VAT insights - May 2023

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What is an economic activity for VAT purposes? There can be no more fundamental question than this in the context of the VAT rules. There have been countless cases on the question and one might be forgiven for thinking that, after 50 years, the position would be well understood. And yet, decisions at the highest level still have the capacity to surprise.

The CJEU has recently delivered two judgments in this context, both concerning Polish local authorities, Gmina O (Case C-612/21) and Gmina L (Case-616/21). These highlight the need to compare the activities taking place with the activities of a normal business operating in the same business in order to determine whether the supplies made for a consideration were made in the course of an economic activity. Since the local authorities in these cases had no intention of regularly providing the services and did so on uneconomic terms, the CJEU has held that the supplies were not made in the course of an economic activity.

As well as looking at these decisions on the meaning of economic activity, in this edition we also cover the following recent VAT developments:

• The correct categorisation of supplies made from EV charging stations
• Whether a taxpayer can appeal against HMRC's decision to retrospectively treat an option to tax as validly made.

We also have updates from across our European network, including 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.

Meaning of economic activity

In Gmina O (Case C-612/21) and Gmina L (Case-616/21), the CJEU has held that, in circumstances where a public authority arranges supplies for local residents which are subsidised by government funds, the uneconomic nature of the arrangements from the public authority's viewpoint meant that there was no economic activity. The Court highlighted the importance of comparing the activities of the public authority with an entrepreneur acting in the same business seeking to derive income of a permanent nature. In doing so, the Court's decision may indicate further restrictions on the scope of the concept of economic activity more generally.

Indeed, it is becoming increasingly difficult to interpret the CJEU's case-law on economic activity. The wording of Article 9(1) seems clear, "[a]ny activity of ... traders or persons supplying services ... shall be regarded as an 'economic activity'". Recent jurisprudence has focused on the subsequent sentence that "[t]he exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity" (emphasis added). A particular strand of recent CJEU case-law seems to interpret the term "in particular" to mean "exclusively" by making it a mandatory condition for economic activity to exist rather than an extension of the scope. This has required the development of the concept of "remuneration" as opposed to "consideration".

Remuneration is not a concept defined in the legislation or adequately in case-law. In particular, it seems objectively impossible to assess the difference between remuneration and consideration without considering the subjective intentions of the taxpayer. This contradicts a long strand of CJEU case-law stretching back to the Commission of the European Communities v. Kingdom of the Netherlands (Case-235/85) [1987] E.C.R. 1471 where the Court stated that the "scope of the term 'economic activities' is very wide, in as much as it covers all the services provided by the liberal professions and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or result" (emphasis added).

At the very least, this case highlights the case-by-case nature of the analysis of this aspect of the VAT rules and a possible restriction in the scope of economic activity where carried out occasionally and without any prospect of profit (even by businesses which otherwise carry on an economic activity).

Read our full review here

Supplies from electric vehicle (EV) charging stations

It can be tempting, when analysing the nature of a supply for VAT purposes, to separately identify various aspects of what is being provided and conclude that there is a complex supply of services whose character needs to be determined. The decision of the CJEU in Dyrektor Krajowej Informacji Skarbowej v P. in W (Case C-282/22), however, highlights that a supply should not be overly dissected to identify separate elements of service within the supply. In particular, in the case of a supply of goods, any element which is simply a necessary prerequisite to provision of the goods should not be seen as a separate element of the supply at all.

The supplier in this case argued that its supplies to users of its EV charging points involved a number of elements (such as the use of an online platform, technical support and use of a charging device integrated with the vehicle charging system) such that the supply should be considered a single complex supply of services.

However, the CJEU noted that the marketing of goods is always accompanied by a minimal supply of services, and as such it is only services other than those which necessarily accompany the marketing of those goods which may be taken into account for the purpose of assessing the part played by the supply of services within the whole of a complex supply which also involves the supply of goods.

