When seeking to obtain credit for input VAT, it is necessary to attribute it to activities by reference to the direct and immediate link test, where possible. In the 1995 ECJ decision in BLP (Case C-4/94), the Court held that it was necessary to ignore the overall aim or purpose of a transaction and attribute input VAT to the most immediate transaction - in that case a share sale. However, the recent Upper Tribunal decision in HMRC v Hotel La Tour Ltd [2023] UKUT 178 shows just how far the law has developed since BLP. In practice, the chain-breaking effect of the share sale in Hotel La Tour was ignored on the facts as the ultimate purpose of the sale was to raise funds for a taxable business endeavour. So, what of BLP? It may not technically be dead, but it appears to be about as active as the proverbial parrot in Monty Python's Pet Shop Sketch!
As well as looking at the recent decision in Hotel La Tour, in this edition we also cover the following recent VAT and indirect tax developments:
- HMRC's power to cancel a VAT registration where it is being used to assist fraudulent activities.
- The extent of the VAT exemption for insurance transactions in the context of life insurance products.
- The ability of a customer to recover overpaid VAT from the tax authorities where it is prevented from recovering from its supplier due to time limits.
- An instructive case on the need for contractual changes to match the economic and commercial reality of arrangements.
- An AG opinion on the responsibility of a business where VAT invoices are fraudulently issued in its name.
We also have updates from across our European network.
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.
Input VAT and share sales to raise funds
In order to fund the development of a hotel in Milton Keynes, Hotel La Tour decided to sell the shares in its subsidiary. In so doing, it incurred input VAT. Was that input VAT attributable to the exempt sale of shares or could it be attributed to the long term taxable business of developing the hotel? HMRC relied on the ECJ decision in BLP to the effect that the ultimate purpose was not relevant to the attribution of the input VAT. However, the Upper Tribunal has held that where the purpose of the sale is to raise finance for a taxable business activity, then the input VAT should be recoverable unless the input VAT forms a cost component of the share sale. The case law of the CJEU had clearly moved on since BLP, which was no longer determinative of the position.
Equally interesting is the restrictive approach the Upper Tribunal took to the identification of a cost component in this context. In essence, the Tribunal has suggested that, in the context of a normal share sale, where the price is determined by reference to profits or assets, for example, it would be very unusual for the associated input VAT to be a cost component of the share sale.
Read our Insights articles here
Cancellation of a VAT registration and abuse
It is clear that the abuse of rights principle allows a tax authority to disregard transactions and make a taxpayer liable for VAT lost to fraud where it knew or should have known of that fraudulent activity. But what about cancelling a taxpayer's VAT registration altogether? In Impact Contracting Solutions Ltd v HMRC [2023] UKUT 215, the UT held that HMRC did have that power, even where the trader made otherwise genuine taxable supplies. The decision highlights the wide-ranging nature of the abuse of rights principle in relation to VAT and the ability of tax authorities to counter abusive arrangements where a taxpayer knew or should have known that they are involved in such arrangements.
Moreover, the decision accepts the continuing status of the Halifax principle in UK law following Brexit, albeit without any detailed argument on the interpretation of the provisions of the Taxation (Cross Border Trade) Act 2018.
Read our Insights article here
Fees paid to SIPP administrator not VAT exempt
There has been a long running series of cases dealing with the extent to which pension products might (or might not) benefit from VAT exemption. Some of those cases (such as United Biscuits) depend on the fact that some pension schemes might be structured as life insurance. Intelligent Money Ltd v HMRC [2023] UKUT 236 is another such case - and is another such case that has failed.
In essence, IM argued that since its product qualified as insurance for general legal purposes, it must benefit from the VAT exemption for insurance. However, the Upper Tribunal has held that "insurance" has a particular meaning for VAT purposes which must involve the insurer bearing the cost of the insured risk or contingent event. Under a SIPP, the amounts paid out as benefits came from the member's own funds and so the SIPP could not amount to an insurance arrangement for VAT purposes.
However, the Tribunal fell short of considering that all life insurance arrangements fall outside the scope of the VAT exemption. If it had had to decide the point, it would have held that a distinction should be drawn between life insurance where the premiums become owned by the insurance company and the cost of the benefits is made out of the insurance company's own resources (even if the amount payable is notionally determined by reference to the value of underlying investments) and a case in which the premiums remain substantially owned by the insured person and the benefits are paid out of those funds.
Read our Insights article here
Recovery of overpaid VAT by a customer
In Reemtsma Cigarettenfabriken (Case C‑35/05)), the CJEU held that a customer should be able to recover overpaid VAT directly from the tax authorities where it was impossible or excessively difficult to do so from its supplier, in particular in the case of the insolvency of the supplier. The CJEU has now expanded that principle to situations where that difficulty arises due to the operation of civil law limitation periods in Schütte v Finanzamt Brilon (Case C‑453/22).
The German tax authorities in this case reduced the amount of input VAT recoverable by the taxpayer following a decision that a lower rate of VAT applied to both supplies made and received by the taxpayer. However, the taxpayer was no longer able to recover the overpaid VAT from its suppliers due to the operation of civil law time limits and so successfully sought to prevent the German tax authorities restricting its input VAT recovery (the VAT had been fully accounted for to the tax authorities).
Whilst the decision is a helpful precedent in this area, clearly taxpayers would be better advised, where possible, to bring protective claims against their suppliers rather than rely on the Reemstma principle.
Read our Insights article here.
VAT, agency and economic reality
It is tempting to think that it is possible to change the unwanted VAT treatment of a transaction purely by tweaking the contractual terms. The decision in All Answers Ltd v HMRC [2023] UKFTT 737 is a reminder that changing the contractual terms will only change the VAT treatment if those changes have an impact on the nature of the supplies and accord with the economic reality of the situation.
