VAT insights - June 2023

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The question of what is and what is not real property is often a complicated question and the answer will almost always depend on individual national rules. This is the reason that VAT adopts an autonomous meaning for concepts such as “immovable property”, which may differ from Member State to Member State. It is important that VAT rules are applied consistently across the EU, irrespective of individual national rules.

A particular area of difficulty can be fixtures, which (for example) may be treated as forming part of the land in the UK (and recall that the UK VAT rules are still to be construed consistently with EU law to the extent that they have not been modified – for the time being at least (more on that below)). In Maierhoffer (C-315/00) the ECJ held that the term “immovable property” must be given a distinct Community interpretation, not dependent on national law. However, the position is complicated by the existence of an exception to the exemption for the letting and leasing of immovable property for “the hiring of tools and machines permanently fixed” to the property. These rules formed the background to the recent “German Turkey Barn” case of Finanzamt X v Y (Case C-516/21) where the CJEU has confirmed that the single supply rule will, in principle, override this exception and treat fixtures as part of the supply of immovable property in appropriate cases.

As well as looking at VAT treatment of fixtures supplied with land, in this edition we also cover the following recent VAT developments:

• A CJEU decision on the application of the rules requiring adjustment of an initial input VAT recovery to the situation where goods are later destroyed or disposed of as unsuitable for use or resale
• Latest developments in relation to the proposed Retained EU Law (Revocation and Reform) Bill
• The Commission’s work plan for the year ahead.

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

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.

Fixed plant and machinery

Article 135(2)(c) of the Principal VAT Directive exclude from the scope of the exemption for the leasing and letting of immovable property
“the hiring of tools and machinery permanently fixed”. On the basis of this, the German tax authorities sought to charge VAT on fixed plant and machinery installed in barns adapted for the rearing of turkeys in Finanzamt X v Y (Case C-516/21) aka “the German Turkey Barn case”.

Despite this specific exclusion, the CJEU has confirmed that the single supply principles takes precedence and where, as in this case, the fixed plant and machinery is ancillary to the supply of the property (which is the principal supply), then it will be taxed at the same VAT rate.

This treatment is in line with the UK treatment of fixtures. Notice 742 para 7.9 states that “If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they're being supplied”.

There have been a number of attempts both by tax authorities and taxpayers to restrict the application of the single supply rules in recent years, following the successful arguments along these lines in the French undertakers case (EC v France (Case C-94/09)) and Talacre Beach Caravan Sales (Case C-251/05). These further cases have generally been unsuccessful however and it is clear that such treatment will require there to be ‘concrete and specific aspects’ of a supply for which legislation has provided a particular VAT treatment which, as a matter of statutory construction, overrides the normal application of the same rate of VAT to all aspects of a single supply. It is perhaps somewhat surprising, therefore, that these were not referred to in the course of the judgment.

Read our full review here

Input VAT and destroyed goods

Where a business can no longer use goods that it had originally purchased for its business, and disposes of them, should it be required to adjust its initial input VAT recovery on those goods? Common sense says “no” – the VAT system is designed to relieve traders of the burden of VAT on goods and services intended for use in their taxable business and, just as expenditure incurred on a project that ultimately is uneconomic and abandoned remains deductible, so should input VAT on goods which can no longer be used.

In Balgarska telekomunikatsionna kompania’ EAD v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Sofia (Case C-127/22) the Hungarian tax authorities sought to assess a company for input VAT it had initially recovered on goods which were later sold as scrap or destroyed on the basis of local Bulgarian VAT rules. The taxpayer, however, successfully argued that these provisions were contrary to the Principal VAT Directive (PVD).

Articles 184 and 185 of the PVD deal with the adjustment of input VAT recovery where there is a change in the factors used to determine the original amount deducted. Article 185(2) provides that no adjustment should be made “in the case of destruction, loss or theft of property duly proved or confirmed”. The CJEU has held that there the taxpayer’s situation was covered by this exception and there is nothing in the wording of Article 185 that indicates it should be limited to the destruction of goods that is beyond the control of the taxable person. (As regards sale of goods for scrap, the CJEU confirmed that there was no change in the circumstances requiring any adjustment to the initial VAT recovery – it made no difference that they were sold at a lower value for scrap.)

The UK VAT Regulations 1995 which provide for the adjustment of input VAT on change of use do not specifically deal with the position on the loss or destruction of goods. However, it is understood that HMRC would not normally expect any adjustment in these circumstances (or indeed for an output VAT charge under VATA 1994 Schedule 4 paragraph 5 to arise where goods are disposed of in these circumstances provided that there is evidence of the destruction).

Read our full review here

Retained EU Law (Revocation and Reform) Bill

In 2022, the UK government introduced a Bill, the Retained EU Law (Revocation and Reform) Bill, to end the status of retained EU law from the end of 2023 and replace it with the concept of “assimilated law”. The government pointed out that the concept of “retained EU law” was never intended to sit on the statute book indefinitely and it intended to end the special status of retained EU Law on 31 December 2023. The Bill was to abolish this special status and enable the government to amend more easily, repeal and replace retained EU Law. In essence, retained EU law was to be either removed from or “assimilated” into UK law by 31 December 2023, subject to review and extension until 2026.

