European Court of Justice

Administration de l'enregistrement et des domains v Eurodental Sarl (Case C-240/05)

VAT

This ECJ (Third Chamber) VAT case considers the availability of input VAT for the taxpayer which is a company established in Luxembourg and is engaged in the making and repairing of dental prostheses for customers based in Germany.

The supply of services by dental technicians and supply of dental prostheses made by dentists and dental technicians are exempt from VAT as activities in the public interest when supplied within the territory of a Member State. The taxable person is not entitled to deduct input VAT paid when supplying such exempt service.

However, in general, supplies of goods and services intra-Community are exempt when dispatched or transported to a destination outside the territory of the Member State. The deduction of input VAT on such transactions was permitted in the Member State of departure.

The key issue in this case is whether transactions like the making and repair of dental prostheses which, when they take place within the territory of a Member State, are exempt from VAT as activities in the public interest may give rise to a deduction of input VAT when they are intra-Community transactions.

It was held that a transaction which was exempted as an activity in the public interest (such as the making and repair of dental prostheses) within the territory of a Member State did not give rise to the right to deduct input VAT even when it was an intra-Commission transaction. The following reasons were given:

• It was only by way of exception that the Sixth Directive provides for input credit for exempt intra-Community transactions, and the terms used by the directive must be interpreted strictly.
• Furthermore, there is a specific provision in the Sixth Directive relating to the deduction of input credit where the transaction is one listed under the same Article as in the “public interest”. If the provisions allowing input credit for exempt intra-Community transactions have different fields of application over the provisions applicable to transactions carried out within Member States, then this specific provision would not have been necessary.
• If intra-Community transactions were to give rise to the right to deduct VAT in the Member State of departure, they could be supplied in the Community totally exempt from VAT.
• If the disputed transactions gave rise to the right to deduct VAT where they were of an intra-Community nature, the principle of fiscal neutrality would not be observed as the same transactions did not give rise to a deduction where they were carried out within the Member State.

For further details, see page 26.

VDP Dental Laboratory NV v Staatssecretaris van Financien (Case C-401/05)

VAT

This is another ECJ case which has the treatment of VAT on the supply of dental prostheses as its subject matter.

In this case, the taxpayer was established in the Netherlands and was engaged in having dental fittings manufactured to order for dentists established in the Netherlands, other Member States and non-member countries. The key issue in this case was whether under the specific provisions of the Sixth Directive, dental prostheses supplied by a taxable person who contracted out the manufacture to a dental technician were covered by “dental prostheses supplied by dental technicians”.

It was held that the specific provisions of the Sixth Directive did not apply in this situation. According to the Court, it was clear from the wording of the provisions of the Sixth Directive that all supplies of dental prostheses were not exempt from VAT, but only those made by ‘dentists’ or ‘dental technicians’.

For further details, see page 27.

EC Commission v Greece (Case C-13/06)

VAT

The ECJ case ruled that car accident or breakdown services supplied by ELPA (the Automobile & Touring Club of Greece) to its members in return for payment by those members of a fixed annual subscription fell within the definition of ‘insurance transactions’ referred to in art.13(B)(a) of the Sixth Directive.

The ECJ said that, although the term ‘insurance transactions’ was not defined, the essentials of an insurance transaction were that the insurer undertook, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.

It is worth comparing this decision with the decision above in VDP Dental Laboratory NV v Staatssecretaris van Financien.Both ECJ cases deal with exempt transactions; in the Dental Laboratory case – certain activities in the public interest, and in the Greece decision – other exemptions. In the Greece case, it is the transaction that is listed in the Sixth Directive, i.e. insurance transactions, whereas in the Dental Laboratory case, the emphasis is on the persons providing the service, i.e. dentists and dental technicians.

For further details, see page 28.

Denkavit Internationaal BV & Anor v Ministre de l'Economie, des Finances et de l'Industries (Case C-170/05)

Commentary on this case was included in Section 1.35 of the January edition of tax.point.

Chancery Division

R& C Commrs v Oriel Support Ltd [2006] EWHC 3217 (Ch)

CIS/Jurisdiction of Special Commissioners

While this UK case deals with the application for a certificate (CIS5) as a contractor under the construction industry scheme, the High Court focuses on the jurisdiction of the special commissioner in reviewing the refusal of the application.

In order to obtain the CIS5 certificate, the taxpayer must satisfy three tests:- the business test; the turnover test and the compliance test. Revenue refused the application on the basis that the first two tests were not met; but they did not consider the compliance test.

Before the Special Commissioners, the Revenue accepted that the first two tests were satisfied but that the compliance test was not. The taxpayer argued that Revenue's attempted reliance on the compliance test was too late. The Special Commissioner declined to put himself in the shoes of the Revenue, taking the view that his function was to review the reasons for refusal originally given. The Revenue appealed on the basis that the decision could have unwelcome consequences in other cases.

The High Court held that the Special Commissioners could not make a determination which would compel the Revenue to issue a certificate where the Revenue considered that the compliance test had not been satisfied, unless the commissioners had themselves decided, on the evidence before them, that the compliance test was satisfied. In summary, the appeals procedure could not override the statutory requirements for the issue of a certificate.

While this case may not have direct relevance for Ireland, the arguments surrounding the role of the Special Commissioners (including the issue of legitimate expectation) may prove useful.

For further details, see page 30.

Special Commissioners

Hinsley & Anor v R & C Commrs

Expenses of employment: wholly, exclusively and necesssarily

This UK Special Commissioners decision concerns whether employees’ expenses have been incurred wholly exclusively and necessarily in the performance of the duties of their employment.

