Category Archives: Tribunal

Latest from the courts – Recovery of VAT on cars purchase

By   14 September 2016
0

Input tax incurred on the purchase of cars

There is a specific blocking order (Value Added Tax (Input Tax) Order 1992) which prohibits the recovery of input tax incurred on the purchase of cars. The block applies if there is any private use of the car whatsoever (even one mile).  HMRC’s approach has been that unless a business can demonstrate that there is no private use the input tax is disallowed.  Previous case law, notably Elm Milk Limited relied on the terms of the insurance covering the car (whether private use was permitted) and inter alia, the physical security of the car.

The case

In the First Tier Tribunal (FTT) case of Zone Contractors Limited TC05330 it was held that VAT was reclaimable on six cars purchased for business use.  The reason for the decision was that the relevant employment contracts specifically and explicitly prohibited any private use of the vehicles.

HMRC claimed that the business had not demonstrated that the use of the cars was monitored and controlled sufficiently to evidence the fact that there was no private use. However the FTT decided that the employment contracts could be relied on and permitted the claims. What is relevant in this case is that the court decided that no reliance could be placed on insurance documentation preventing recovery on the grounds of the policy including cover for use for social, domestic and pleasure and that HMRC could not rely on such documentation to disallow a claim as they had in the past.

Action

If a business has been denied input tax recovery on cars by HMRC, or has refrained from claiming input tax based on previous case law, it may well be beneficial to review the circumstances in light of this case. We can assist in lodging claims where appropriate.  After all, the VAT of £8000 on a £40,000 car is significant; even if only one has been purchased.

VAT Latest from the courts – what is an economic activity by a charity?

By   5 September 2016
0

In the VAT case of Longridge on the Thames (Longbridge) here the Court of Appeal considered previous decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) on whether Longbridge carried on an economic activity. This is an important case as it goes some way in determining the meaning of “business” in light of the term “economic activity” used in EC legislation.  The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business, and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning.  Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have previously commented on this matter here 

Background

Longbridge is a charity. It uses volunteers to provide boating activities (mainly to young people) on the Thames. The fees charged by Longbridge were often at below cost and the charity relied on donations to continue its operations. It constructed a new building and sought VAT zero rating of these costs on the basis that the building was to be used for non-business purposes. Consequently, it was crucial to the relief claimed that the charity was not carrying out a business in VAT terms.  The FTT and the UT found that the charity’s “predominant concern” was not to make supplies for a consideration and therefore it was not in business. These findings were based on long standing case law, the most salient being; Lord Fisher and Morrison’s Academy Boarding Houses Association. Lord Fisher set out a series of tests which HMRC rely on to determine whether a business exists – considered here and here 

Decision

The Court of Appeal allowed HMRC’s appeal.  It decided that Longridge was carrying on an economic activity and therefore the construction of the new building could not be zero rated.  The decision is worth considering in full, however, the court held that there was a “direct link” between the fees paid and service the recipients received, even if it was subsidised in certain instances and that Longbridge was furthering its charitable objectives.  The requirement for a direct link was clearly demonstrated in The Apple and Pear Development Council case. The establishment of the direct link meant that Longridge was carrying in business (in UK law).

Commentary

The important test for whether an economic activity is being carried on is now; the direct link between payment and service. There is no longer the requirement to consider the test of “predominant concern” and in fact it was stated in the decision by the judges that this test is “unhelpful and may be misleading.” We must now ignore; the motive of the provider of the service, its status as a charity, the amount charged, whether subsidies are received by the charity, and whether volunteers are involved in the relevant activities.

This is a very big change in the analysis of whether a business exists and basically means that previous cases on this matter were wrongly decided.  It brings the UK into line with the EC on the definition of an economic activity and therefore provides clarity on this matter – which has long been an area which has desperately required it.

It means that, unless the decision is reversed at the Supreme Court, we say goodbye to the unloved Lord Fisher tests. However, this may be very bad news for charities and not for profit entities that have relied on these tests to avoid VAT registration and charging VAT on their supplies.  It is likely that many more charities will be dragged into the VAT net.  It remains to be seen whether this case will trigger a renewed targeting effort on charities by HMRC, but what is clear is that charities need to be conscious of this new turn of events and consider their position.  We strongly recommend that any bodies which have had previous discussions with HMRC on this point and any entity which is affected by this decision take professional advice immediately.

VAT Latest from the courts – HMRC’s bad ‘phone service

By   18 August 2016
0

As we know, late payment of VAT results in a Default Surcharge. Details of DS here

However, if a taxpayer has a reasonable excuse the DS will not be due. In the interesting recent case of McNamara Joinery Ltd here

The appeal was on the grounds that HMRC itself caused the default. The business was successful in the appeal on the grounds that its agent could not contact HMRC to arrange a time to pay agreement because of HMRC’s poor telephone service. Anyone who has attempted to contact HMRC by telephone will appreciate that this isn’t a one-off case!

