is a growing sector of the economy. Article 9a of the VAT Implementing Regulations 282/2011 seeks to clarify the operation of Article 28 of the Principal VAT Directive in relation to electronically services provided via platforms and networks. It deems online platforms to be treated as acting as undisclosed agents when facilitating supplies of electronically supplied services, so that VAT is accountable on the full amounts received rather than merely on the commission charged by the platform.
In Fenix International v HMRC (Case C-695/20), the taxpayer sought to argue that Article 9a was not compliant with EU law and should not be applied to treat it as the supplier of the underlying services made via its platform. The CJEU has now rejected that contention and held that Article 9a is compliant with EU law.
The decision is extremely important, bearing as it does on an ever-growing aspect of e-commerce. And the fiscal importance is borne out by the fact that the AG recommended that, if the CJEU had disagreed and ultimately found that Art 9a was invalid, the scope of that decision should, exceptionally, only have apply prospectively for taxpayers other than Fenix due to the financial consequences for Member States.
Characterising a single complex supply for VAT purposes
Where a supplier provides a service involving a number of elements which together make up a single, complex supply for VAT purposes, how do you characterise that supply? This can be important for a number of aspects of the VAT system, such as, most commonly, determining its VAT liability but also, as in HMRC v Gray & Farrar International [2023] EWCA 121 determining the place of supply.
Following a review of recent CJEU jurisprudence, the Court of Appeal has held that there is now one main, mandatory test for determining this question: where it is possible to identify a predominant element within a single complex supply, the primary test for characterising the supply is the predominant element test determined from the viewpoint of a typical customer. Where there is no predominant element, then the hierarchy of alternative tests to apply are, second, the principal/ancillary test and, third, a test based on the overarching supply.
Just as interesting, perhaps, in this case, was the failure of the Upper Tribunal to correctly apply this test to the matchmaking services provided by Gray and Farrar (“G&F”). The Upper Tribunal had undertaken an artificial dissection of the introduction service supplied by G&F of a kind warned against by the CJEU. The starting point was the contractual arrangements and these clearly showed that G&F had agreed to make a minimum number of introductions. This was the predominant element, such that the services could not be categorised as the supplies of consultants or information (and were therefore not supplied outside the UK to non-UK customers).
This case also contains some interesting analysis from HMRC regarding how they define “services of consultants” as referred to in Article 59 (c) of the Principal VAT Directive, arguing that this should be limited to the “liberal professions”. The decision goes into some analysis as to whether HMRC’s approach is correct, concluding that the definition becomes irrelevant in the end because the predominant element is an introductory service. Nevertheless, the Court of Appeal’s comments that the services that consultants “principally and habitually supply” consist of the giving of “advice based on a high degree of expertise”, implies that HMRC’s current approach is too narrow.
VAT and uncertain, contingent consideration
Where a person enters into an event with the hope of winning a prize, such as a horse race, there is no supply – in Baštová (C-432/15), the CJEU held that a prize for placing in a horse race was not consideration for the entering of the horse in that race, but simply paid for the achievement of a certain result, namely the placing of the horse during competition, which is highly uncertain.
In A v Finanzamt X (Case C-713/21) the taxpayer entered into arrangements for the stabling, training and racing of horses. In addition to charging the owners an amount to reimburse costs, the taxpayer also received half of any winnings from prizes obtained by horses at competitions. On the basis of Baštová, the taxpayer did not account for VAT on these amounts.
The CJEU agreed with the German tax authorities that this scenario should be distinguished from the Bastova case. It was necessary to distinguish between prize money as consideration per se and the agreement to assign prize money as consideration. In the latter case, it is the assignment of the right itself which amounts to consideration for VAT purposes. Unfortunately, the decision does not go on to consider the implications of this analysis, which would, in principle, appear necessary to treat the supply as a form of barter requiring a valuation of the assignment of the right to receive 50% of any prize money upfront – rather than simply treating any monies received pursuant to the arrangement as the consideration.
