European Court of Justice

Ecotrade SpA v Agenzia delle Entrate-Ufficio di Genova 3 (Joined Cases C-95/07 and C-96/07)

VAT – different time periods for claiming and recovering VAT

The taxpayer was an Italian limited company specialising in granulated blast furnace slag and other ingredients, in particular synthetic gypsum and ashes used for the manufacture of cement. It entrusted to operators established outside Italy the transport of those materials from Italy to other Member States.

In the invoices issued by those operators for services supplied to the company, those services are described either as ‘chartering of the vessel’ or ‘shipping’ (‘the transactions in question’). The relevant transactions were regarded as being exempt from VAT.

The Italian tax authorities took the view that the transactions in question were services in the intra-Community transport of goods subject to VAT, and that the reverse charge procedure was applicable to them, which was not disputed by the taxpayer. However, the Italian Tax Authority also found that the taxpayer had not complied with the accounting requirements relating to the reverse charge procedure because the invoices concerned had been recorded only in the register of purchases and not in the register of invoices issued.

The crux in the case is something that interests all Chartered Accountants working in tax-the Italian Tax Authority took the view that the taxpayer company had lost its right to deduct VAT because it had not exercised that right within a period of two years from the time the VAT became chargeable; whereas the tax authorities were still within the time-limits for recovering the VAT because notices of reassessment and recovery could be served within a period of four years calculated from the date on which the tax returns relating to disputed taxes were submitted.

The ECJ was asked to consider whether the relevant provisions of the Sixth Directive allowed national legislation which (in relation to the reverse charge procedure) made the right to deduct VAT shorter than that time available to the tax authority for recovering VAT.

The ECJ ruled that the Sixth Directive did not preclude national legislation which laid down a limitation period for the exercise of the right to deduct provided that the principles of equivalence and effectiveness were respected. In addition, the principle of effectiveness was not infringed merely because the tax authority had a longer period in which to recover unpaid value added tax than the period granted to taxable persons for the exercise of their right to deduct.

It should be noted that this ruling is specific to the reverse charge procedure rather than a general ruling.

For further information, see page 23.

UK Court of Appeal (Civil Division)

R & C Commrs v EB Central Services Ltd & Anor [2008] EWCA Civ 486

VAT – luggage storage facilities

The Taxpayers accounted for VAT at the standard rate in respect of storage services provided by them to airline passengers. The services were left luggage facilities in the “landside areas” of Heathrow, Gatwick and Manchester airports i.e. the areas of the airport to which members of the general public have unrestricted access. There is no requirement that the deposited luggage either has been or will be carried on aircraft. 95% of the luggage left is, or has been, carried on aircraft by passengers. 76% of the luggage is carried by air to and from places outside the EU.

The Taxpayers contended that the services supplied by them to passengers should have been zero-rated for VAT as the services supplied were not directly connected with the import or export of the passengers' luggage. They claimed a repayment of the overpaid taxes.

The Court of Appeal held that the supply of storage facilities for the personal luggage of passengers was not a zero-rated supply. The key issue in the decision was that there was an insufficient link between the storage service and needs of aircrafts or their cargoes.

For further information, see page 28.

UK High Court (Chancery Division)

R&C Commrs v AXA UK plc [2008] EWHC1137 (Ch)

VAT – financial services

The taxpayer company, which is a subsidiary of AXA and a member of the VAT group, provided a range of administrative and support services to dentists, including payment handling services in respect of payment plans under which a patient agrees to pay his or her dentist a fixed monthly sum in return for a specified level of dental care each year. The company agreed with the dentist to collect the payment from the patient by direct debit and, after paying an insurance premium to a group company to cover emergency treatment and deducting its own fee, transferred the balance to the dentist. The company charged the dentists a fee amounting on average to 71p for each monthly payment that was actually made by the patient and received by the company.

There were two main issues in the appeal:

• whether the monthly fees charged by the company fell within the exemption for the provision of financial services;
• whether the services provided by the company in return for the monthly fees constituted a composite or multiple supply, and if the former whether the composite supply was taxable or exempt.

The High Court held that the principal service provided by the company was within the exemption for the provision of financial services.

HMRC had argued for a narrow interpretation of the exemption which would confine its ambit to a person which supplied services analogous to those supplied by a bank or financial institution.

In addition, it was held that the company was providing services which were ancillary to the principal service, together with services which were distinct from the principal service; and hence apportionment was required. The Court could not accept HMRC's submission that the company's essential purpose was to provide a seamless administrative service. The payment handling service was the principal service provided by the company in return for the monthly fee.

For further information, see page 29.

Stone v R & C Commrs [2008] EWHC1249 (Ch)

VAT – barge for living purposes

This appeal deals with the importation of goods into the UK.