Background

The appellant had a previous history of submitting returns on time, but making late payments late such that the period in question would give rise to a DS if the return or payment was late. Appreciating that the business would not have sufficient funds to meet the VAT payment due, it instructed its agent to contact HMRC on its behalf in an attempt to arrange a “time to pay” (TTP) agreement. The agent attempted to do this two days before the payment was due. However, there were significant problems with the telephone service and the agent was unable to get through as the line kept “going dead” (It appears from later comments made by HMRC that this was due to the volume of calls made at the end of the VAT period). A TTP agreement was subsequently reached, but only after the due date which HMRC argued was too late to avoid the DS.

Decision

On the subject of reasonable excuse, the FT Tribunal observed that “A reasonable excuse is normally an unexpected event, something unforeseeable, something out of the appellant’s control. Insufficiency of funds is not regarded as a reasonable excuse although the reason for the insufficiency might be. It is unfortunately part of the hazards of trade that debtors fail to keep promises to pay. These submissions cannot be regarded as establishing for the appellant a reasonable excuse for the late payment.”
It continued “However, faced with the problem of not having received promised payments, the appellant through its agent did all that it could do in the circumstances…., its agent tried repeatedly to contact HMRC by telephone but was unsuccessful until 12 February 2016 when a time to pay agreement was made and subsequently the arrangements made were adhered to. In the Tribunal’s view this repeated failure to contact HMRC was unexpected and unforeseeable”. Therefore the taxpayer had a reasonable excuse and the DS was removed.

The Judge did not accept HMRC’s submission that the appellant should have been aware that there was a likelihood that there would be a large volume of calls being made to HMRC on the days immediately prior to the due date and that as a result the appellant could reasonably have expected delays in being able to make contact. HMRC do not publish times when their lines are likely to be busy. Rather than expecting delays it is reasonable for a taxpayer to expect telephone calls to HMRC to be answered without delay. In the Tribunal’s view HMRC were in a better position than the appellant to know when there is a likelihood of a large volume of calls and they should have arrangements in place to deal with the higher volume of calls promptly.

So HMRC lost this case because they failed to answer the phone.

Lessons to be learned

  1. One cannot rely on HMRC answering their own phones, even though they are fully aware that there will be an increased demand at certain times. They do not have arrangements in place to deal with the known demand. They do not have a reasonable excuse for not dealing with taxpayers!
  2. When attempting to contact HMRC it is a very good idea to keep an accurate log.
  3. If it is likely that a business is experiencing cashflow issues, contact HMRC as soon as possible and do not leave it to the last moment.
  4. It is possible to arrange a TTP agreement with HMRC.
  5. A business should take advice from their advisers as soon as possible to avoid DSs. This may avoid both a TTP position and/or a DS.

VAT Latest from the courts – more on composite or separate supplies

By   1 August 2016
0

The case of: General Healthcare Group Limited (GHG)

Those that have read my articles in the past will recognise the topic of composite or separate supplies rears its ugly head on many occasions. It is a matter that has occupied businesses, advisers and HMRC since VAT’s inception, and shows no signs of disappearing any time soon.  To put it into the Tribunal chairman’s words:  This is another appeal on the subject of whether a transaction which comprises several different elements should be regarded as a single supply or several distinct and independent supplies.

In the latest episode, a ruling was handed down by the Upper Tribunal (UTT) in the case of GHG.

Background

GHG challenged the decision in the First tier Tribunal (FTT) that it made a single supply of prostheses and operating services via its consultants. Consultants fit prostheses in certain procedures, eg; hip replacements when they operate in GHG hospitals. The prostheses are supplied by GHG which also provide the hospital facilities to enable the independent, self-employed consultants to supply healthcare which includes the fitting of prostheses, to its patients. The FTT (in the lead case of Nuffield Hospital with GHG) decided that there was a single supply of exempt healthcare to the patient in these circumstances. GHG appealed against this decision, contending that there is one supply of exempt healthcare, and a separate zero rated supply of the prosthetics prescribed and fitted by the consultants who performed the operations.

VAT Impact

Treating the prosthetics as zero rated rather than exempt would have no impact on output tax (no VAT would be due in either analysis) but zero rating would enable GHG to recover input tax on the prosthetics in question and an increased amount of VAT incurred on general overheads. It is likely that such a claim, across the board would run into many multi-millions.

Decision

The UT dismissed GHG’s appeal, stating that “… from the point of view of the typical patient who requires a prosthesis, GHG makes a single supply of hospital and medical care which includes providing the prosthesis to be fitted by the consultant …”.