If the logic in this case is followed by any tax authorities, there could be worrying implications for contingent fee arrangements, with the agreement itself (an assignment of a right according to this decision) crystallising a tax point.
VAT bad debt relief and insurance
The decision of the CJEU in Euler Hermes (Case C-482/21) that an insurer which indemnified bad debts, including a proportion of the VAT on those bad debts, was not entitled to recover input VAT on its payments will not be surprising. There was simply no basis for the insurer to claim the input VAT as its own input VAT. More interesting was the analysis of the Court that payment by the insurer amounted to third-party consideration such that the debts were not unpaid to that extent.
Although the Court refers to the service in this case as insurance, the arrangements appear very similar to debt factoring. The VAT treatment of debt factoring is a complex area. In the UK, HMRC guidance in Notice 701/49 states that, “A factor cannot claim bad debt relief for debts assigned to him by his client. The client cannot claim bad debt relief for a debt assigned to a factor but can do so if the factor re-assigns the debt to him”.
More generally, the analysis of the CJEU that the payment of an amount by an insurer under such arrangements amounts to third party consideration does not appear in line with the UK position. For example, the VAT Bad Debt Relief Manual states that, “If a business takes out an insurance or similar policy to pay out in the event of their customer’s debt going bad, this does not constitute a payment for the purposes of establishing whether it can claim bad debt relief.”
VAT treatment of fund management services
Last month, we reported on the government’s consultation on its plans to codify the definition of the existing VAT exemption for the management of special investment funds (SIF). In essence, the government intends to replace the existing definition with one that will not require reference back to EU law and jurisprudence, providing a basis on which investment managers are able to determine whether they fall within the exemption with greater certainty.
Simmons & Simmons responded to the consultation, noting that the consistent feedback from our clients has been that the tax framework for UK funds and fund management must be underpinned by a simple, straightforward and effective tax system. We therefore welcome the objective of seeking to clarify the SIF definition in UK domestic law, given the unclear position that has arisen both pre- and post-Brexit. However, we consider that, whilst positive, the limited nature of the consultation leaves certain items open, including the meaning of “management”, which is equally critical when seeking to identify the scope of the VAT exemption.
More fundamentally, consistent feedback from clients has been that any changes should protect the existing VAT position for UK managers of non-UK funds and that as part of seeking to establish the UK as a fund, rather than a manager, domicile for internationally-marketed funds, zero-rating of management services for such funds would be a critical piece of the jigsaw.
Evidence of export
There are parts of the VAT system that depend on law essentially made by HMRC (tertiary law) and contained, usually, in VAT Notices. One such example is in VAT Notice 703 which sets out conditions for the zero-rating of exports, including the need to ‘obtain official and commercial evidence of export ... within the specified time limits’. Given that this law is “made” by HMRC, it is somewhat embarrassing (to say the least) for HMRC to misunderstand it… but that is exactly what happened in Pavan Trading v HMRC [2023] UKFTT 79.
HMRC assessed Pavan Trading (PTL) to VAT on exports it made as it was unhappy with the export evidence provided to it and also on the basis that PTL had failed to provide that evidence to HMRC within three months. On this latter point, PTL reasonably pointed out that the requirement was simply to ‘obtain’ that evidence within three months, not to provide it to HMRC within three months. Unsurprisingly, the FTT agreed. There was simply no basis for HMRC’s argument that export evidence needed to be provided to HMRC within three months of export, which was ‘plainly wrong’. The FTT’s exasperation is clear where it notes that HMRC’s erroneous view of the law set out in their own notice had even been ‘perpetuated by the nonsense written by the review officer, and then compounded by HMRC’s statement of case and skeleton argument’.
The FTT was even more critical of HMRC’s rejection of the actual evidence of export provided to them, being ‘at a loss to understand’ why HMRC did not accept it and describing it as ‘a counsel of perfection for the provision of export documentation’.