It was held that the taxpayers were not entitled to set against their employment income payments made to reimburse their employers for the cost of training when they left their employment, since the expense had not been incurred wholly, exclusively and necessarily in the performance of their duties.

These were appeals by two commercial airline pilots which were heard together. Each of the pilots received training free of charge from their first employer. Each pilot's employment contract provided that if the pilot should leave the employment within a fixed period after receiving that training the employee should pay a sum to the employer. The pilots left their employment at different times and reimbursed their employers for the cost of the training.

The Commissioner firstly considered when the “wholly, exclusively and necessarily” test should be applied – it was decided that the test should be applied when the payment was expended and not when it was incurred as the relevant legislation uses the term incur and defray and not just incur. As the payment was made when the employees left the employment, the payment was held not to be expended wholly, exclusively and necessarily in the performance of the pilot's duties. Rather the payment was expended as a consequence of the employment contract.

As a “belt and braces” exercise, the commissioner went on to consider whether the payment would have been deductible if it had been made when the training was undertaken. The test the commissioner used was whether the duties of such an employment could objectively be said to require the expense, for which he concluded that they did not.

As similar legislation exists in Ireland, this case may have some relevance for Ireland.

For further details, see page 31.

Daas v R & C Commrs

Deductibility of trade expenses

This UK Special Commissioner's decision concerned the entitlement of a taxpayer to deduct the costs in respect of examination re-sit fees as either vocational training relief or as an ordinary trading deduction.

Initially the Revenue disputed the taxpayer's entitlement to the second fee but concede the relief on a ‘one-off or without prejudice basis due to the amount of the claim being so small (£200). The taxpayer appealed in relation to the disallowance of the earlier fee and complained that his human rights had been infringed.

On the basis that the course would equip the taxpayer with a new qualification which would enable him to venture into a new area of practice and not merely a ‘refresher’ course, the costs were not held to be allowable.

As similar legislation is used in Ireland, the non-deductibility arguments of the costs may have relevance.

For further details, see page 32.

Postlethwaite's Executors v R & C Commrs

Inheritance Tax: gratuitous benefit

This UK Special Commissioners decision concerned the interaction of section 10 of the Inheritance Act 1984 (“IHTA”) excluding from inheritance tax dispositions not intended to confer gratuitous benefit with section 94 imposing a charge on participators when a close company makes a transfer of value.

Dr Postlethwaite, who was a highly skilled designer and engineer in Formula One motor racing, worked in Ferrari in 1982 and 1983. From 1987 to 1991 he was engaged by the Tyrell Racing Organisation and Sauber in the UK. In December 1991 Dr Postlethwaite returned to work for Ferrari in Italy, working through Pintacorze Ltd for GSA which was connected with Ferrari. Pintacorze Ltd signed a contract with GSA to provide engineering services for a fee of £600,000 per annum. Dr Postlethwaite signed an employment contract with Pintacorze Ltd for a salary of £75,000 per annum, together with pension arrangements and bonus payments which were unspecified at the time of signing the contract.

In August 1993, the directors of Pintacorze Ltd resolved to set up a retirement benefits scheme and to make an initial contribution of £700,000. In the event of his death before receiving the benefits there were discretionary trusts for a class which included his spouse and children. The employment contract was terminated with effect from 30 September 1993. Dr Postlethwaite died in April 1999.

It was decided that the payment of £700,000 was not intended to confer a gratuitous benefit on the deceased or anyone else. The contract between the deceased and Pintacorze Ltd specifically contemplated a bonus in addition to a salary and pension arrangements to be agreed. A surplus in excess of £800,000 had accrued by the end of July 2003 generated entirely from income earned for the company by the deceased. In those circumstances a payment of £700,000 to a pension arrangement could not properly be described as ‘given… for nothing’ or ‘not earned’.

This case should not have direct relevance for Ireland, but the discussion around the meaning of “gratuitous” may be useful.

For further details, see page 33.

VAT and Duties Tribunals

Topps Tiles plc

This tribunal dealt with the method of dealing with fractions of a penny when accounting for VAT on tax-inclusive amounts.

Generally, the taxpayer treated the sales to each customer as a single transaction, and rounded up or down accordingly. However, for two quarters in 2003, the taxpayer rounded down only in respect of each unit price (e.g. each tile). This resulted in a reduction of output tax due of approx £200,000. The taxpayer argued that since the law did not provide for rounding up, as rounding up resulted in a rate higher than the standard 17.5%, it was entitled to use rounding down.

The commissioners argued that in an invoice only one rounding should occur and that would be when the total of the invoice was calculated and there was no authority for rounding down.

The commissioner dismissed the taxpayer's appeal as the commissioners’ contention achieves a fair result.

For further details, see page 34.

Newcastle United plc

This UK VAT Tribunal decision concerned the deductibility of VAT paid by Newcastle United plc (“Newcastle”) on players’ agents’ fees.

The agents were appointed by players to act exclusively on their behalf. However, in the renegotiation of a player's contract, the agent would act jointly for the player and the club.

The Tribunal dismissed the Club's appeal on the following grounds:

• The agent was appointed to act exclusively for the player and so cannot be engaged as agent of the Club and hence cannot supply his services to the Club.
• C& E Commrs v Redrow Group plc [1999] BVC 96 (“Redrow”) did not apply in this situation because the players’ agents did not have obligations to the Club since they were exclusively contracted to the individual players.

For further details, see page 35.