Commentary

The decision appears logical and in line with both EC and UK legislation and past case law and was not really a surprise. In these type of cases it is important to consider what the recipient of the supply thinks (s)he is receiving.  In this case, and having been on the receiving end of a similar procedure (although I hope that I am a few years off a hip replacement) I think it is absolutely accurate to say that the patient would consider that (s)he is receiving a single supply of medical care.  However, I have no doubt that the patient who has just received a new hip would be very unlikely to be thinking of the VAT treatment of their….errr treatment in the slightest…..

The UTT chairman stated that it declined to make any reference to the CJEU.

As always, this is a tricky area, if you have received any questionable rulings from HMRC on single/multiple supplies, or wonder whether there is a different way of analysing your supplies, please contact us as explained above, the matter continues to throw up interesting results.

Full case here 

VAT – Latest from the courts: impact of outside the scope income

By   25 July 2016
0

Outside the scope (of VAT)  income leads to loss of input tax: Upper Tribunal (UT) decision

In the recent UT case of VCS it was decided that input tax relating to outside the scope activities of the appellant was not recoverable.

Background

VCS is a car park operator, which manages and operates car parking for its clients on private land. Inter alia, providing parking control services, including the issue of parking permits and enforcement action (solely at the discretion of VCS).

In practice, most of VCS’s revenue is derived not from providing parking permits, but from parking charge notices (“PCNs”) which it issues to motorists who are in breach of the rules for parking in the car parks. In the period considered, approximately 92% of VCS’s income came from PCNs, and just 8% from parking permits. In March 2013 the Court of Appeal (CoA) decided that the PCN revenue was not subject to VAT. This was because VAT is chargeable only in respect of revenue from the supply of goods or services. The CoA held that the PCN revenue was not earned in respect of supplies of services liable to VAT. Rather, the PCN revenue represented damages for breach of contracts between VCS and the motorists and/or damages for trespass by the motorists.

Decision

The UT agreed with the First-tier Tribunal’s decision that that VCS was not entitled to recover input tax that related to outside the scope (PCN) income and that it was reasonable to assume that since 92% of the income generated by VCS was outside the scope of VAT, only 8% of the input tax incurred on its costs should be deductible.

Commentary

It is clear that there is a direct link between the general overheads of the business in respect of which VCS incurred input VAT and both VCS’s taxable supplies of parking permits and the PCN income.  The appellant’s contention that a taxable person (such as VCS) is entitled to deduct all the input tax if the goods or services are used to any extent for the purposes of taxed transactions was doomed to failure and the chairman stated that “…we accept HMRC’s interpretation of Article 168 PVD. Accordingly, where purchased goods or services are used by a taxable person both for transactions in respect of which VAT is deductible (ie; taxable supplies) and for transactions in respect of which VAT is not deductible (ie; where the transactions do not constitute economic activity or do not constitute taxable supplies (even though they may be transactions undertaken in the course of a taxable person’s business) or where the supplies are exempt), VAT may only be deducted in so far as (that is, to the extent that) it is attributable to taxable supplies.”.

There are no surprises in this decision, but it serves as a timely reminder that not only is “VAT free” income not always a beneficial treatment, but any income that does not relate to a business’s’ taxable supplies can create costs and complexities, whether it be outside the scope, non-business, or exempt.

Outside the scope income can be received by any business in certain circumstances, and it must be recognised in its VAT reporting as this case demonstrates that not all input tax may be recovered and there is no de minimis for input tax attributed to outside the scope and non-business, it is simply not input tax.

Full case Vehicle Control Services Limited (VCS)

VAT – The “business” of shooting; a tale

By   15 July 2016
0

Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of the The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As we orchestrated the defence for The Shoot we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are: 
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. 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 recent case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is details here

VAT – Latest from the courts: Royal Mail claims (Zipvit)

By   4 July 2016
0

The Upper Tribunal (UTT) decided that VAT incurred on the receipt of certain postal services is not recoverable.

 Brief background

It is estimated that businesses could have recovered more than £220 million of credit for input tax on RM’s postal services had the decision gone in their favour.

It has previously been decided that certain supplies made by Royal Mail (RM), including Parcelforce, to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services were able to make retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.

Decision

The UTT has agreed with the verdict in the FTT hearing that the appellant: Zipvit Limited (along with many other taxpayers) was unable to recover input tax claimed to be embedded the value of the supply by RM.  Regardless of the arguments on the embedded input tax point (and interesting comments on the absence of a correspondingly equal amount declared as output tax by RM) the UTT agreed with the overall finding by the FTT.  Although a This is a highly technical issue, the deciding point was the simple fact that as the claimant did not have valid tax invoices to support the claim it was invalid.  Additionally, it was decided that although HMRC may consider alternative evidence, in these circumstances they were not obliged to accept other documentation and that Zipvit’s claim therefore failed.