The taxpayer is a naval officer. In 2005 he acquired a boat from a supplier in the Netherlands, and sailed it to the UK. The boat was a newly made replica of a Dutch barge. The boat was intended for use both as living accommodation and as an office. It was not intended for and was not designed for recreational sailing.

The issue was whether as a matter of law VAT was payable by the taxpayer when he brought the vessel into the UK.

The VAT Acts provides for zero-rating in relation to certain importations, including a ship of a gross tonnage of not less than 15 tons which was neither designed nor adapted for recreation or pleasure.

The key issue in this appeal by the Revenue was the interaction between the UK VAT Act and Sixth Directive. The High Court noted that the UK provisions upon which the taxpayer relied on for zero-rating had existed before the Sixth Directive and as long as it remained on the statute books, the taxpayer could rely on it.

The High Court dismissed the Revenue's appeal.

For further information, see page 30.

UK High Court (Administrative Court)

R (on the application of BMW AG & Ors) v R & C Commrs [2008] EWHC 712 (Admin)

VAT – exporters

Exporters are usually permitted by HMRC to make monthly VAT returns. This allows them to reclaim input VAT from HMRC which improves their cash flow position as they are usually in a repayment position.

In this case, HMRC informed the taxpayer that it was no longer entitled to make monthly VAT returns, but instead had to make three month returns (the same as its supplier). HMRC based this decision on a Business Brief from June 2005 which provided guidance on best practice in dealing with cases of perceived manipulation of stagger to obtain a cash flow advantage associated with monthly VAT returns. The reason for the decision was that the export company (i.e. the taxpayer) was associated with the supplier.

The taxpayer applied for permission to apply for an order quashing that decision. Its case was decided with two other similar applications.

The High Court ruled in favour of the taxpayer, allowing the application by the taxpayer for permission to challenge HMRC's decision requiring the taxpayer to make three-monthly VAT returns. The key issue in the decision was that HMRC did not actually show that the imposition of the associated export company was more advantageous than if the supplier had exported the cars directly. Hence the HMRC decision was flawed.

Note: The appeal by the other two taxpayers was rejected on the basis that they had not filed their returns on time and hence could not seek the application out of time.

For further information, see page 32.

Special Commissioners

Smith v R & C Commrs

Bank Accounts – unexplained deposits

The dispute related to income tax purportedly due on benefits in kind received by the taxpayer whilst a director of a company and on unexplained deposits to the taxpayer's private bank account. The taxpayer denied that he received benefits in kind from the company. Further the unexplained deposits represented receipts from the sale of personal items rather than trading income.

The Revenue had conducted an enquiry into the company. As part of that enquiry they requested details of the taxpayer's personal bank accounts.

Expenditure totalling £54,251.63 was incurred on the American Express credit card for the company. Revenue concluded that at least £46,000 of this expenditure was spent by the taxpayer on his personal needs.

The taxpayer's bank account revealed unexplained monetary deposits to the total sum of £682,000. Revenue accepted that £272,000 of the £682,000 related to the sale of personal assets. Revenue concluded that the balance of £410,000 was either cash extractions from the company or undeclared income from an undisclosed taxable source.

The Special Commissioners decided that the unexplained monetary deposits and personal expenditure on the employer credit card constituted taxable income. The key issue in the decision was that the taxpayer didn't provide any evidence to the contrary.

For further information, see page 34.

McCall & Anor (Personal representatives of McClean, deceased) v R & C Commrs

Inheritance Tax – business property relief

The deceased inherited land from her husband on his death in 1983. She did not farm the land herself, but it was let under conacre agreements to local farmers, and those farmers' beasts grazed the land during the months when the grass grew. Throughout this period, the deceased's son-in-law tended the land. He and the deceased's daughter lived nearby.

The deceased visited her other daughter some distance away and stayed there until her death (7 years later). While she was away her son-in-law continued to tend the fields and also organised their letting usually through a land agent. The rents were paid into his and his wife's bank account and were not paid out to the deceased. They also continued to look after her house.

At her death the land was zoned development and so had a value of £5.8m, with an agricultural value of £165,000.

The appeal relates to whether the land was relevant business property and hence qualified for business property relief, as opposed to agricultural property.

The Special Commissioner decided that the land did not qualify for business property relief. While it was decided that the deceased was carrying on a business at the date of death, the key issue in the decision was that the letting of the land was a business which consisted wholly or mainly of the making of investments which was specifically not allowed for business property relief. The Special Commissioner distinguished between a business consisting of the provision of the grass (which it was not) and the provision of the (non-exclusive) use of the land (which it was).

For further information, see page 35.

