Do services provided by a director to the company of which it is a board member amount to taxable supplies? Clearly if the director is also an employee then this will not be the case as Article 10 of the VAT Directive expressly provides that those services are not provided "independently". In TP (Case C‑288/22), the Advocate General has suggested that, even if the director is not an employee, the services of a member of the board of directors will not usually be carried out independently of the company of which it is a board member such that VAT will not be chargeable on directors' fees. If followed by the CJEU, this may call into question the correctness of the provision in VATA 1994 deeming the services of an office holder provided in the course of a business to give rise to taxable supplies for VAT purposes.
As well as looking at the recent decision in TP, in this edition we also cover the following recent VAT and indirect tax developments:
- Recent decisions involving the application of legitimate expectation arguments in relation to VAT cases
- The government's consultation on reforming the TMO
- A CJEU decision on the question whether a local spa tax amounted to consideration for supplies
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.
Please note that VAT Insights will be taking a short holiday in August, but will return at the end of September.
Directors' services
TP (Case C‑288/22) concerns services provided by a lawyer acting as a member of a board of directors of a number of companies. The Luxembourg tax authorities considered that he was making taxable supplies in return for the fees he received, but the AG has opined that his services were not carried out "independently" as required by Article 9 of the VAT Directive. In particular, the AG considered that Article 9 requires a "typological" interpretation, determining whether other activities fall within its scope by reference to the types of activity listed in Article 9 ('producers, traders or persons supplying services' or 'mining and agricultural activities and activities of the professions').
Applying this approach, the AG suggests that the typical activity of an independent taxable person is characterised by the fact that they assume their own economic risk and bear a risk of loss and profit personally. Typically, they, and not another person, decide on the scope of their activities. They are responsible for the success or failure and to that extent they use their own economic initiative. They decide which risks to take and how much time to invest in one project or another. This is not the case for the typical position of a member of a board of directors who receives his remuneration not for his own activities (for example as a lawyer), but as part of a collective body and where an independent assumption of risk appears lacking. In addition, the activities as part of the board cannot be carried out on the free market to other third parties, but can only benefit the company for which he was appointed as part of the board. The fact that TP also acted as a lawyer was not relevant to this question according to the AG.
There are two interesting aspects to the opinion. Firstly, it follows the recent trend to emphasise the typical aspects of an independent economic activity, focussing in particular on the elements of risk and reward. However, it is not clear that all businesses typically follow this pattern and this could, in principle, call into the question the VAT treatment of persons, such as consultants, who regularly work for businesses but do not in practice take on the risk of financial losses. Secondly, the opinion might cast doubt on VATA 1994 section 94(4), which provides that where a person, in the course or furtherance of a trade profession or vocation, accepts any office, services supplied by him as the holder of that office are treated as supplied in the course or furtherance of the trade, profession or vocation. Whilst the AG opinion (and any subsequent CJEU decision) are not directly relevant in the UK at this stage, they do remain persuasive. And the suggestion by the AG that any separate taxable activity should not "infect" the activity of the individual as a board member seems to run counter to VATA 1994 s.94(4).
VAT and legitimate expectation
Two recent cases have looked at the scope of legitimate expectation claims in the context of VAT.
In the first, R (on the application of Realreed Ltd) v HMRC [2023] EWHC 1572, the claimant sought to argue that HMRC's failure to question the claimant's exempt treatment of certain supplies of serviced accommodation during inspections over a number of years gave rise to a legitimate expectation that HMRC would not retrospectively assess the claimant to VAT on the correct basis. That suggestion was given short shrift by the High Court. There was no evidence that HMRC had given any assurance or representation that the treatment adopted by Realreed was correct and the mere failure by HMRC to spot the error could not give rise to a legitimate expectation.
