Category Archives: Latest from the Courts

VAT: Are aphrodisiac products food? – The X case

By   1 October 2020
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Latest from the courts

Can products designed to, errr… stimulate sexual desire be treated as foodstuffs?  – Only in VAT do such questions ahem arise eh?

Background

X (the name of the business), sold items in its sex shop which included; capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido. Those products, which are composed essentially of elements of animal or vegetable origin, were intended for human consumption and were to be taken orally.

X applied the reduced rate to these products (the rate in The Netherlands, certain food in the UK is zero rated) treating the sexual stimulants as foodstuffs.

This was challenged by the tax authorities as it was not considered that they fell within the definitions of ‘foodstuffs for human consumption’. Assessments were issued for the difference between the reduced rate and the standard rate. The case was referred to the ECJ – C-331/19  Staatssecretaris van Financiën vs X

The Gerechtshof den Haag (Court of Appeal, The Hague, Netherlands) found in favour of X, ruling that the use of the products in question as aphrodisiacs did not preclude them from being taxed at the reduced rate applicable to foodstuffs. This was broadly on the basis that the products were intended to be consumed orally and were made from ingredients that may be found in foodstuffs.

The VAT Directive contains no definition of the concepts of ‘foodstuffs for human consumption’ or ‘products normally used to supplement foodstuffs or as a substitute for foodstuffs, so that is, at the least, unhelpful, although it was emphasised that the words must be interpreted in accordance with the usual meaning of them in everyday language.

Decision

It was ruled that any product intended for human consumption which provides the human body with the nutrients necessary to keep the human body alive and enable it to function and develop comes within the scope of the category set out in point 1 of Annex III to the VAT Directive, even if the consumption of that product also aims to produce other effects.

Further; the nutritional role was a decisive factor for a product to be classed as a ‘foodstuff for human consumption’/ The question whether that product has health benefits, its ingestion entails a certain pleasure for the consumer, or its use is part of a certain social context, is irrelevant. Consequently, the fact that consumption of that product has positive effects on the libido of the person ingesting it is irrelevant.

So, aphrodisiacs can be food.

Action

If any business which sell such products which, incidentally, contain nutrients may have a VAT claim based on this case.

VAT: Staff costs – The San Domenico Vetraria SpA case

By   24 August 2020
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Latest from the courts

In the San Domenico Vetraria SpA CJEU case the issue was the treatment of the secondment of staff by an Italian parent company to its subsidiary and the reimbursement by the subsidiary company of the costs incurred. Was there a VAtable supply?

Background

The issue was whether the relevant payment represented a supply of services ‘for consideration’. The parent company seconded one of its directors to its subsidiary and a charge was made based solely on a reimbursement of actual costs. The Italian domestic court ruled that the transaction was outside the scope of VAT on the basis that there was no consideration paid or received and therefore no supply of services.

Decision

The court ruled that despite the fact that the value of the payment to the parent company was limited to the parent company’s costs this did not mean that consideration for the director’s secondment was absent. Therefore, as consideration flowed in both directions, a taxable supply took place such that VAT was due, the claim of input tax made by the subsidiary was correct and the Italian authorities were incorrect to deny credit for it.

The President of the Chamber stated in the ruling that “The amount of the consideration, in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service, is irrelevant in that regard”. It was immaterial that no profit was made, and the absence of such profit did not affect the VAT treatment.

There was a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

Commentary

This is a useful clarification/confirmation. The supply was not a disbursement (details here) so it was a supply by the parent company. More on inter-company charges here.

Planning

If the recipient company was partly exempt or unable to reclaim the input tax for any reason, the VAT would have represented a real cost. So, would there be a way to avoid this charge? The answer (in the UK at least) is yes. If the director had a joint contract of employment with both companies, there would be no supply. Also, if the two companies were part of the same VAT group, the “supply” would be disregarded, so there would be no VAT cost for the subsidiary.

VAT: Whether a person “in business”. The Y4 Express Ltd case

By   7 August 2020
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Latest from the courts

In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.

Background

Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.

HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.

Decision

The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.

Commentary

The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here.   HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.

This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.

VAT – Input tax claims. Latest from the courts

By   1 June 2020
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Latest from the courts

In the recent First Tier Tribunal (FTT) case of Aitmatov Academy an otherwise unremarkable case illustrates the care required when making input tax claims.

The quantum of the claim was low and the technical issues not particularly complex, however, it underlined some basic rules for making a VAT claim.