In this case, the transaction consisted in the supply of electricity to the batteries of an EV, which constitutes a supply of goods. That supply necessarily requires the use of suitable charging devices integrated with the vehicle operating system. As such, provision of a charging device could not be seen as a separate element to the supply of electricity. Moreover, the other elements of the supply were merely ancillary to the supply of electricity, including both the technical support and the provision of the online platform enabling the user to reserve a connector, to view his or her transaction history and to purchase credits for the purpose of paying for recharging sessions.

Read our full review here

Retrospectively approving an option to tax

HMRC has the power to retrospectively approve an option to tax under paragraph 30 of Schedule 10. This power is normally used in favour of the taxpayer where all of the conditions for automatically opting were not met at the time the option was made and the taxpayer failed to obtain HMRC's permission. In Rolldean Estates v HMRC [2023] UKFTT 359, however, the taxpayer sought to prevent HMRC using its power to retrospectively validate Rolldean's option and rely on the fact the option was not valid in order to avoid accounting for VAT on the sale of the property. This was despite the fact that the reason the option had not been validly made was due to the fact that Rolldean had made exempt supplies of the property before opting, which it had failed to declare to HMRC.

Did Rolldean have any right of appeal in relation to HMRC's decision to exercise the power? VATA 1994 s.83(wb) provides that a person may appeal "any refusal of the Commissioners to grant any permission under, or otherwise to exercise in favour of a particular person any power conferred by, any provision of Part 1 of Schedule 10". Despite the fact that HMRC argued that the taxpayer did have a right of appeal in this case, the FTT disagreed. Section 83(wb) only provided a right of appeal where HMRC refuse to do something which a person has asked them to do. Here, HMRC had not refused to do anything, they had simply deemed the option to have effect.

In any event, there can be no real surprise that the FTT went on to hold that the decision to validate the option was entirely reasonable in the circumstances and that Rolldean was, by its original conduct in falsely confirming that it had not made any exempt supplies before opting, estopped from arguing the option was not validly exercised.

Read our full review here

The Netherlands: RETT exemption for the acquisition of shares in companies that hold "newly built" real estate

It is proposed that the real estate transfer tax (RETT) exemption for the purchase of "newly built" real estate, which based on a Dutch Supreme Court ruling also applies on the purchase of shares in companies that hold "newly built" real estate, is to be abolished for such purchases of shares. Effectively, this would mean that the Dutch Supreme Court ruling is superseded. A legislative proposal was released for public consultation earlier this year. The consultation period ended on 27 March 2023. The purchase of shares in companies that, for VAT purposes, own "building plots" (eg in forward funding transactions) would also be impacted by this repeal. For investment property, the current RETT rate is 10.4%.

It was noted during the consultation that the proposal could result in overkill in certain situations. The Dutch Spring Memorandum confirmed that a revised legislative proposal is being prepared with transitional rules to address this issue. It is expected that this proposal will be presented on the next Budget Day (September 2023) and the measure will enter into force on 1 January 2024. However, a postponed implementation date is still an option, given the complexities that have been highlighted with regard to the transitional rules.

Read our full review here

Other issues we have recently covered

The UK's implementation of the OECD Pillar Two rules
Leslie Mok and Gary Barnett's article for LexisNexis reviews the Finance Bill provisions for implementing the OECD Pillar Two top-up tax.

Taxation of DeFi lending and staking: consultation
The government is consulting on the introduction of a regime to disregard for tax purposes transactions involved in lending and staking cryptoassets.

Modernising stamp taxes on securities
The government is consulting on replacing stamp duty and SDRT with a single, modern stamp tax on transactions in securities.

Reserved Investor Fund consultation: tax
The government is consulting on the introduction of a new fund to be marketed to professional investors and certain other sophisticated investors only.

Dutch Spring Memorandum 2023
On 28 April 2023, the Dutch Ministry of Finance presented the 2023 Spring Memorandum containing a number of measures relevant to the taxation of Dutch real estate and real estate entities.

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.