Indeed, the Court considered (even if there had been a representation), there had been no detrimental reliance. The onus was on the claimant to determine the correct VAT treatment of its supplies and there was no indication that the claimant did anything different as a result of the inspections. The courts should not use legitimate expectation to reverse the burden of proof on the taxpayer, It is for the taxpayer to determine the correct treatment of its supplies. As a general rule, the fact that HMRC do not challenge the taxpayer's treatment of a particular supply on a particular occasion or occasions is not to be treated as shifting the burden from the taxpayer to HMRC.
In the second case, R (on the application of Glint Pay Services) v HMRC [2023] EWHC 1621, the High Court held that a business that operated a retail business allowing clients to buy and sell gold was not entitled to rely on the terms of the Memorandum of Understanding between the London Bullion Market Association (LBMA), London Platinum and Palladium Market and HMRC (MOU). On the facts, the MOU had not been directed at taxpayers such as Glint and as such it did not have a legitimate expectation that it could rely on its terms as opposed to the strict VAT provisions.
Whilst the decision that the MOU did not apply on its terms to Glint may be relatively straightforward, the decision does also suggest that it may be incumbent on taxpayers to check the application of guidance with HMRC in relation to individual situations before a legitimate expectation claim can be made. However, perhaps this should be seen in the particular light of this case, involving a novel business model, rather than suggesting there should be a general requirement to check the application of guidance to individual situations with HMRC, before a legitimate expectation claim can be made.
Read our Insights articles here and here
Reforming the TMO
The government is consulting on reforming the application of the Terminal Markets Order 1973 (TMO), which provides a VAT zero rate for certain wholesale commodity transactions made by members on named commodity exchanges or market associations. The consultation does not propose significant changes to the scope of the TMO but rather simply updating the existing legislation to better reflect current practice and ensure that it can be kept up-to-date more easily in future.
In particular, the government wishes to move away from list-based legislation and adopt a principle-based approach to the TMO in relation to defining what qualifies as: a recognised TMO commodity exchange or a recognised market association; a member of the market; and qualifying transactions that fall under the scope of the TMO. The consultation is open for responses until 12 September 2023.
Read our Insights article here
Local taxes and VAT
Can the imposition of a local tax amount to consideration for supplies of facilities made available by a local authority? It seems implausible and the CJEU has agreed with this assessment in Gemeinde A v Finanzamt (Case C‑344/22).
The applicant in this case was a state-recognised spa town whose spa administration qualified as a commercial business for the purposes of corporation tax laws. The applicant collected a spa tax in accordance with local by-laws in order to cover the costs of erecting and maintaining the facilities provided for spa and leisure purposes. Taking the view that the spa tax constituted consideration for the operation of the spa, the applicant claimed a deduction of VAT paid on services received by it which were connected with tourism.
In fact, the spa tax was payable by persons using accommodation in the town (whether or not they used the spa facilities) and the spa facilities could be used by anyone (not just those who had paid the spa tax). Clearly therefore there was no direct link between the spa tax and use of the facilities and the spa tax could not be consideration for the provision of those facilities.
The decision appears to be a straightforward application of the requirement for a direct link between the consideration charged and the services or goods supplied for there to be a supply for VAT purposes. Indeed, even if there had been a direct link in this case, it is perhaps questionable whether the activities would have amounted to an economic activity in any event.
Read our Insights article here
Spain: Spanish Supreme Court rules on full VAT adjustment in tax audits
The Spanish Supreme Court recently published a decision on 17 May 2023, which is an important step towards safeguarding the rights of taxpayers in cases where the Spanish Tax Agency (STA) determines that no VAT deduction is available. In this case, the taxpayer acquired plots of land on which VAT was charged by the seller and which was deducted by the purchaser. The STA rejected the VAT deduction claimed by the purchaser on the basis that the plots were not used for a VATable activity (no development took place). The STA also rejected the purchaser's claim to obtain a VAT refund on the basis that the VAT charged by the seller was actually not due (on the basis that the transfer was exempt from VAT).
