Decisions of the Supreme Court are always worthy of note and the decision in Target v HMRC on the scope of the VAT finance exemptions is no exception. The particular issue here was the tension between recent decisions of the CJEU and an older Court of Appeal decision in the UK. Unsurprisingly, the Court has followed the more recent CJEU jurisprudence in confirming that it is not sufficient for a supply to fall within the scope of the VAT exemption for transactions concerning payments or transfers for the service to be essential for that payment or transfer or to result in a payment or transfer automatically being made by another financial institution. The older UK Court of Appeal decision (FDR Limited [2000] STC 672) was overruled on this aspect.
Of course, as the UK's VAT regime diverges from that of the EU, such situations should become rarer. But the government has, however, recognised the special nature of VAT as a creature of EU law. A recently published draft Finance Bill clause will ensure that EU law principles will remain relevant to the interpretation of UK VAT law in the future, despite the drastic pruning to the concept and role of retained EU law to be carried out by the EU Law (Revocation and Reform) Act 2023 (REULA 2023) from the end of this year.
As well as looking at the Supreme Court decision in Target, in this edition we also cover the following recent VAT and indirect tax developments:
- the FTT decision in JPMorgan concerning the correct VAT treatment of supplies of intra-group services under a global services agreement;
- a CJEU decision on the correct VAT treatment of a "free" item provided with a magazine subscription;
- the draft Finance Bill clause published for stakeholder feedback which modifies REULA 2023 in its application to VAT and excise laws;
- HMRC's proof of concept tender in relation to a possible split payments approach to VAT in cross-border online transactions.
We also have updates from across our European network, including the Netherlands, Spain and Ireland.
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 links to our more detailed reports.
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.
Narrow, functional interpretation of VAT finance exemption necessary
The extent to which outsourced services can fall within the various VAT finance exemptions has always been a contentious issue. Indeed, this was one of the areas of disagreement that derailed the EU Commission's original attempt to modernise the VAT finance exemptions. On the one hand, it is clear that the application of an exemption (or not) is not down to the nature of the person carrying out the activity but rather what they do. On the other hand, the exemptions should, in principle, be applied narrowly and only where what is being done fulfils the essential and specific functions of the exempt supply.
Perhaps due to its potentially extremely wide scope, the exemption for transactions concerning payments and transfers has, in particular, been restricted. Whilst there is no requirement for the service to be carried out by a bank, for example, recent CJEU caselaw such as Bookit Ltd (Case C-607/14), National Exhibition Centre Ltd (Case C-130/15) and especially DPAS (Case C-5/17) has stressed the need for a functional approach. It is necessary for the services to actually have the effect of paying or transferring funds. Simply providing instructions to another person to make a transfer or payment, even where the subsequent transfer or payment is automatic, is not sufficient. The service must have the effect of changing the parties legal and financial positions.
The Supreme Court decision that an entity providing instructions resulting in payment, but not making payments itself, could not fall within the exemption was not therefore a surprise. Perhaps what will be more interesting to follow in the future is to what extent (if at all) this narrower, functional approach, stressing the need for the services to change the legal and financial positions of the parties, might infect the treatment of outsourcing in relation to other VAT finance exemptions.
Read our Insights articles here
Single supply of global support services
In a decision that is long on factual description but short on analysis, the FTT has held that supplies of intra-group services made between two group companies under a global master services agreement within the worldwide JPMorgan group amounted to a single supply of services: JPMorgan Chase Bank NA v HMRC [2023] UKFTT 856. It was not possible to separate supplies between those which were general, taxable support services and supplies which might fall within the scope of the exemption for transactions in securities, despite the inclusion in the contract of a schedule seeking to differentiate between the two. The fact that the recipient was entirely dependent on receiving all of the support services from the supplier under the global arrangements, all of which were essential to its proper functioning, suggested that there was a single supply that would be artificial to split. Moreover, properly characterised, that single supply was a taxable supply and did not fall within the exemption for transactions in securities.
