Summary
Chancellor Rachel Reeves has announced the UK is moving towards electronic invoicing (e-invoicing) with a view to modernise the tax system. HMRC will soon be publishing a consultation to get input from businesses on how best to roll this out. The idea is to make invoicing easier and more accurate, improve cash flow, and boost productivity by automating processes. We will update you when the consultation is published.
The most notable case report this month comes from the First Tier Tribunal, which has ruled against Barclays, saying that at the moment it applied to VAT group its overseas service company the application failed because it did not have a fixed UK establishment. Given the importance of the principles we are expecting an appeal.
News from the UK Courts and Tribunals
Upper Tribunal
[2024] UKUT 284 (TCC) TalkTalk Telecom Ltd v HMRC
Talk Talk has failed to convince the Upper Tribunal that its Speedy Payment Discount allowed it to reduce the output tax due even when not taken up by its customers.
Before 1 May 2014, if a prompt payment discount was offered, a supplier was able to discount the output VAT even if the customer did not meet the prompt payment terms. It seems that TalkTalk hit on the bright idea of the “Speedy Payment Discount” as a way of reducing its output tax liability by offering a very short window of opportunity to claim the discount. With a take up of only 3% for a discount of 15%, it appears that the offer was not well publicised to customers and only the canniest were up to the challenge of paying on the dot. HMRC asserted that this was not a genuine arrangement within the valuation rules, and the Upper Tribunal has agreed. The First Tier Tribunal found for HMRC and given the sum involved (more than £10M) Talk Talk predictably took it further to the Upper Tribunal.
In a relatively short Judgment of just 9 pages, the Upper Tribunal dismissed the appeal, saying that for a prompt payment discount to apply there must be two payment dates mentioned in the agreement: “a standard due date for payment and an earlier optional payment date”. The main agreement had no mention of this, and instead Talk Talk sent a message offering to reduce the price by 15% if payment was made within 24 hours (only 3% of customers took this up). This was not sufficient to come within the rules. As the particular provision under dispute was changed with effect from 1 May 2014 so the substantive issue is of historic interest only.
First Tier Tribunal
TC09275 Barclays Service Corporation & Barclays Execution Services
Barclays has long had a service company operating from New York that provides a wide range of services to Barclays group companies both in the UK and overseas. When services were received in the UK, it was obliged to apply the reverse charge, leading to a VAT cost. The bank investigated establishing a branch of the service company in the UK and adding it to the UK VAT group.
Several senior employees were identified and employment contracts set up with office space for them in an office in Cheshire. Barclays submitted its application to add the Service company to the VAT group on 4 December 2017 with effect from 1 December.
HMRC had some reservations but were required to make a decision within 90 days, so asked for more information then rejected the application in early February 2018.
HMRC asserted the service company did not have a UK fixed establishment, and even if it did, refusal could be based on “protection of the revenue”. Of course, the bank asserted the opposite and appealed.
At this point, it’s worth noting that HSBC had a similar issue with its overseas service company being unilaterally removed from the UK VAT group by HMRC. We have seen several preliminary issues from both the HSBC and Barclays appeals in the FTT and UT, but this is the first judgment that looks at the substance of the dispute.
The FTT considered a large volume of witness and documentary evidence provided by both sides and considered some of the evidence in great detail to decide whether a fixed establishment existed at the effective date applied for. Ultimately, it concluded that only preparatory activities were being undertaken by 1 December 2017 and the employees did not take up their positions with any serious effect until sometime after 1 December. The FTT declined to answer when it considered a fixed establishment came into being. The conclusion, arguably based on this very narrow interpretation, is that at the date applied for the Service company did not have a UK establishment.
The FTT went on to consider, if it was wrong on the first point, whether HMRC could have refused the application for the “protection of the revenue” as VAT grouping would result in many millions of VAT savings for the bank. The FTT concluded that such savings would have been a natural consequence of VAT grouping rather than avoidance and HMRC's argument would fail.
The third issue for the FTT to consider was what the effect of VAT grouping would be in the light of Danske Bank, but since it decided there was no entitlement to VAT grouping, this issue did not get much airtime.
Comment: This is an important step in this appeal. The very narrow interpretation of Fixed Establishment will surely lead to an appeal by the Barclays to the Upper Tribunal. However, the detailed examination of the circumstances that pertained at the date of the application begs the question what would have been the result if the application had been delayed by a month or two so the relevant employees were well established in their roles as the human resources on a permanent basis able to receive or make supplies.
Court of Justice of the European Union
C–741/22 Casino de Spa SA & Others — Judgment - Belgium
The Court was asked to consider online gambling v lottery cards for a two-year period when the Belgian State taxed them differently. The Court has provided guidance to the Belgian court saying it need to decide if the typical consumer would be influenced to bet on different forms of gambling according to the tax treatment.
Comment: The ruling considers the concept of fiscal neutrality between similar supplies, but since the specific dispute relates to the period from 2016 to 2018, its current implications are limited.
C–709/22 Syndyk Masy Upadłości A - Judgement - Poland
In Poland the customer is required to pay the VAT and net amount on the invoice separately, with the VAT going into a special bank account of the supplier that is ringfenced to pay national tax revenues to the state. In this case, the company became insolvent, and the insolvency practitioner wanted to use some of the ringfenced funds to pay local municipal taxes. The Court has found that the account can only be used for other purposes once all the relevant tax liabilities have been settled.