According to the Supreme Court's decision, when the STA determines that VAT has been wrongly deducted, in the context of a tax audit or administrative procedure, the STA must also carry out the necessary actions to determine whether the taxpayer is entitled to a refund of unduly charged VAT, thereby fully rectifying the situation, without the need for the taxpayer to commence a new procedure for correcting the self-assessment and applying for a VAT refund. Beyond the specific scenario in this case, this landmark decision underlines the importance for the STA to adopt the most favourable approach for taxpayers and to ensure that their rights are protected, avoiding double taxation and unjust enrichment of the STA.
This decision has already been adopted by the highest administrative court (the "Tribunal Económico Administrativo-Central" or TEAC) in a subsequent ruling changing its previous approach to these cases. This change in the TEAC's approach and the Supreme Court's clearer position should serve as an important guideline for future VAT deduction cases, streamlining the process and reducing the administrative burden for taxpayers.
Other issues we have recently covered
Carried interest regimes: a European tax overview
Global asset managers continue to look to incentivise key executives through the award of carried interest. Those executives are increasingly based across Europe (as well as in the US and UK "head office" locations). Different jurisdictions have different regimes which apply to carried interest and the precise rules as to their scope can be complex. Our European tax overview identifies the regimes that do exist in a number of European jurisdictions in which we see the most interest for such incentives and sets out a brief overview of the operation of each of those regimes.
Nomad employees: new HMRC guidance
HMRC has published new guidance providing a number of examples involving employees of overseas entities working temporarily in the UK and considering whether the permanence condition of the fixed place of business permanent establishment (PE) test might be met in those scenarios. Whilst a welcome development, the guidance published in the International Manual at INTM264435 is ultimately limited in scope and businesses with employees working occasionally in the UK may still need to consider their position on a case by case basis. In addition, even where a fixed place of business PE is not established, the position regarding dependent agent PEs will separately need to be considered.
OECD announces Pillar Two safe harbours
The OECD has published further guidance on the application of the Pillar Two rules. Importantly, this guidance includes details of two safe harbour rules, one applying where a sufficiently rigorous qualified domestic top-up tax (QMDTT) is in place and the other a temporary limitation on the application of the undertaxed payment rules to an ultimate parent entity where there is a corporate income tax rate of 20% in place.
In addition, the OECD has agreed an Outcome Statement containing a package of measures to take forward the remaining elements of the Two Pillar solution. As well as setting out an agreed framework to progress the Two Pillar solution the Outcome Statement also commits members to refrain from imposing new digital services taxes or similar measures before 31 December 2024.
New UK/Luxembourg double tax treaty
The new UK/Luxembourg double tax treaty has been ratified by Luxembourg. The new treaty may have a significant impact on investors in UK real estate held through Luxembourg structures, but also contains potentially beneficial withholding tax changes. Affected taxpayers have until April 2024 to review their structures and implement any appropriate steps to mitigate the impact of the new treaty.
Spanish tax authorities cannot override tax residence certificates
The Spanish Supreme Court has confirmed that the Spanish Tax Authorities (STA) cannot simply override a tax residence certificate issued by a foreign tax administration for the purposes of Double Tax Treaties (DTT) on the basis of Spanish domestic tax residence indicia. In all such cases, the STA must apply the tie-break provisions included in the relevant DTT instead.
Tax incentives for occupational health
The UK government has published a consultation seeking views on expanding the scope of tax incentives to incentivise employers to provide access to occupational health (OH) services for their employees. The consultation puts forward a number of proposals to extend existing exemptions from the benefit in kind rules, in particular. However, it also recognises that there may be alternative views and support for different tax policy options that could help to deliver on the objective of increasing the provision of OH and therefore welcomes views on whether there are alternative tax incentives that would be more effective.
German tax changes relevant to asset managers
The German Federal Ministry of Finance (Bundesfinanzministerium) has recently published a number of draft bills and a protocol, which will introduce a number of changes to German tax rules which are relevant for the asset management industry.
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.
.jpg?crop=300,495&format=webply&auto=webp)
_11zon.jpg?crop=300,495&format=webply&auto=webp)
.jpg?crop=300,495&format=webply&auto=webp)
_11zon.jpg?crop=300,495&format=webply&auto=webp)