Read the decision in full here
The Netherlands: consultation on real estate transactions
Under current Dutch legislation, it is possible to transfer new real estate through a share transaction in such a way that neither VAT nor real estate transfer tax (RETT) is due. This structure is of particular interest for buyers of new real estate who are unable to deduct input VAT - and for whom that VAT constitutes a cost – such as, landlords of homes, educational institutions, pension funds, insurance companies and healthcare providers.
According to the Dutch Government, the starting point is that VAT should be due when new real estate is being transferred and to combat this ‘scheme’, draft legislation has been drawn up. The proposed approach is to amend the exemption in the RETT in such a way that the acquisition of new immovable property through shares is no longer exempt from RETT. This means that when a sufficiently large shareholding in a real estate legal entity is acquired (at least one third), RETT is levied at the rate of 10.4%.
Implementation of this new legislation is proposed for 1 January 2024. The proceeds of this measure have been provisionally estimated at €155m. But before the draft legislation goes further in the political decision-making process, the Dutch Ministry of Finance is keen to receive comments from the ‘market’ and has published a consultation on the proposals which is open until Monday 27 March 2023.
Other issues we have recently covered
Online Sales Tax: response to the consultation
HM Treasury has published its response to the consultation on the possible introduction of an online sales tax which was launched in February 2022. The government had already announced in the Autumn Statement 2022 its decision not to proceed with an online sales tax and the consultation response document sets out more details on the responses received and the government’s decision.
EU list of non-cooperative jurisdictions for tax purposes updated
The EU Council announced further changes to the EU list of non-cooperative jurisdictions for tax purposes on 14 February 2023. The most recent update saw the addition of four new jurisdictions to the black list, including the British Virgin Islands, Costa Rica and the Russian Federation. The black list now contains sixteen jurisdictions. A number of jurisdictions, which have committed to agreeing necessary changes to their tax systems with the EU, remain on a second grey list. The grey list was also updated and three new jurisdictions were added, Albania, Aruba and Curaçao, and four removed, Barbados, Jamaica, North Macedonia and Uruguay.
UK implements OECD Model Disclosure Rules
The UK has now introduced regulations to implement the OECD Model Disclosure Rules in the UK. The rules will come into force from 28 March 2023 and replace the existing rules which implement part of the EU DAC6 rules. The new rules are heavily based on, and reliant on the definitions in, the OECD MDR and there is a look-back period to 25 June 2018. Compliance with the rules will require affected intermediaries to make reports to HMRC using the XML software made available by HMRC, which may prove administratively burdensome for intermediaries or taxpayers that do not regularly report other information (such as under the Common Reporting Standard) already.
Net zero and UK tax policy
On 13 January, Chris Skidmore MP published a report, Mission Zero: Independent Review of Net Zero. This report was commissioned by the government in September 2022 to consider how the net zero target might maximise economic growth whilst also increasing energy security and affordability for consumers and businesses. The Report contains a number of recommendations in relation to tax policy as well as highlighting a number of other areas where stakeholders made suggestions as to how tax changes might incentivise the move to net zero.
Taxation of restrictive undertakings and settlement payments
The FTT has held that payments for a restrictive undertaking in connection with an employment are taxable whether or not the undertaking restricts the conduct of or activities in connection with any employment. As such, payments made in a settlement agreement in connection with confidentiality and non-disclosure undertakings and in relation to dropping Employment Tribunal claims were subject to tax as employment income in full.
Spain approves new list of non-cooperative jurisdictions
The Spanish government has updated the list of non-cooperative jurisdictions, first published in 2021 to prevent and combat tax fraud. The updated list now includes 24 countries and territories considered non-cooperative jurisdictions.
Luxembourg: The tax treatment of the redemption of “alphabet” classes of shares
The Administrative Tribunal has confirmed that the redemption of a class of shares followed by its cancellation qualifies as a gain from the disposal of a participation. It is not treated as a distribution of profits, which would be subject to withholding tax, to the extent the redemption price does not exceed its fair market value.
Tax podcasts
Our contentious tax podcast series covering tax controversy and transfer pricing issues can be found here. More general tax podcasts can be found here.
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