Background

A doctor organised a cultural event at the House of Lords for which no charge was made to attendees. The event organiser as shown on the event form was the doctor. Aitmatov Academy was shown as an organisation associated with the event.  It was agreed that the attendees were not potential customers of Aitmatov Academy and that the overall purpose of the event was cultural and not advertising.

Issues

 HMRC disallowed the claim. The issues were:

  • HMRC contended that the expenses were not incurred by the taxpayer but by the doctor personally (the doctor was not VAT registered)
  • that if the VAT was incurred by the Academy, it was not directly attributed to a taxable supply
  • that if the VAT was directly attributed to a taxable supply, it was business entertaining, on which input tax is blocked

Decision

The FTT found that the Academy incurred the cost and consequently must have concluded that the Academy was the recipient of the supply, not the doctor.

However, the judge decided that the awards ceremony was not directly or indirectly linked to taxable supplies made or intended to be made by the Academy, and therefore that the referable input tax should not be allowed. Consequently, the court did not need to consider whether the event qualified as business entertainment.

On a separate point, the appellant contended that, as a similar claim had been paid by HMRC previously, she could not see the difference that caused input VAT in this case to be disallowed. The Tribunal explained that its role is to apply the law in this specific instance and as such it cannot look at what happened in an early case which is not the subject of an appeal.

Commentary

A helpful reminder of some of the tests that need to be passed in order for an input tax claim to be valid. I have written about some common issues with claims and provided a checklist. Broadly, in addition to the tests in this case, a business needs to consider:

  • whether there was actually a supply
  • is the documentation correct?
  • time limits
  • the VAT liability of the supply
  • the place of supply
  • partial exemption
  • non-business activity – particularly charity and NFP bodies
  • if the claim is specifically blocked (eg; cars, and certain schemes)

I have also looked at which input tax is specifically barred.

Finally, “entertainment” is a topic all of its own. I have considered what is claimable here in article which includes a useful flowchart.

As always, the message is; if a business is to avoid penalties and interest, if there is any doubt over the validity of a claim, seek advice!







VAT: Intention is crucial – The Sonaecom case

By   18 May 2020
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We cannot control the future…

The Sonaecom case

In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.

Background

Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.

Unfortunately, the intended purchase was aborted.

 The issue

The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?

Opinion

In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:

  • Sonaecom was not a “pure holding company”
  • There was a genuine intention to make taxable supplies (to the acquired co)
  • There was a direct and immediate link between the costs and the intended supplies
  • Although the acquisition costs would exceed the proposed management charges, this was not a reason to invalidate the claim
  • The above analysis was not affected by the fact that the transaction did not take place

Commentary

There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.

There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.

Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.

I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.

It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.

*  AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.







VAT: Retrospective claims – standard of proof. NHS Lothian case

By   24 April 2020
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Latest from the courts

An interesting and helpful comment was made by the judge in the NHS Lothian Health Board Court of Session (the Scottish equivalent of the Court of Appeal) case.

Background

The case involved a claim for overpaid VAT going back to 1974. The primary issue was not the existence of the taxpayer’s claim to recover overpaid VAT, but the quantification of that claim, and in particular whether the claim can be quantified with sufficient accuracy to permit an order for repayment of tax to be made. In the previous case it was held that the onus of proving that an amount of tax had been paid and not recovered rested upon the taxpayer and that the standard of proof was the balance of probabilities and Lord Drummond Young agreed with that proposition here.

Judgement

The specific comments which will be of assistance with businesses with similar clams were:

“The fundamental problem in such cases is that primary evidence does not exist owing to the lapse of time. The absence of such evidence, at least in cases such as the present, is not the fault of the taxpayer, and the lack of evidence should not be held against the taxpayer,”

Outcome

The court urged Tax Tribunals (First Tier Tribunal – FTT and Upper Tribunal – UT) to apply a flexible approach to the burden and standard of proof when making decisions in similar cases; of which there is a considerable number. This approach should apply to so called “Fleming” claims and others in respect of overpaid output tax. We understand that 700 such claims were made by NHS authorities in Great Britain alone, and circa 200 of these remain unresolved.

Commentary

In most cases, a taxpayer is only required to retain records for six years. So the comments made in this case should bolster the chances of success for claims made by other businesses, whether they be for overpaid output tax or underclaimed input tax. There are many and varied reasons why sufficiently detailed could be unavailable; we are looking at a potential 46-year time span. In 1974 record keeping was a different world and physical/manual records were usually the only option. It seems only reasonable that HMRC should make the allowances suggested in this case when it is agreed that a claim is valid in all other respects.

Action

If you, or your client, have had a claim rejected on the basis of insufficient supporting primary evidence, it may be worthwhile revisiting it on the basis of this decision. It sets out helpful and clear guidance and provides businesses with effective, appropriate tax relief where applicable.







