The High Court held that on the proper application of the place of supply rules in art. 9(2)(e) of Council Directive 77/388 (the sixth directive) a supply of consultancy services to a Swiss company was made to its fixed establishment in the UK. Accordingly, the result of applying the reverse charge provision in s. 8 of the Value Added Tax Act 1994 was the same as the result required by the directive and the taxpayer was liable for VAT in respect of those services.

Facts

The taxpayer was a Swiss company with headquarters in Zurich. It had subsidiaries and branches in many countries, with a large operation in the UK. A new software system was introduced throughout the company and in the UK branch offices (‘ZUK’) with the help of consultants (PwC) engaged by the head office in Switzerland. The performance of the consultancy services was subcontracted to PwC's UK office and most of the consultancy services were physically provided at the taxpayer's business premises in the UK.

The invoices submitted in respect of the consultancy services did not include VAT. If the UK office had obtained the same or similar consultancy services from a supplier based in the UK, it would have charged VAT at 17.5 per cent on the basic contract price. Since most of the supplies made by the UK operation in the course of its business were exempt from VAT under VATA 1994, Sch. 9, Grp. 2, it would only have been entitled to recover a small proportion of the input tax paid as part of the invoiced price charged to it by the supplier. Customs considered that, under the reverse charge provisions in VATA 1994, s. 8, the taxpayer was liable to pay VAT in the UK, and assessed the taxpayer in the sum of just over £2 million.

The taxpayer appealed to the VAT and Duties Tribunal contending that the services were supplied in Switzerland where the taxpayer was established, but Customs argued that the services were supplied in the UK where the appellant had a fixed establishment.

The tribunal allowed the taxpayer's appeal concluding that the place of supply of the consultancy services was Switzerland ([2006] BVC 2,003, Decision No. 19,157). Customs appealed to the High Court.

Issue

Whether the place of supply of consultancy services was Switzerland or the UK.

Decision

Park J (allowing the appeal) said that art. 9(2)(e) of the sixth directive provided that the place where services of consultants were supplied when performed for customers established outside the European Community, such as Switzerland, was the place where the customer had established his business or had a fixed establishment to which the services were supplied.

On the facts of this case, the only tenable conclusion was that the consultancy services in question were supplied to the taxpayer at its UK establishment. The court disagreed with the tribunal's view that the most important consideration was the place at which the contract for the services to be supplied was made. VAT was not charged on the supply of the service of making a contract for services. It was charged on the supply of the services which had been contracted to be supplied (Berkholz v Finanzamt Hamburg-Mitte-Alstadt (Case 168/84) [1986] BTC 5,011; [1985] ECR I-2251, C & E Commrs v DFDS A/S (Case C-280/95) [1997] BTC 5,167; [1997] ECR I-1005 and RAL (Channel Islands) Ltd v C & E Commrs (Case C-452/03) [2005] ECR I-3947 considered).

When a work order was signed, the taxpayer contracted with the consultants for them to provide services to its UK establishment. It was a contract made in Switzerland of a kind that, for commercial reasons, the head office would want to be involved in. However the consultants were not providing or supplying their services to the taxpayer at its head office by making a contract to do so. It provided or supplied the services after it had made the contract, performing them entirely in the UK through a subcontractor. The taxpayer's head office wanted to get the new system installed into the operations of its establishment in the UK. It was in order to secure that result that the taxpayer engaged the consultants. The actual provision of the services to the taxpayer in the UK far outweighed in importance the feature that the contract which the consultants performed in the UK had been made in Switzerland. In reality, the fixed establishment of the taxpayer to which the services were supplied was its establishment in the UK and not its head office in Switzerland (C & E Commrs v Redrow Group plc [1999] BTC 5,062 considered).

The conclusion that the consultancy services were supplied to the taxpayer's fixed establishment in the UK was not just the only tenable conclusion on the facts. It was also the conclusion which produced a rational result which avoided non-taxation in a case where there ought to be taxation and which avoided distortion of competition. Accordingly, the tribunal's decision to allow the taxpayer's appeal against s. 8 assessments could not stand.

Chancery Division. Judgment delivered 23 March 2006.