European Court of Justice

Teleos plc & Ors v C & E Commrs (Case C-409/04)

VAT

See Section 1.41 for commentary on this case. For further information, see page 37.

Navicon SA v Administracion del Estado (Case C-97/06)

VAT – chartering of ships

This ECJ case dealt with the chartering of vessels used for navigation in the high seas, which was referred by the Spanish Courts.

Two questions that the ECJ had to consider were:

• Was the term “chartering” in the exemption provided for in Article 15(5) of the Sixth Directive to be interpreted as including only chartering of the entire capacity of the vessel (full chartering) or as including chartering relating to a part or percentage of the vessel's capacity (partial chartering)?
• Did the Sixth Directive preclude a national law which allows exemption only for full chartering?

The reply to the questions was as follows:

• Article 15(5) of the Sixth Directive must be interpreted as covering both full chartering and partial chartering of vessels used for navigation on the high seas.
• Consequently, that provision precludes national legislation, such as that at issue in the main proceedings, which grants the benefit of the VAT exemption only in the case of full chartering of such vessels.

Article 15(5) makes no distinction between full chartering and partial chartering, and “chartering” is not further defined within the Sixth Directive. It has been established in case law that Member States are to lay down the conditions for exemptions within the Sixth Directive in order to ensure the correct and straightforward application of the exemptions and to prevent any possible evasion, avoidance or abuse. However, any such domestic conditions cannot affect the definition of the subject-matter of the exemptions envisaged.

For further information, see page 38.

Van der Steen v Inspector van de Belastingdienst Utreacht-Gooi/kantoor Utreacht (Case C-355/06)

VAT

Until 6 March 1998, the taxpayer ran a one-man business providing cleaning services, in his capacity as a trader within the meaning of the Dutch Turnover Tax Law. From 6 March 1998, the taxpayer became the director and sole shareholder of the private limited company, which took over and continued the business previously carried on by the him. The company was an undertaking within the meaning of the Turnover Tax Law.

The taxpayer had concluded a contract of employment. The company deducted income tax and compulsory social insurance premiums from his salary. The company did not employ anyone apart from him.

The issue was triggered by the company becoming insolvent, and the net point is whether or not the taxpayer could obtain a VAT registration separate to that of his company. By decision of 28 April 2004, the inspector decided that, with effect from 1 May 2004, the taxpayer and the company would constitute a fiscal entity within the meaning of Article 7(4) of the Turnover Tax Law. In short, as the answer given was no, the taxpayer appealed to the ECJ.

The following is the question that the ECJ had to consider:

• Is Article 4(1) of the Sixth Directive to be interpreted as meaning that if a natural person has the sole activity of actually carrying out all work ensuing from the activities of a private limited company of which he is the sole manager, sole shareholder and sole “member of staff”, that work is not an economic activity because it is carried out in the course of the management and represen tation of the private limited company and thus not in economic dealings?

The following is the answer to the question:

• For the purposes of the application of the second paragraph of Article 4(4) of the Sixth Directive, a natural person carrying out all work in the name and on behalf of a company that is a taxable person pursuant to a contract of employment binding him to that company of which he is also the sole shareholder, the sole manager and the sole member of staff, is not himself a taxable person within the meaning of Article 4(1) of that Directive.

In reaching this decision, the ECJ considered Article 4(4) of the Sixth Directive, whereby, a taxable person is any person who independently carries out any economic activity. The word ‘independently’ excludes employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

In this case, the parties agreed that even though the taxpayer was the only director and the sole shareholder of the company, he performed his work under a contract of employment, and so is not a taxable person.

For further information, see page 39.

Court of Appeal (Civil Division)

Loyalty Management UK Ltd v R & C Commrs [2007] EWCA Civ 938

VAT – loyalty scheme

The issue in this appeal was whether the taxpayer was entitled to recover, as input tax, the VAT element of the amount which it paid to suppliers who, under a loyalty scheme, had agreed to accept points, or vouchers, in consideration for the supply of goods or services to members of the public.

The Court of Appeal allowed the taxpayer's appeal and, accordingly overturning the High Court decision and restoring the Tribunal's decision. The key issue in the decision was that on the facts in the present case, there was a supply of redemption services to the taxpayer in respect of which the taxpayer was entitled to input tax credit (see House of Lords decisions in Redrow and Plantiflor).

It was also decided that it was not necessary to seek a preliminary ruling from the ECJ.

For further information, see page 40.

Total UK Ltd v R & C Commrs [2007] EWCA Civ 987

VAT – vouchers

The taxpayer operated a sales promotion scheme. Customers who joined the scheme and purchased sufficient quantities of fuel at Total filling stations were entitled to receive vouchers which could be used in payment for goods or services purchased from certain national retailers. This appeal concerns the VAT consequences of the transfer of those vouchers by Total to members of the scheme.

The Court of Appeal allowed the Revenue's appeal, by finding that the transfer of a voucher by the taxpayer to a redeeming customer under the sales promotion scheme did not operate to reduce the consideration obtained by the taxpayer in respect of its supplies of fuel.

In reaching this decision, importance was attached to the fact that the scheme's documentation did not describe the transfer of a voucher as a discount or rebate on the price of fuel. The focus was on the acquisition of something extra through participation in the scheme. There was no suggestion that the voucher constituted money-off or cash-back in respect of the purchases of fuel by which the points had been earned, or that the customer in some way paid less than the full price of the fuel purchased.

The reality of the scheme was that the customer paid the full pump price for the fuel whether or not he was a member of the scheme and whether or not, if a member of scheme, he earned sufficient points under the scheme to qualify for a voucher. The customer who received a voucher did not thereby receive a discount on the price of the qualifying purchases of fuel, but got something extra for the price he paid for the fuel.

For further information, see page 41.

UK High Court (Chancery Division)

Smith & Ors v R & C Commrs [2007] EWHC 2304 (Ch)

Inheritance Tax – life assurance policies

Parents took out three annuities and three policies of life assurance in October 1996 in favour of their children. The parents died within seven years of doing so. The appeal concerns the father's estate and the issue is whether these arrangements constitute a transfer of value by him to his children for inheritance tax purposes.

The High Court upheld the Special Commissioner's decision (in favour of the Revenue) -that the taking out of certain life assurance policies by the parents in favour of their children amounted to a transfer of value for inheritance tax purposes.

The Inheritance Tax Act provisions specifically relate to the situation where an annuity is purchased in conjunction with a life policy and the benefit of the life policy is vested in a person other than the person purchasing the annuity, and provides that:

• “unless it is shown that the purchase of the annuity and the making of the insurance were not associated operations, the person who purchased the annuity shall be treated as having made a transfer of value by a disposition made at the time the benefit of the policy became so vested”.

HMRC issued a Statement of Practice (E4) to provide guidance as to how it would interpret the relevant legislation. Statement of Practice (E4) provides that:

• “Life assurance policies and annuities are regarded as not being affected by the associated operations rule if, first, the policy was issued on full medical evidence of the assured's health and, second, it would have been issued on the same terms if the annuity had not been bought.”

On the basis that the answers to the insurance company's questionnaire given by the mother did not provide “full medical evidence” (she did not undergo a full medical examination, as the father had), the Statement of Practice did not apply. Therefore the associated operations rule applied and so the taking out of certain life assurance policies by the parents in favour of their children amounted to a transfer of value for inheritance tax purposes.

For further information, see page 43.