Whilst highly fact dependent, the decision perhaps highlights the legal and practical difficulties of identifying specific, individual exempt outsourced supplies within the context of such an all-encompassing group support services agreement. The lack of any separate invoicing for outsourced exempt services (which was not essential in a group context) militated against the identification of individual services which might fall within the exemption.
Perhaps it also highlights the vagaries of the conclusion as to whether a supply is a single or multiple supply. In the end, despite the lengthy factual background, it is hard to escape the conclusion that the final decision was as much about general impression and "feel" as about the application of the strict legal principles.
Read our Insights article here
VAT and "free" promotional items
Is an item provided "free" to a customer purchasing other items really gratis? Or is "free" just a marketing label intended to promote the offer? The issue was considered by the Upper Tribunal several years ago in Marks & Spencer v HMRC [2019] UKUT 182 concerning wine provided free with purchases. The FTT took the sensible view that the wine was not really free and part of the consideration must be attributed to it. The CJEU has now confirmed that this is the correct approach in a Portuguese case concerning devices provided free with a magazine subscription: Deco Proteste -- Editores Lda v Autoridade Tributaria e Aduaneira (Case C-502/22). As such, it was not necessary for the supplier to account for output VAT on the value of the items under the deemed supply rules.
Whilst the main decision itself seems uncontroversial (and very much in line with the UK position), by contrast the Court's single supply analysis appears less orthodox. In particular, the Court highlighted the purpose of the supplier in seeking to increase magazine sales as an important feature in determining that the devices were merely ancillary to the main supply of magazines. This contrasts with the normal approach which highlights the purpose of the typical customer as to whether an element represents an end it itself. This raises the possibility of potential conflicts if the purpose of the supplier and typical customer do not coincide (as might arguably be the case here to the extent that customers only subscribed to the magazine for one month to get the device).
Read our Insights article here
REULA 2023 and VAT
REULA 2023 was enacted in June 2023 and ends the supremacy and special status afforded to retained EU law with effect from the end of 2023. It also contains provisions to revoke the EU-derived subordinate legislation and retained direct EU legislation listed in Schedule 1, revoke retained EU law rights and obligations, abolish general principles of EU law and convert retained EU law into "assimilated law". The Act also includes provisions to modify, revoke, replace and update assimilated law. The role of retained EU case law, however, remains largely unchanged by REULA 2023.
VAT is, in essence, a creature of EU law and derived from the EU VAT Directives. As such, the government made clear its intention to introduce a "bespoke legislative approach" for retained EU law concerning VAT. The government has now published draft legislation for the future interpretation of VAT and excise law, which provides for the modified application of the provisions of REULA 2023 in this context.
The draft legislation will ensure that the principle of supremacy, EU rights and liabilities and retained general principles of EU law will (despite the provisions of REULA 2023) continue to be relevant for the purposes of interpreting VAT and excise law. Given the fundamental role that EU general principles have had on the interpretation of VAT law, it is clearly welcome that their relevance has not been removed at a stroke, leaving something of a void. As the government's statement on the draft clause recognises, it's intention is that it "ensures the stability of the VAT and excise regimes and provide legal certainty for businesses" and "mitigates the risk of re-litigating settled interpretations of UK law".
Read our Insights article here.
VAT invoicing: split payments
In 2018, HMRC published a consultation on the possible use of "split payments" to collect VAT through the payment process and reduce VAT loss resulting from online, cross-border VAT fraud. Five years later and it is reported that HMRC have published a proof of concept project to evaluate the possibility of using split payments to collect VAT directly. In a VAT context the idea is that when qualifying goods or services are bought, the VAT within the purchaser's payment could be routed directly to HMRC with the seller only receiving the net amount.
HMRC's current emphasis is only to discover whether technology is capable of real-time payment interventions to tackle overseas VAT non-compliance. This will then inform policy developments. Nevertheless, this has the potential to see major administrative changes in the future.