VAT: Zero rated books? The Thorstein Gardarsson UT case

By   14 April 2020
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Latest from the courts

In The Thorstein Gardarsson T/A Action Day A Islandi Upper Tribunal (UT) case the issue was whether supplies of an “Action Day Planner” (ADP) were zero-rated as supplies of a book.

Legislation

The VAT Act 1994, Schedule 8, Group 3, item 1 zero rates – “Books, booklets, brochures, pamphlets and leaflets.”  The words in Group 3 are used in their ordinary, everyday sense.

Background

The Appellants (HMRC) appealed against a decision of the First Tier Tribunal (FTT) which determined that the ADP is a “book” with the result that supplies of it made by Thorstein Gardarsson (TG) were zero-rated for VAT purposes. TG belonged outside the EU but sold its products B2C via the Amazon platform to consumers in the UK.

HMRC argued that the ADP was properly to be considered a ‘diary’ and thereby stationery which is standard rated. Predictably, TG asserted that the ADP is not a diary and despite it having space in which the ‘student’ seeking to master skills of time management may enter information, doing so is merely part of the learning taught through the narrative sections of the book.

The FTT allowed TG’s earlier appeal and considered the judgment of the High Court in Colour Offset Ltd. [1995] BVC 31 to be binding. The FTT concluded that the main function of the ADP is to teach the user how to better or more effectively manage time. The writing space was no different from a student filling out answers to practice papers or someone completing a crossword puzzle. The ADP was therefore a book and zero rated.

Appeal

In this UT case HMRC appealed the FTT decision on the grounds that whilst Colour Offset was binding on the FTT, it failed to:

  • identify the correct test set out in Colour Offset
  • apply the test correctly to the facts it had found

The Product

The external appearance if the ADP is that of a black leather covered book. It had an elastic strap attached to the inside of the back cover that can be wrapped around the front to hold it closed. Inside it has 115 pages. The ADP is described as a time management tool developed to “help people to grow; to teach and instruct people time management skills”. The first 16 pages contain text setting out a narrative of the ethos articulated by the appellant for effective time management. The remainder of the ADP is taken up with 52 double page planners. At the back is a cardboard slip pocket.

Decision

The UT noted that the FTT had quoted from VAT Notice 701/10 and this had led the FTT into error. In the Notice ‘crossword books, exam study guides etc.’ are considered books although the statutory provisions do not mention these at all. The Notice only records HMRC’s practice in this regard and does not have force of law. However, the FTT concluded that because crossword books and exam study guides are referred to as books, it should follow that any item with the necessary physical characteristics ‘which has as its main function informing/educating or recreational enjoyment’ is also a book. The tests in Colour Offset do not refer at all to whether the main function of an item is to inform or educate; nor does it refer to recreational enjoyment.

The UT considered that the FTT approached its task by applying a test that was different from that articulated in Colour Offset and this had the ability to produce a different outcome from the correct test. In doing so, he FTT made an error of law. It also concluded that the ADP is not a book as its main function is to be written in (as distinct from being read or looked at) and that the comparison to crossword puzzles or revision guides is irrelevant. Therefore, ADPs were standard rated and output tax was due on the sale of them.

HMRC’s appeal was allowed, the FTT decision is set aside and directed the matter back to the FTT for reconsideration. It was directed that the FTT makes a decision predicated on the basis that the ADP is not a book.

Commentary

The zero rating of printed matter has long been a moot point in VAT and the amount of detail that the guidance goes into demonstrates this. It should be noted that HMRC guidance set out in Public Notice 701/10 is purely that, and does not have the force of law. This logic extends to all HMRC published guidance unless the narrative specifically states that it has the force of law. A lot of the guidance is based on case law, but certain definitions are unhelpful.

Even the FTT can get it wrong and apply the wrong tests, so if you or your clients have any doubts about the VAT liabilities of supplies made, it is worthwhile having these reviewed by a specialist.







VAT: Extent of exemption for healthcare. The X-GmbH CJEU case

By   10 March 2020
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Latest from the courts

In the CJEU case of X, a German business, the issue was whether services provided by telephone could be treated as exempt. The decision is not available in English in the link above, so thanks to Google translate and very rusty schoolboy language skills!

Background

X provided a healthcare hotline to people covered by certain insurance. The types of services carried out where in respect of medical issues; medical advice, answers to queries, explanations of possible diagnoses and treatments, and patient support programmes for certain conditions. The service was provided by suitably qualified nurses, medical staff and doctors.