All Answers (AA) operated a website for ordering bespoke academic works such as essays, dissertations and coursework. A 2018 decision of the Upper Tribunal held that those supplies were made to customers by AA and not the writer such that AA was required to account for VAT on the whole of the payments received. Following that decision, AA introduced changes to its contracts including: changes to the IP arrangements so that IP remained with the writer; and including an explicit contractual term in the contracts with writers stating that accepting a job resulted in a binding contract between the writer and the customer.
The FTT has held that those changes did not affect the supplies made. The core obligations to the customer remained with AA and not the writer (who was unknown to the customer) and there was no basis to give effect to the clause providing that a contract arose between writer and customer. Merely stating that a person is acting as agent does not necessarily cause an agency arrangement to arise - particularly where the customer and purported principal are entirely unknown to each other.
Read our Insights article here.
Fraudulent VAT invoices issued in a business' name
If someone issues fraudulent VAT invoices in a business' name without their knowledge, one would assume that they could not possibly be liable for the VAT on them. After all, they are not truly issued by that business. Well, the Advocate General (AG) has (mostly) agreed with that approach, but with the caveat that the business must have acted "in good faith". And, in addition, the concept of "good faith" according the AG may involve the business meeting certain requirements of due diligence where the person actually issuing the invoices is known to the business, such as an employee: P sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Lublinie (Case C‑442/22).
The case concerns VAT invoices fraudulently issued by an employee at a garage which were used by recipients to claim input VAT (on amounts never paid). The tax authorities sought to recover that VAT from the business to the extent they were unable to recover it from the fraudsters. The opinion of the AG seeks hard to strike a balance between entirely relieving a taxable person of any responsibility in such cases (where it is equally in some ways the victim of the fraud) and (leaning on cases such as Kittel) suggesting there may be some cases where it should be responsible for tax losses where it failed to correctly supervise its employees.
It should be noted that some jurisdictions, such as the UK, have in place quite separate rules involving offences for the failure to prevent fraud or the failure to prevent the facilitation of tax evasion. Arguably, these are more appropriate methods to penalise supervisory failures in relation to the activities of others with whom a business has a connection, rather than via an extension of the VAT system.
Read our Insights article here
Other issues we have recently covered
Unallowable purpose and group tax planning
The Upper Tribunal has held that the intra-group borrowings of a UK subsidiary which was incorporated as part of arrangements to acquire a US group should be disallowed as the loan had an unallowable purpose considering the reason that the subsidiary was brought into existence as part of the wider group arrangements, rather than simply looking at the narrow purpose for which the loan was taken out. The decision is important and comes soon after HMRC published updated guidance on the application of the unallowable purpose rule.
Measuring Tax Gaps 2023: analysis and predictions
Craig Kirkham-Wilson's article for Tax Journal analyses HMRC's most recent report on the tax gap and notes that another strong performance for HMRC raises interesting questions about what HMRC might do next. The data suggests two things: first, that reducing the tax gap further isn't going to be easy; and second, that HMRC are likely to focus more on the 'large businesses' segment of customers. Large businesses should be prepared for further scrutiny of their tax affairs.
Updated HMRC Advance Pricing Agreements guidance
HMRC have updated their guidance on Advance Pricing Agreements (APAs). The new guidance adds to and expands the guidance in a number of respects, both as regards the formal process and HMRC's expected timelines. Of particular note is the new guidance on the impact of open investigations and enquiries, which will now generally inhibit the ability of a taxpayer to make an APA request until those enquiries are concluded. This will also include situations where HMRC has suggested to the taxpayer that it should engage in the Profit Diversion Compliance Facility.
Commission proposes BEFIT and Transfer Pricing Directives
The EU Commission has published proposals for two new Directives, the first covering its proposal for a common framework of corporate taxation (BEFIT) and a second on transfer pricing (TP) rules. Both are significant developments, but will require unanimity from all 27 Member States to progress.
HMRC has announced that the government will introduce legislation in the Finance Bill to formally remove the 1.5% charge to SDRT on issues of shares into a depositary receipt or clearing system. The charge will be removed with effect from 1 January 2024. The removal will also extend to the transfer of shares into such systems when this is integral to a capital raising arrangement and to the issue of bearer instruments.
CGT planning and the reorganisation rules
The FTT has held that arrangements to transfer shares within a family prior to a third party sale of a company, together with the use of loan notes as consideration for the sale, in order to benefit from entrepreneurs' relief did not mean that the whole exchange had a main tax avoidance purpose so as to be excluded from roll-over treatment under section 135. The FTT held that the relevant arrangements were the exchange of all of the shares in the company for shares and loan notes issued by the buyer and that the CGT saving could not be said to be a main purpose of those wider arrangements.
Payments in settlement of regulatory breaches not tax deductible
The Upper Tribunal has held that payments made by Scottish Power pursuant to agreements with regulators in settlement of various regulatory investigations into matters such as mis-selling, complaints handling and costs transparency were not deductible for corporation tax purposes. The Tribunal held that the payments were penal in character and as such were not made for the purposes of the trade.
Substantial shareholding exemption and hive-downs
The Upper Tribunal has held that a stand-alone company that transferred its business by way of hive down to a new subsidiary and then sold that subsidiary 11 months later could not benefit from substantial shareholdings exemption. The Upper Tribunal rejected the argument that a stand-alone company could amount to a group of one and held that the legislation clearly required the selling company to be a member of a group for a period of 12 months in the two years prior to the sale.
A review of the most important changes proposed by the Dutch government on 19 September 2023 in its budget for 2024.
Italy has proposed a one-off windfall tax on excess profits realised by banks with the aim of using the proceeds to support mortgage holders and cut taxes on households and enterprises.
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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