Read our Insights article here
Netherlands: basis of partial exemption calculation
In the Netherlands, the general rule is that input VAT on general costs must be deducted on a pro rata basis, calculated by reference to turnover on exempt and taxable supplies. However, that pro rata calculation may instead be based on the actual use of the incoming goods and services, if it is likely that actual use deviates from the pro rata turnover basis.
In a recent case, a Dutch bank sought to deduct input VAT on the basis of actual use, using certain assumptions about that actual use. The parties agreed that the bank's calculation resulted in a more accurate approach for input VAT recovery than that on the basis of turnover. Nonetheless, the Dutch tax authorities (DTA) challenged this method before the High Court of Den Bosch, but lost the case.
The DTA has now appealed to the Dutch Supreme Court (DSC), which agreed with the DTA's position. According to the DSC, a calculation on the basis of turnover is the main rule and deviation of that main rule is only possible if and when the taxpayer can substantiate its actual use. According to the DSC, this requires "hard" proof of the actual use. An approach based on assumptions made about the actual use, is not hard proof even if the parties agree that the alternative approach provides for a more accurate estimate of the actual use of the goods and services. The DSC has held that it is simply not possible to replace an estimate based on turnover with an estimate based on other variables. Moreover, in this particular case it was also clear that the bank had not taken all costs into account in its calculation.
On the basis of this DSC ruling, it is clear that in the Netherlands it will be almost impossible to deviate from the general rule in which the pro rata approach to input VAT deduction should be calculated on the basis of turnover.
Spain: Supreme Court rejects tax penalties for failure to report VAT exempt transactions
The Spanish Supreme Court has issued two decisions (which will from now on be considered as case law) analysing a tax penalty imposed by the Tax Inspectorate. The penalties are based on a fixed percentage of the theoretically chargeable VAT on the relevant transaction (in the cases analysed, the acquisition of a property exempt from VAT) for failure to report the VAT exempt transaction in the VAT self-assessment.
In line with CJEU case Farkas (C-564/2015), the penalty was imposed for the omission of a formal, purely procedural requirement - failure to report a VAT exempt transaction. The only relevant difference between Farkas and the two cases analysed by the Spanish Supreme Court was that in the Farkas case, the penalty imposed by the Hungarian rules was 50 per cent of the theoretical VAT, while in the Spanish case it was 10 per cent. Still, the penalty imposed was above €1.8m. By comparison, other non-VAT equivalent penalties under Spanish tax law for failure to file in a timely manner in relation to tax exempt transactions (therefore not causing any tax loss to the Spanish treasury) amount to €200 per unreported transaction.
According to the decision of the Supreme Court rejecting the imposition of the 10% penalties, the fact that the system of tax penalties established for VAT purposes is not harmonised does not mean that the national legislation has unlimited powers. The Spanish rules must comply with EU law, and in particular with the principle of proportionality and the 10% penalty was contrary to that principle.
Spanish tax authority establishes controversial VAT criteria for employee car use
The taxation of the use of vehicles by employees is a controversial issue in Spain, which has generated a large number of administrative and judicial disputes. The issues that arise are generally related to the extent to which the use of the vehicle is available to the employee [for personal use], the VAT treatment for the employer, including the VAT deductibility of the acquisition cost and VAT treatment of the assignment of use to the employee, the deemed self-supply of services and the taxable base.
Very recently, a note issued by the Spanish Tax Agency (STA) has provided a summary of its updated criteria on miscellaneous VAT issues relating to employee car allowances. For instance, the note stresses that the applicable criterion for determining the percentage corresponding to the business vs private use of the vehicle is the availability for the private use of the employee. Although this criterion is in line with some recent court rulings, it is often considered to be a restrictive criterion (as the vehicle will be at the employee's disposal most of the time, notwithstanding its actual use) and is arguably [out of] line with the Spanish VAT law, which establishes a general rule that the acquisition of vehicles with partial use for business purposes is subject to a presumption of 50% business use.
In addition to the availability for use criteria, the STA provides several clarifications on other controversial matters, such as when the private use of the vehicle is considered a chargeable vs a non-chargeable supply for VAT purposes, the deductibility of VAT paid on the acquisition of vehicles and the taxable base for VAT purposes.