The issue

Was this service exempt from VAT as personal care considering it was “support” provided by telephone? He relevant legislation is Article 132(1)(c) of the VAT Directive. A separate issue was whether the staff required additional proof of their professional qualifications to qualify as an exempt service by telephone. The advice was provided via a computer assisted assessment, using targeted questions allowing X to assess the patient’s situation and to advise accordingly. Consequently, there was a degree of automation involved.

The German authorities considered that the supplies fell short of the exemption and raised assessments for output tax due on the services.

Decision

The CJEU has ruled that personal care is not dependent on where it is carried out and there is no bar to it being conducted by telephone. X contended that its services were directly connected with illness and was medical care and, as a result of its activities, the cost of subsequent treatment was reduced.

The court established that the supply was exempt if it met two tests:

  • it must be a service of personal care, and
  • it must be carried out within the framework of the exercise of the medical and paramedical professions as defined by the Member State concerned

Therefore, healthcare services carried out by telephone may fall within the exemption, but only if they meet all the conditions for applying this exemption. The test was not how the services were delivered.

Whether X’s services met the exemption conditions depended on case law and whether they were to;

  • diagnose, treat and cure illnesses or health anomalies
  • protect (including maintaining or restoring) the health of individuals.
  • explain diagnosis and therapies
  • propose modifications to treatments and medication

Such services were likely to have a ‘therapeutic purpose’. However, simply; directing patients to factsheets, providing specialists’ contact details and communicating information is insufficient to qualify for exemption and would be regarded as of a (taxable) administrational nature.

Summary

The services provided by telephone, consisting of providing advice on health and illness, were likely to be exempt, if they pursue a ‘therapeutic aim’. However, this was for the German referring court to verify. On the “additional qualifications” point, EU law does not define medical professions, so it is the responsibility of each Member State to determine the necessary qualifications. In the UK, these qualifications are set out at VAT Act 1994, Schedule 8, Group 7, item 1 (mainly; registered or enrolled as a doctor, optician, osteopath, chiropractor, nurse or midwife). It was decided that Article 132(1)(c) does not require that those X’s staff which provide telephone services to obtain additional professional qualifications.

Commentary

There is often significant uncertainty when businesses provide “healthcare”, This has mainly manifested in questions of whether staff or medical services are actually provided (and in more wide-ranging cases, whether the provision of staff is by way of agent or principal). However, with technology moving faster than ever, it is helpful to have these guidelines and the understanding that it is not just “old-fashioned” medical services which are covered by the exemption.







VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case

By   10 March 2020
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Latest from the courts

The difference between intended use and first actual use of an asset.

In the Dutch case of Stichting Schoonzicht (C‑791/18) the AG was asked to provide an opinion on the interaction between clawback and the Capital Goods Scheme (CGS) via Directive 2006/112/EC, Articles 185 and 187. Details of the CGS here. In the UK clawback is set out in The General Regulations 1995, Reg 108.

Background

Stichting Schoonzicht constructed a number of apartments which it intended to sell on completion. This would have been a taxable supply and afforded full input tax recovery on the costs incurred on the development. Unfortunately, due to market conditions, the business was unable to find buyers at the appropriate sale price. Therefore, a decision was made to let some of the flats on a short-term basis until the market picked up. This was done and created an exempt supply. The intention to make taxable supplies remained, but in the meantime, exempt supplies had actually been made. This could affect the original input tax claim. Details of partial exemption here.

Technical 

The Dutch referring court entertained doubts about the compatibility of the ‘first-use full adjustment’ requirement provided for under Netherlands law and the CGS.

So the issue was whether the CGS (Article 187 of the VAT Directive) applied such that any required adjustments to the initial input tax claim could be made via a CGS calculation, or whether, as the Dutch authorities contended, there should be a one-off clawback of the input tax previously claimed.

Decision

In the AG’s opinion, the Dutch tax authorities could clawback 4/7 of the input tax on the construction (as four of the flats were let and three remained unoccupied). The AG decided that the CGS could co-exist with clawback and that EU Member States are allowed to adjust the initial deduction of input tax using clawback where actual use varies from intended use. A distinction was made between clawback and the CGS. The CGS is intended to adjust input tax claims as a result of fluctuations in the taxable use of capital assets over a period of time (ten years for buildings in the UK).

Commentary

In the UK, there are published easements for input tax recovery in similar circumstances: “VAT: Partial Exemption – adjustments when house builders let their dwellings”. However, this is an interesting AG opinion, is worth a read and it will be interesting to see how this develops. However, with prior planning, this situation may be avoided in the UK (where new house sales are zero rated).