The government has now, however, announced that the original sunset clause to remove all retained EU law except that explicitly made part of UK law will no longer form part of the Bill. The announcement on 10 May 2023 explained that “with the growing volume of REUL being identified, and the risks of legal uncertainty posed by sunsetting instruments made under EU law, it has become clear that the programme was becoming more about reducing legal risk by preserving EU laws than prioritising meaningful reform”. The sunset clause will now be replaced with a list of the retained EU laws that the government intends to revoke under the Bill at the end of 2023.

VAT is, in essence, entirely derived from the EU VAT Directives. As such, under the original proposals, any VAT regulations would have expired from 31 December 2023 unless they were preserved in the meantime or unless special provision was made to extend their application until 2026.
The government website originally made it clear that it would introduce a “bespoke legislative approach” for retained EU law concerning VAT, excise and customs duty in a future Finance Bill. Following the changes announced in May 2023, it is now uncertain what approach the government will take in relation to VAT provisions that are retained EU law, but what is clear is that this will be an important area for practitioners to watch.

DG TAXUD 2023 programme

The European Commission has published its DG Tax and Customs Union Management plan for 2023, which includes a number of developments in the indirect tax area. In particular, the plan confirms that DG TAXUD will support the work to finalise technical details of the EU CBAM and will continue to provide guidance and explanations to Member States seeking derogations from EU excise duties and VAT rates for environmental and climate friendly products. The Commission also hopes to secure an agreement on its VAT in the Digital Age package in the coming year. Perhaps most notable by its exclusion, however, is any mention of the Commission’s review of the VAT treatment of financial services.

On customs duties, DG TAXUD intends to present, in the first half of 2023, the biggest reform of the EU Customs Union to make the Customs Union fit for a more globalised, digitalised and geopolitical world, including simplifying processes, improving risk management, exploiting the full potential of data sharing and creating and improved governance structure. Digitalisation will be a key part of this reform involving development of IT systems needed for the reforms. The Commission will also continue to make efforts for the implementation of the EU-UK Trade Co-operation Agreement on VAT administrative co-operation and tax debt recovery assistance.

There are also many announcements in the direct tax area: for more details see our Insights article.

Spain: Use and enjoyment rule

In a surprise move, Law 13/2023 has introduced a significant amendment to Spanish VAT Law. As from 26 May 2023, the use and enjoyment rule will no longer apply to B2B supplies of insurance and financial services.

The use and enjoyment rule was modified in the 2023 Budget Bill removing most categories of services from its scope in relation to B2B supplies. However, at that stage, B2B supplies of insurance and financial services were specifically left within the scope of the use and enjoyment rule. Now, less than five months later, in a law designed to implement the DAC7 regulations in Spain, the government has amended the use and enjoyment rule again to exclude B2B supplies of insurance and financial services.

From 26 May 2023 onwards, only insurance and financial services provided to consumers (B2C) will be subject to the use and enjoyment rule. This amendment will certainly be welcomed by the Spanish insurance and financial sector. In particular, providers of financial or insurance services to non-EU businesses/entrepreneurs will benefit from the certainty of being able to recover input VAT borne in Spain in relation to such supplies.

Other issues we have recently covered

Judicial review and HMRC ESCs
The Court of Appeal has provided guidance on characteristics to be attributed to the “ordinarily sophisticated taxpayer” for the test applied in claims based on legitimate expectation in Murphy v HMRC [2023] EWCA Civ 497. The decision, concerning the application of an extra statutory concession (ESC), highlights that HMRC’s long-standing practice on the application of the concession will not be relevant to its correct interpretation where that practice was not visible to the general body of taxpayers. The decision also indicates that other factors, such as incompatibility of HMRC’s interpretation with EU law, may be relevant to the interpretation of a concession.

Unallowable purpose: new HMRC guidance
HMRC have substantially revised and expanded their guidance on their approach to the question whether a loan relationship has an unallowable purpose. The guidance, in the Corporate Finance Manual, has been updated following recent court decisions and, it appears, in the light of a wider approach by HMRC to the application of this anti-avoidance provision. In particular, the guidance now includes substantially new sections on how “purpose” is to be determined for the purposes of the application of the rules, what is the main purpose of arrangements, how HMRC will approach the question whether a loan relationship has an unallowable purpose and many more examples of the application of the rules.

Special circumstances and penalty reductions
The Upper Tribunal has held that the FTT was wrong not to reject as irrelevant a notification and prepayment of tax, as well as the size of the penalty imposed, in determining whether there were special circumstances that might justify a reduction of a tax geared penalty. As a result, the Upper Tribunal has remitted the matter to a differently constituted FTT to reconsider the question whether the penalties should be reduced on the basis of the existence of "special circumstances".

Hydro-electric scheme: capital allowances
The Supreme Court has held that expenditure on building various underground conduits and tunnels in the Glendoe Hydroelectric scheme did qualify for capital allowances. In a decision that could be significant for the renewable energy sector, the Court has held that the exclusions for “tunnels” and “aqueducts” in the capital allowances legislation did not apply to the structures constructed by SSE as part of the power plant. The Court has held that, read in context, the references to tunnels and aqueducts should be limited to, broadly, where they are used for transportation and not where they are part of an engineering complex for the generation of electricity.

Withholding tax and UK source interest
The Upper Tribunal has confirmed the decision of the FTT that interest on loans which were assigned retained its character as UK source interest in Hargreaves Property Holdings Ltd v HMRC [2023] UKUT 120. The decision also considers other aspects of the requirement to withhold tax on payments of yearly interest, including its interaction with the UK/Guernsey double tax treaty and the question of beneficial entitlement for the exemption for payments to UK resident companies.

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