Comment: We do not have a general split payment system in the UK, the nearest equivalent being the special accounting scheme for gold transactions that requires the purchaser to declare the output tax on its own VAT return in a similar manner to the domestic reverse charge.
C–243/23 L BV (Drebers) - Judgement - Belgium
The Court has disagreed with the narrow interpretation of capital goods scheme items that are liable to adjustment over up to 20 years rather than the general rule of just 5 years proposed by the Advocate General in this dispute. It has instead confirmed construction services that involve a significant extension or renovation can be subject to adjustment over up to 20 years.
Comment: The AG opinion led to some speculation that the UK’s interpretation of the Capital Goods Scheme was questionable, but the Court decision has quashed that theory.
C–248/23 Novo Nordisk A/S - Hungary
This case concerns a Danish manufacturer and distributer of pharmaceutical products and its operations in Hungary. In Hungary, certain pharmaceutical products benefit from public funding; the patient pays a subsidised price, and the subsidy is paid to the pharmacy by the National Health Insurance Fund (NEAK). The pharmacy accounts for output tax on the total price paid consisting of the consumers’ payments and the subsidy from the NEAK.
Novo Nordisk sells its products to wholesalers who supply the pharmacies. It made payments to the NEAK based on the amount of medicine sold and was obliged to make a payment of a percentage of 20% or 10% over the subsidy under an “ex lege” (enshrined in law) payment obligation.
Novo Nordisk adjusted its output tax to take account on the ex lege payment, as if it were a discount but the Hungarian tax authority contended that Novo Nordisk does not have the right to reduce the taxable amount retrospectively because the legal payment obligation is not a price reduction but akin to a tax or charge, rather than a discount to the original price of the medicine.
The Advocate General opined on this in June this year and recommended that the ex lege payments should be treated as a discount or reduction of the original price, referring to the Boehringer Germany case, which found that a price reduction does not need to be voluntary to be treated as a retrospective discount for VAT purposes and can also result from a legal obligation.
The Court agrees with Novo Nordisk and the AG that these additional contributions qualify as retrospective price reductions within the rules of the VAT Directive, thus entitling it to a retrospective reduction of the taxable amount.
Comment: for the few of us who can remember the judgement in Elida Gibbs being published, this decision comes as no surprise. Elida Gibbs was the case where if you collected several packet ends from Gibbs toothpaste and sent them to the manufacturer you received a pound coin pressed into a piece of cardboard. The manufacturer convinced the CJEU that the consumer's consideration was reduced by the “cash back” and this fundamental concept enabled the manufacturer rather than the retailer, which had made the supply to the consumer, to reduce its output tax. The Court has followed this reasoning.
C331/23 Dranken Van Eetvelde NV – AG Opinion– Belgium
This is a Belgian case where a supplier was held liable to a penalty because it sold goods, charged VAT that was correctly accounted to the tax authority, but failed to provide the customer’s details on its tax invoices. This meant the customer was then able to sell the goods on the black market without accounting for VAT, as the tax authority could not easily trace the goods.
The AG’s opinion, which may be followed by the Court ruling, is that the penalty levied against a supplier cannot be based on an estimate of the tax liability of another party.
C–573/22 A, B, Foreningen C — AG Opinion - Denmark
Unlike the UK, Denmark opted to tax the radio and TV licence fee, and the AG has concluded that Denmark was entitled to continue to tax it after the PVD came into force on 1 January 1978. The UK has never treated the licence fee as subject to VAT and allows the BBC and S4C to recover the VAT they incur using the special refund scheme in s.33 of the VAT Act.
C-639/22 X and Others - Netherlands
Several Defined Benefit Pensions schemes applied for a ruling that they acted as special investment funds (“SIFs”), which would mean their investment management costs would be exempt.
The Court’s judgement seems to be an equivocal judgement without providing much clear guidance, on the basic position for a defined benefit pension scheme. However, it does say that where a pension fund does not come within the meaning of a UCITS a comparison with funds that do may lead to the conclusion that the pension fund is a “special investment fund”.
You may recall this comparison was considered for investment funds in CCLA (TC09241) which was discussed in August 2024 Indirect Tax Update 2024.
C-83/23 - H GmbH - Germany
H GmbH purchased several motorboats with the intention of leasing them back to the seller (sale and leaseback of goods). The seller charged German VAT (even though the boats were in Italy). H was blocked from recovering the VAT, because it had been incorrectly charged, even though the supplier was obliged to pay over the output tax (because it was shown on the sales invoice).
The seller was subsequently allowed to adjust its sales invoices and obtain a refund of the VAT incorrectly charged, but then became insolvent without making the corresponding refund to H, its customer. H requested a direct refund from the tax authority (quoting Reemstma) but the Court has ruled that such a claim is not admissible.
HMRC and HM Treasury
On 19 September 2024, published Guidelines for Compliance — Help with VAT compliance controls, which are aimed at businesses that use invoice accounting. Is this the first move towards Making Tax Digital 2.0 by the UK's tax authority?
Controls are fundamental to an effective VAT compliance process and can range from the simple to the very complex and will be dependent on the technology landscape within each business. There is no 'one' out of the box solution and ensuring the right controls are in place usually involves looking from the very start of a transaction all the way through to post submission to HMRC.
On 9 September 2024, HMRC published a policy paper on zero-rating for residential caravans in light of the updating of the latest British Standard. This ensures the continuation of the existing VAT treatment.