Ireland: Digital real-time reporting and e-invoicing
On Budget Day in Ireland (Tuesday 10 October this year), the Minister for Finance announced a public consultation focusing on how we can digitalise and modernise Ireland's VAT Invoicing and Reporting System. The consultation aims to reform Business to Business (B2B) and Business to Government (B2G) VAT reporting, supported by e-invoicing.
Modernising Ireland's domestic VAT Reporting system should make it easier and more seamless for businesses to comply with their VAT reporting obligations. Mandatory e-invoicing could be costly at the outset for small businesses but should ultimately be a good investment. It has the potential to improve the business' efficiency and flexibility and could help the business to compete and take advantage of trade opportunities across the Single Market.
All interested parties have been invited to voice their views on the development of the new system of digital real-time VAT Reporting and mandatory e-invoicing. The window of opportunity to do so is open until 12 January 2024.
Other issues we have recently covered
With the Labour party continuing to be favourites to secure the most seats in a general election expected to take place in late 2024, the party conference currently taking place in Liverpool takes on added significance. In particular, looking past the political rhetoric and the "Ready to serve, ready to lead and ready to rebuild Britain" mantra, we look at the actual tax policy announcements mentioned by the potential next Chancellor of the Exchequer in her speech to the conference.
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.
Carried interest and private equity funds
The Good Law Project is reporting that, on the back of the threat of legal challenge, HMRC has closed a "loophole" which allows carried interest received by private equity fund managers to be taxed as capital. The truth appears to be rather more prosaic, however. It appears that HMRC has simply confirmed that each case must be looked at on its individual facts and the tax treatment depends on the private equity fund not trading, such that the 1987 BVCA agreement never represented concessionary treatment. In legal terms, therefore, nothing appears to have changed. In the longer term, whether the spotlight that has been shone on this tax treatment means that, in practice, HMRC feel obliged to risk assess this area more actively, remains to be seen.
Clarification of the taxation of carried interest in Spain
The General Directorate of Taxes (GDT) has issued the first tax ruling including interpretation of the brand new carried interest regime in Spain. This first piece of binding guidance provides some level of flexibility on the different aspects covered by the ruling, however there are still some grey areas in the regime that will require further clarification. Overall, however, the guidance is to be welcomed as a step in the right direction.
The EU Council has adopted a directive amending EU rules on administrative cooperation dealing with the reporting and automatic exchange of information in relation to transactions in crypto-assets. DAC8 will impose new tax transparency rules for all service providers facilitating transactions in crypto-assets for customers resident in the EU. The rules, which will come into effect in 2026, will require all service providers, of whatever size and wherever located, to report on crypto-asset transactions carried out by clients residing in the EU. It will also require financial institutions to report on e-money and central bank digital currencies.
OECD publishes Amount A Multilateral Convention
The OECD has published the text of a Multilateral Convention to give effect to the Amount A aspects of Pillar One. Amount A is designed to reallocate taxing rights to market jurisdictions in relation to a share of the profits of the largest MNEs, regardless of their physical presence. The complexity and scope of the challenge is highlighted, however, by the fact that the Multilateral Convention (MLC) runs to over 200 pages and has Explanatory Notes which run to over 600 pages.
Spain: the participation exemption and solar project SPVs
The General Directorate of Taxes (GDT) has overturned previously published criteria regarding the application of the participation exemption (PEX) on the transfer of shares of an SPV engaged in the development of photovoltaic projects. The new guidance indicates that the fact that the entity has not yet commenced the construction of the relevant solar farm will not result in it being treated as a passive holding company subject to restrictions on the application of the PEX.
EU list of non-cooperative jurisdictions for tax purposes updated
The EU Council has announced further changes to the EU list of non-cooperative jurisdictions for tax purposes on 17 October 2023. The most recent update saw the addition of three new jurisdictions to the black list, Antigua and Barbuda, Belize and Seychelles, and the removal of three, British Virgin Island, Costa Rica and Marshall Islands. 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 (or "state of play document").
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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