Walsh v R & C Commrs

Deductible expenses

The taxpayer started business as a self-employed general builder in early 2003. The Inspector opened an enquiry into the taxpayer's self-assessment for 2003/04. The Inspector asked for sight of the business books.

They were not provided and so the Inspector issued a Notice which was not compiled with and a £50 penalty was imposed.

The Inspector was concerned about the following:

• £3,867 for cost of sales because the CIS25 vouchers
• did not include any payment for materials;
• subcontractor costs of £470 because the taxpayer was not registered to make payments to subcontractors;
• other direct costs of £4,802 about which she had no information;
• employee costs of £2,210 because the taxpayer was not registered for PAYE;
• premises costs of £2,288 which she thought unlikely to have been incurred; and
• various other expenditure.

The closure amendment was to add back the cost of sales, sub-contractor costs and other direct costs and 90% of the indirect costs apart from accountancy fees of £720 which she allowed in full

It was found that the taxpayer had not given evidence from which the Special Commissioner could conclude that the taxpayer was overcharged by the amended self-assessment and accordingly it must stand good. The key pont in the decision is that if a taxpayer does not have evidence to back up an expenses claim then he cannot get a deduction.

For further information, see page 36.

Moran v R & C Commrs

PAYE – no employer returns

The taxpayer was a builder by trade. Between 6 April 1996 and 5 April 1999 he was employed at various times by three companies. The taxpayer's self assessment returns for the relevant years showed employment income from various companies with a tax deduction from those earnings. However, no PAYE tax in respect of deductions from the taxpayer's employment income was sent to the HMRC by the three companies between 6 April 1996 and 5 April 1999.

HMRC contended that the taxpayer's employers did not operate PAYE. HMRC directed under specific regulations that the unpaid tax for the said years should be recovered from the taxpayer. The taxpayer appealed against the assessments.

The taxpayer submitted that he should be given credit for the tax deducted from his employments for the tax years in question. The onus was on the taxpayer to demonstrate on the balance of probabilities that the income tax was deducted from his earnings, and thereby discharge the assessments against him.

The Special Commissioner upheld the issue of assessment to recover unpaid income tax. The key issue in the decision was that the taxpayer failed to show on the balance of probabilities that the income tax had been deducted from his earnings.

For further information, see page 37.

Trustees of Nelson Dance Family Settlement v R & C Commrs

Inheritance Tax – business property relief

In this case, the taxpayer made a “transfer of value” (as defined in the Inheritance Tax Acts). Prior to the transfer of value, the taxpayer executed a settlement such that the property comprised in the trust would be “relevant property”. At the time of the transfer of value by way of declaration of trust, the taxpayer did not transfer a business or a part of a business.

It should be noted that the transfer of value in issue qualified for agricultural relief but that relief was limited to the agricultural value of the land. As the land had development value, the Appellants claimed business relief for the excess value.

The key issue in this decision revolved around the interpretation of the business property relief provisions:

Whether for business property relief to be available there has to be:-

Taxpayer argument: a transfer of value which has resulted in a reduction in the value of ‘relevant business property’ in the transferor's estate, regardless of whether an actual transfer of the ‘relevant business property’ takes place; or

Revenue argument: a transfer of value that is a transfer of property that meets the definition of ‘relevant business property’.

The Special Commissioner decided all that was required was that the value transferred by the transfer of value was attributable to the net value of the business. There was no implication that the transfer had to be a business rather than business assets. The Special Commissioner applied the plain meaning of the legislative provisions.

For further information, see page 38.

VAT and Duties Tribunals

Enron Europe Ltd (in administration)

This is an appeal by the Appellant, Enron Europe Limited (in administration) against an assessment for £6,608,250 made on Enron as the representative member of the group. The assessment was raised on 21 March 2005 and the supplies in question were made before 1 April 2002. The sole issue in this appeal was whether the assessment was made in time.

The supplies in issue involved the forward purchase of gas and power under long and complicated documents. There were complex provisions in these documents dealing with events of default. These came into play when Enron went into Administration. There was a consolidation of certain obligations and provisions as to payment which raised complex legal issues of construction and set off to decide when payment was made and so when, as a matter of law, was the taxpoint.

It was concluded that the assessment was out of time. HMRC had all relevant documents and information more than 12 months before the assessment was made.

For further information, see page 43.

Burrows

The Appellant was an established professional actor who had performed in films, television and theatre. She resided in the United Kingdom.

In March 2004 the Appellant contracted with a company (whose place of business was New Zealand) to perform a role which required the Appellant to render acting services in New Zealand where the filming would take place. The Appellant received a fee for her services. Under the contract the Appellant

• was obliged to participate in rehearsals, wardrobe fittings and filming;
• could also be recalled to re-shoot scenes or dub her voice and
• carry out other post production activities.

