Summary
We have one interesting judgement from the Upper Tribunal to get our teeth into this month, with yet another sweetened food related case. The Judges have provided a useful step by step guide of how to approach the confectionery question, ultimately finding that giant marshmallows are zero rated.
The output from the Court of Justice raises interesting questions of free supply of surplus heat; how to treat electric vehicle charging; electronically supplied vouchers and pawnbrokers’ auction commission.
HMRC published another “clarification” of the impact of Brexit on the supremacy of EU law for VAT and Excise, but the impact still seems uncertain, until we get some guidance from the Courts in due course.
News from the UK Courts and Tribunals
Upper Tribunal (‘UT’)
[2024] UKUT 95 (TCC) Innovative Bites Limited
The Upper Tribunal has confirmed the FTT decision that “Giant Marshmallows” sold for roasting over a fire / barbeque are zero rated.
The UT spent 74 paragraphs over 15 pages undertaking a highly technical analysis of outlining how confectionery should be approached for VAT purposes. It found that unless the item is obviously sweets or chocolates, a multi-factorial assessment must be made and provided step by step guidance for future tribunals to follow.
After that it was relatively plain sailing to conclude within another 40 or so paragraphs that HMRC's arguments and published guidance is at best inconsistent. For example, it is unclear whether certain items are not considered to be confectionery per se, or “untaxed” by concession. Ultimately HMRC was not able to convince the UT that the First-tier Tribunal (‘FTT’) had got it wrong.
With new food products being created all the time, it is vital for manufacturers to consider how each new item would be considered for VAT purposes, as the borderline between zero and standard rating has proved incredibly difficult to navigate. For sweetened foods, the guidance from this Tribunal may provide some clarity, at least on how to approach the issue.
FTT
While there have been a number of judgements published by the FTT in April, none merit further study or comment.
Court of Justice of the European Union
C-207/23 Y KG - Germany
On 25 April 2024, the Court ruled that the free supply of heat as a bi-product of a biomass electricity generator is a deemed supply of goods with output tax due on the full cost of the supply.
Y burned biomass to generate electricity, selling it to the grid. It is never possible to convert all the heat energy from combustion into electricity, so surplus heat must somehow be got rid of (hence the large cooling towers seen near power stations). Instead of wasting the heat energy, Y supplied it free to a nearby timber business to dry wood, and to an asparagus farmer to heat the soil.
The Court has ruled that because the supply of heat is deemed to be goods (Article 16 of the PVD), there is a deemed supply that must be taxed according to the cost of the supply, including indirect costs. Given that the heat is a bi-product of power generation, it would be an interesting challenge to work out that cost. Instead, the taxpayer might be well advised to avoid that calculation and agree a small regular charge (plus VAT) rather than making a free supply.
C–657/22 SC Bitulpetrolium Serv SRL - Romania
On 25 April 2024, the Court ruled, that the Romanian policy deeming the return of goods into an excise warehouse to be a taxable transaction are outside the principles of the PVD.
The facts of the dispute are unusual, in that, excisable fuel was delivered to customers, then returned (for quality or other reasons) to the supplier's excise warehouse. It seems the tax authority took issue with the difference between the equivalent rebated fuel (it would be red diesel in the UK) and motor fuel (white diesel). In terms of VAT, the tax authority wanted output tax based on the higher priced motor fuel. The Court has said that the return of the goods into the warehouse does not lead to a taxable transaction on which VAT is due at a different rate to the original supply. Any relevance of this case in the UK appears to be tenuous.
Case C-68/23 M-GbR - Germany
On 18 April 2024, the Court ruled that electronic vouchers redeemable in Germany for digital content must follow the strict voucher rules, and if the customers declared themselves to belong in Germany (even if they did not), then VAT would be due on the sale of the single purpose voucher, rather than delayed until the voucher is redeemed.
M marketed prepaid cards or voucher codes enabling ‘user accounts’ to be loaded for the purchase of digital content in online shop X.
These credits, known as ‘X cards’ were denominated in euros, and the account holder could purchase digital content from shop X, which was managed by company Y, established in the United Kingdom, at the prices indicated therein.
Y was responsible for issuing X cards and marketing them in the European Union, with different ‘country’ codes, through various intermediaries. X cards with the ‘country’ code DE were intended exclusively for customers who had both their domicile or habitual residence in Germany and a German X user account.
The terms and conditions required customers to state their place of domicile or residence and were supposed only to use the X cards to download content from that country. However, some customers provided false information about their residence, and it seems a large number of non-German residents bought German X cards for pricing reasons. The seller did not undertake verification of the customers' residence.
The Court looked only at the strict interpretation of the voucher rules in the PVD to determine whether the X Card is a single purpose voucher, adopting the premise that the abuse of the terms and conditions by customers could not be taken into account.
Comment: The Court referenced the DSAB Stockholm case on single v multiple purpose vouchers in its judgement, and indicated that in the present case, the X Cards would be single purpose vouchers because the Ts & Cs indicated the place of supply (where the customer belongs) must be Germany. Although the Court did not have evidence before it, it seemed likely that all supplies by shop X would be standard rated, so single purpose voucher treatment would follow, and German VAT would be due on issue of the voucher. Whereas if it were a multi-purpose voucher, the VAT is not due until the voucher is used.