Action

We are aware of many appeals being stood behind Zipvit. This case clearly is unhelpful for claims, but it may not be the end of the process.  We will advise on any further progress of the appeal when that information is available.

Please contact us if you have any queries on this case.

Full case here Zipvit Limited

VAT – Charities and donations. Latest from the courts

By   22 June 2016
0

What is a donation?

In the widely anticipated case of Friends of the Earth Trust Ltd (TC05165) the issue was; what constitutes a donation for VAT purposes? This is a perpetually thorny issue for charities.

True donations are outside the scope of VAT which usually produces a beneficial outcome for charities as no output tax is due on these payments. However, if any consideration is provided by a charity then it is likely that a taxable supply is being made.  This subject often creates disputes and is another difficult area with which charities and NFP bodies have to contend.

This case is slightly unusual as the appellant was arguing that payments received from the public are taxable supplies.

Background

The charity incurred input tax on the expenses of training of street fundraisers (chuggers) who were used to sign up members of the public to a commitment to make regular direct debit payments to the charity. I am sure we have all encountered this type of fundraising.

The recovery of this input tax was dependent on whether the money collected in this way represented taxable supplies made by the charity, or were simply donations.  If it was non-business income (donations) it was not possible to recover the relevant input tax.

Contentions on the consideration point

Supporters of the charity who paid £3 or more per month received a magazine and various other benefits. Those paying less than £3 received no benefits.

The charity contended that taxable supplies were being made, albeit that the supply was wholly or overwhelmingly zero rated (the supply of printed matter). Further, there was a direct and immediate link between the expenditure on the training of the fundraisers and the benefits obtained (by a certain class of supporter). This would mean that there would be no output tax on the payments, but recovery of the relevant input tax.

HMRC formed the view that the direct debit payments were donations and as a result a non-business activity such that the attributable input tax was irrecoverable.

The Decision

The Tribunal, citing, inter alia, the FTT’s decision in The Serpentine Trust Ltd v The Commrs for Revenue and Customs, decided that “..it is quite clear when viewed objectively that the £3 minimum monthly payment was not “for” the magazine and benefits, or in other words a quid pro quo for them. The magazine and benefits were quid cum quo, the transaction being that the payment was a gift to the appellant to be used in its charitable work and that the appellant would send the supporter free copies…”.

The Chairman stated that the evidence, when viewed in the round, is simply not consistent with the transaction objectively being one where the person was paying a subscription for the magazine and other benefits. And that it was a donation to support the appellant’s charitable activities. The fact that the taxpayer only provided the benefits if the minimum payment of £3 was made did not turn the payment into value given in return for the magazine and other benefits. It still retained its character as a donation. It was just as consistent with the transaction being one whereby the taxpayer undertook to send a free copy of the magazine where donations were made above a certain level.

The Tribunal therefore concluded that the payments were donations to the taxpayer and so the relevant input tax on the fundraising costs was not claimable.

This case demonstrates the uncertainty over the distinction between taxable supplies and donations and that every case is decided on precise facts.  Please contact us if this has rung any alarm bells, or perhaps provided an opportunity to review a charity or NFP body’s income. Our charity services here

VAT – Latest from the courts: A round up of partial exemption

By   20 June 2016
0

The partial exemption calculation

The calculation is required to quantify the amount of input tax a partly exempt business is able to claim. A partly exempt business is one which makes a mixture of taxable and non-taxable (eg; exempt) supplies. Input tax attributable to exempt activities is not recoverable.

With certain businesses HMRC accept that the usual “partial exemption standard method” based on taxable turnover versus exempt turnover is either impractical, distortive, or inappropriate. In such cases the business submits an application for a partial exemption special method (PESM). This may be based on many various factors such as; floorspace, staff numbers, transaction counts, management accounting etc (or any combination). If HMRC accept that the proposal is fair and reasonable, a formal agreement will be entered into by both parties.

The question in this case was when a PESM is agreed with HMRC is there a requirement to round up figures to a whole percentage point?

According to the CJEU decision in Kreissparkasse Wiedenbrück the answer is no. It was decided that, via EC legislation, in cases where there is a PESM agreement in place there was no obligation to round up.

The view was that as a significant amount of PESMs are “sophisticated” (compared to the partial exemption standard method) they achieve a more accurate allocation of input tax between taxable and exempt activities and rounding would counter this accuracy.

Full case here

Please contact us if your business is partly exempt and you either have a PESM in place, are in the process of agreeing one, or feel that your input tax recovery is suffering by the use of the standard method.

VAT Latest from the courts – what is a business?

By   8 June 2016
0

In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean:  The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning.  Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client.  In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

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 made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately 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?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation,  Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system.  The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid.  The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational.  The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here