As part of the contract the Appellant was required to publicise the film when it was released, attend at premieres and promotional events and give interviews in several different countries. Under the contract the Appellant assigned the rights in her performance to the production company which enabled the company to sell the production to distribution companies or theatres.

The Appellant was assessed for output tax due on fees paid by the company to her for acting services in the film which was shot in New Zealand.

The dispute concerned the place of supply of the Appellant's services. The Appellant contended that the Appellant's acting services were cultural, artistic or entertainment activities and were physically carried out in New Zealand. Thus the place of supply of the Appellant's services was New Zealand, in which case no output tax was due on the fees.

The Revenue submitted that the Appellant's acting services were not cultural, artistic or entertainment activities because she was supplying those services in connection with a film. Thus the place of supply of the Appellant's services was where she had her permanent address, namely the United Kingdom.

It was held that the acting supplies related to cultural, artistic and entertainment activities, and they were physically carried out in New Zealand. There was no distinction between supplies of acting services for film and for the theatre.

For further information, see page 43.

T-Mobile (UK) Ltd

T-Mobile submitted a voluntary disclosure claiming a sum of £4,063,228.08 as overpaid output tax over a period from August 2003 to July 2005. The claim related to a £3 charge which T-Mobile imposes on customers who paid for mobile telephone services otherwise than by Direct Debit (described as a separate payment handling charge) and on which T-Mobile had previously accounted for VAT.

The issue before the Tribunal was whether the charge represented consideration for a supply which was exempt, being a financial service separate from T-Mobile's mobile telephone services.

It was held that T-Mobile made a single supply of telecommunications services and that the handling fee was payment for an ancillary supply which took the VAT treatment of the main supply.

The reason for the decision was that T-Mobile was doing nothing of substance different from that which other traders with significant turnovers do as a matter of course: receiving payments from their customers by a number of methods, including cash, cheque, and credit or debit cards, or directly or through an agent (such as Post Office Ltd or Pay point). The “payment handling services” provided by T-Mobile were not, therefore, “by their nature, financial services, nor were the transactions carried out by T-Mobile transactions relating “to the sphere financial transactions”.

For further information, see page 44.

Capital Cranfield Trustees Ltd

The appellant acted as a professional trustee for reward in the pensions sector of the economy. It did so in two different capacities. It

• provided professional advice to pension fund trustees; and
• acted as a pension fund trustee itself.

In both capacities it incurred input tax when it obtained advice from other professionals such as solicitors and actuaries.

The appellant as well as being the representative member of the Group was the company whose activities have given rise to the claim.

It was not in dispute that when the appellant obtained advice from other professionals, in order itself to give advice to other pension fund trustees, that gave rise to the correct deduction by it of input tax to be set against the fees it charged to those trustees. What was in issue was whether the appellant was entitled to claim input tax when it obtained advice from other professionals where that advice was needed to enable itself properly to act as the trustee of a pension fund.

The Tribunal found in favour of the taxpayer-the appellant was entitled to deduct VAT charged on the fees paid to professional persons in its capacity as trustee. The key issue in the decision was that the appellant's activities of adviser and trustee were not separate and distinct. The appellant made taxable supplies to the beneficiaries of the fund, and for a consideration.

For further information, see page 45.

Livewire Telecom Ltd

The decision appealed against was to the effect that the Appellant knew or ought to have known it was involved in MTIC [Missing Trader Intra-Community (fraud)] transactions.

The Appellant was incorporated on 1 April 1999 and had, since June 2003, been trading in mobile telephone handsets in the course of business. Approximately 99% of the Appellant's trades were in relation to new mobile telephones.

On 3 May 2006, the Appellant submitted to Customs a claim for recovery of input tax for the sum of £2,158,459 in respect of the April 2006 period. Most of this claim was denied by Revenue on the basis that the transactions formed part of an overall scheme to defraud the Revenue. The Revenue also stated that there were features of those transactions and conduct on the part of the appellant, which demonstrated that they knew or should have known that this was the case.

It was not disputed that the Appellant had in principle an immediate right to deduct the input tax in question. In Optigen, Cases 354/03, 355/03, the ECJ made it clear that this right was not to be taken away by reference to transactions elsewhere in a chain of transactions unless the taxpayer knew or had the means of knowing about the fraud. A person who had taken every precaution which could reasonably be required of them to ensure that their transactions were not connected with fraud show that by taking those precautions they could not have known about the fraud.

The Tribunal reviewed the evidence: the missing trader took part in a chain that was only connected to the Appellant via two traders, who the Tribunal had decided were not involved in the fraud. The Tribunal concluded that there was no connection between the appellant and the fraud. Hence, the Tribunal decided that the Appellant had neither knowledge nor means of knowledge of the fraud.

For further information, see page 46.