Case C-89/23 Companhia União de Crédito Popular SA (‘CUCP’) - Portugal
On 18 April 2024, the Court ruled that when a pawnbroker organised auction sale of pledged goods, the auction commission charged is not exempt.
CUCP operated as a pawnbroker, offering loans secured against chattels, and charging interest (agreed to be exempt). If the borrower failed to pay the interest, and did not redeem the property within 3 months, CUCP would arrange for the property to be sold at auction and the proceeds offset against the loan less a commission of 11% of the hammer price.
CUCP had treated the commission income as exempt (thinking it was ancillary to the granting of credit) but the tax authority assessed for output tax at the standard rate.
Comment: The Court has come down against the business and decided the auction commission is not ancillary to the granting of credit. It said exemptions, being a departure from the status quo should be interpreted narrowly, but not so far as to deny the purpose of the exemption.
Case C-122/23 Legafact Ltd - Bulgaria
On 11 April 2024, the Court ruled that where a member state has a VAT registration threshold, it is perfectly reasonable for it to impose registration calculated from the date the threshold was reached, rather than a later date submitted by the taxpayer.
In this case a business, which exceeded the VAT registration threshold, applied for registration a bit late. The tax authority registered it a month or so earlier and asked for the output tax from the effective date of registration. The answer, hidden in the Court's Judgement, is that this seems perfectly reasonable action by the Bulgarian tax authority.
Comment: As we know, the UK operates in a similar way, so the Judgement confirms the UK system has been operating in accordance with EU rules.
Advocate General Opinions
C–741/22 Casino de Spa SA and Others and C-73/23 Chaudfontaine Loisirs SA – Belgium
On 25 April 2024, the AG proposed the Court should rule that the exemption for gambling in the VAT Directive has no direct effect as it is subject to limitations and conditions decided nationally.
Comment: In Belgium, from July 2016 to May 2018 online gambling was standard rated while other gambling remained exempt. Various companies, which had paid the output tax in this period asked for refunds, but these claims were rejected. The AG is saying that the temporary law did not offend the principle of fiscal neutrality.
C–60/23 Digital Charging Solutions GmbH - Sweden
On 25 April 2024, the AG proposed the Court should say the recharging of an electric vehicle at a network of charging points to which the driver has a subscription service with a company other than the charging-point operator, implies that the electricity consumed is delivered from that operator to the user, and the company offering access by the subscription service acts, in that supply, as a commission agent.
Alternatively, if the specific conditions for a commission agent are not met, the supply of electricity to the user is deemed to be made by the company providing the subscription service.
Background and Comment: DCS is a German company without an establishment in Sweden. Owners of Electric Vehicles (EVs) subscribe to DCS for a fixed monthly fee giving them access to charging points operated by different companies (the Charging Point Operators or CPOs). It seems to be agreed between the parties that the services in return for the monthly fee are separate from the supply of electricity, because the fee is payable regardless of whether the EV is charged on the network. The question appears then to be who is providing the electricity (deemed to be goods rather than services) to the consumer.
The AG appears to be over-complicating the situation, since with both possible conclusions DCS would have to charge Swedish VAT on the electricity supplied and would be able to issue tax invoices to the drivers. It is not at all clear how the AG’s alternatives would work differently in practice. Maybe we should wait to see what the Court concludes in a few months’ time.
Case C‑709/22 Syndyk Masy Upadłości A - Poland
On 11 April 2024, the Advocate General recommended the Court ruled that the special account that holds VAT received from customers under the split payment system in Poland is not accessible by an insolvency practitioner unless the tax authority confirms that there are not taxes due.
Comment: This involves the Polish “split payment” mechanism (a customer pays the net amount of the invoice to the main bank account of the supplier, and the VAT amount into a special designated bank account that is ringfenced for the benefit of the tax authority). In this case, the supplier became insolvent, and the insolvency practitioner wanted access to the split payment account, so he could use the funds for the benefit of all the creditors, not just the tax authority. The opinion, if followed by the Court, indicates that these funds may not be accessed unless they exceed the money due to the tax authority.
Other News
VAT Treatment of Private Hire Vehicles
On 18 April 2024, HMRC published a consultation on the potential tax impacts of recent High Court judgments regarding Uber on transport legislation on the private hire vehicle sector and its passengers.
Comment: If you have been affected, we would be happy to talk to you in informing and formulating our response to HMRC.
Revenue and Customs Brief 04/2024
This Brief says that the “bespoke solution” for VAT and Excise interpretation of EU Law in the light of Brexit means HMRC’s policy on these taxes is unchanged. However, that statement is rather confusing, as HMRC goes on to say that EU Law may no longer be relied on by businesses as having direct effect. It will probably take some tricky disputes in the courts over the next few years to gain clarity on what this really means.
Revenue and Customs Brief 05/24 Tour Operators Margin Scheme (TOMS) and wholesale supplies
After concluding a review, HMRC has concluded that B2B wholesale supplies are within the scope of the TOMS and by concession, tour operators may opt B2B wholesale supplies out of the TOMS RCB 05/2014 has been withdrawn and Notice 709/5 amended.
