VAT Insights - July 2024

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By now one can't fail to have noticed the recent glut of fixed establishment cases at a CJEU level. And especially fixed establishment cases where tax authorities have essentially relied on exclusive, intra-group arrangements as the basis for treating one member of a group as a fixed establishment of the other. The Advocate General in SC Adient Ltd & Co KG (Case C-533/22) considered this an "astonishing" development and speculated that "tax authorities had started searching within corporate structures for fixed establishments constituted in the form of subsidiaries or even just other group companies". In fact, tax authorities have consistently failed to extend the reach of the fixed establishment concept to such group arrangements in these cases and it is to be hoped that the most recent failure, with the decision of the CJEU in this case, will prove the death knell for this aggressive approach to the presence of a fixed establishment.

In addition to the CJEU decision on fixed establishments, in this edition we cover the following recent VAT and indirect tax developments:

• An Upper Tribunal decision on the scope of various estoppel arguments in VAT litigation, including the effect of VATA 1994 section 85 where a party withdraws from an appeal

• Publication by HMRC of the VAT gap statistics for 2022/23

• (lack of) progress at the 21 June ECOFIN meeting on the ViDA proposals.

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.

Please note that VAT Insights will now be taking a short summer holiday, but will return at the start of September.

Subsidiaries as fixed establishments (again!)

If you have been following CJEU decisions in relation to fixed establishments and toll manufacturing arrangements over recent years, SC Adient Ltd & Co KG (Case C-533/22) is likely to give you a strong sense of déjà vu! The arrangements in this case are so similar to those considered in earlier cases (such as Berlin Chemie A (Case C-333/20) and especially Cabot Plastics Belgium v Belgium (Case C-232/22)) that it is hard to see why there was any need for an AG Opinion. That Opinion projected a real sense of exasperation and sought to put to bed, once and for all, some of the wider arguments put forward by tax authorities for treating a subsidiary as a fixed establishment of its parent entity.

The CJEU has now published its decision, which follows that Opinion closely, confirming that neither the group relationship nor exclusive service arrangements can lead to a subsidiary being treated as a fixed establishment without (much) more. It also dismisses that frankly non-sensical argument that a subsidiary making supplies to its parent can at the same time represent a fixed establishment of that parent for the purposes of receiving those supplies! As the Court points out, even if that were correct, it would be an entirely internal transaction, not subject to VAT in any event.

Helpfully, the decision also stresses the importance of considering the question whether there is a fixed establishment in its specific context and, in particular, whether it is a fixed establishment for the purposes of receiving as opposed to making supplies. It is important not to assume that, even if a related entity might be a fixed establishment for the purposes of making supplies, it is also a fixed establishment for the purposes of receiving supplies.

Read our Insights article here

Estoppel and earlier withdrawn VAT appeals

Is it possible to pursue an argument that a taxpayer is entitled to claim a VAT refund of input VAT on certain investment management services when it had previously withdrawn an appeal in relation to a VAT assessment for the same amounts? The Upper Tribunal in Telent Technology Services Ltd v HMRC [2024] UKUT 183 has held that such a claim is prevented by both issue and cause of action estoppel. This is because VATA 1994 s.85 provides (broadly) that where an appeal is settled or withdrawn, then the position is treated "for all purposes" as if the tribunal had determined the appeal on that basis.

In addition, the UT held that HMRC were not prevented by estoppel by acquiescence from raising the estoppel argument. HMRC's initial indication that it would not raise estoppel as a defence was not detrimental to the taxpayer and so didn't prevent HMRC later raising the procedural point.

Read our Insights article here

Mind the VAT gap

HMRC has published its annual tax gap figures for 2022/23. Within the broader tax gap figure, the VAT gap is now estimated to be 4.9% of the theoretical VAT liability( £8.1bn in absolute terms) for the 2022/23 tax year. This is down from 5.9% in 2021/22 continuing a long-term downward trend. Over the longer term, the VAT gap has reduced from 13.7% of theoretical VAT liability in 2005/06 (or £11.6 billion).

Whilst this is no doubt good news, it is perhaps not such good news for both Conservative and Labour plans to raise substantial amounts from further reductions in the tax gap! Especially as these figures are substantially revised down from the preliminary figures in the Autumn Statement 2023 and Spring Budget 2024.

For further information, see HMRC's website

ViDA VAT reporting package

At the recent 21 June 2024 ECOFIN meeting, it was reported that the "Council exchanged views, making progress towards an agreement" on the VAT in the digital age package. Though behind that lies the message that in fact this was another failed attempt to reach agreement.

ViDA is made up of three main measures: common and standardised digital reporting and e-invoicing requirements for intra-Community transactions; updated VAT rules for the platform economy; and expanding the scope of single EU VAT registration.

It is understood that Estonia continues to have reservations concerning the implementation of changes to the role of platforms in the collection of VAT when they facilitate the supply of short-term accommodation rental or passenger transport services.

Information from the ECOFIN meeting can be found here

Other issues we have recently covered

UK General Election July 2024: manifesto tax pledges

The major political parties have now published their manifestos and associated documentation ahead of the 4 July General Election, with tax and tax avoidance/evasion pledges being key themes across many. Our report summarises the principal manifesto tax pledges of the Conservative, Labour, Liberal Democrat, Reform1 and Green parties.

Unallowable purpose and group tax planning

The Court of Appeal has affirmed the decisions of the FTT and UT 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: JTI Acquisitions Company (2011) Ltd v HMRC [2024] EWCA 652. Both the CA and the UT considered that the FTT was entitled to look at 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 follows HMRC's updated guidance on the application of the unallowable purpose rule. No doubt HMRC will consider that its interpretation of the legislation set out in that expanded guidance is further supported by this latest decision.

EU infringement proceedings

The EU Commission has issued a reasoned opinion to six Member States that have failed to notify national measures transposing Council Directive (EU) 2022/2523 (the EU Minimum Tax Directive) into domestic legislation. These Member States are Cyprus, Latvia, Lithuania, Poland, Portugal and Spain. Member States were required to bring into force the laws necessary to comply with the EU Minimum Tax Directive by 31 December 2023. Cyprus, Latvia, Lithuania, Poland, Portugal and Spain have two months to reply and take the necessary measures, otherwise the Commission may decide to refer the case to the Court of Justice of the European Union.

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.