Ireland's relationship with the EU has probably never been more under scrutiny. The issue of bailouts for banks and the interest rates paid to our European colleagues for emergency funding fills a significant portion of most of our newspapers. From a tax perspective, the proposed CCCTB has led many to question the continued ability of each member state to control its own taxation policy (such as setting the corporation tax rate). There has been much commentary in this space.

One area of taxation where individual member states have effectively given up control is VAT. On joining the EU, member states must operate VAT in a similar fashion and take their lead from European legislation. Hence, the Irish VAT Act 1972 was introduced when we joined the then EEC. More recently, the VAT Act in Ireland has been consolidated and now more closely follows the format of the EU Directive on which it is based. Unless a member state has a particular ‘derogation’, it must implement the rules contained within the EU legislation. A derogation is effectively permission to deviate from the VAT treatment prescribed in the EU Directive. For example, admission fees to sporting fixtures and transportation of passengers in Ireland are both exempt from VAT, as Ireland has a derogation in relation to these particular services.

By Finbarr O'Connell

There have been numerous occasions when the EU has effectively forced Ireland to amend its VAT laws to bring them in line with the EU VAT Directive while further changes are being pursued. These include:

• Charging VAT on toll bridges (Ireland had initially treated these as VAT-exempt lettings)
• Obliging local authorities to account for VAT on a range of activities from waste collection to off-street parking
• Infringement proceedings have recently commenced in relation to some of Ireland's rules concerning VAT groups
• Additionally, the European Commission is looking for Ireland to remove the reduced VAT rate it currently applies to sales of horses and greyhounds (4.8%)

Irish legislation can also change as a result of cases ruled on by the European Court of Justice (ECJ). Cases are often referred to the ECJ by a national court for a ruling on a point of law. This is generally done by sending specific questions to the ECJ, asking it to comment on the point of law or to interpret the intention of a particular Article within the VAT Directive. The decisions of the ECJ are binding on the member state in question. The decisions therefore have a direct impact on the particular case, but they also have a much wider impact. The principles laid down in the decisions act as precedents for future transactions and can be relied on in other transactions involving any of the member states.

Hundreds of cases relating to VAT have been heard by the ECJ. The full list can be accessed on the official EU website http://curia.europa.eu. While all of the cases potentially impact on Ireland and Irish businesses, the rest of this article reviews some of the more recent cases of interest.

EMI Group

VAT does not usually arise on samples given away free to potential customers, subject to certain conditions. In Ireland, Revenue state that the samples must be in reasonable quantities and in a form not ordinarily available for sale to the public.

The EMI case concerned free sample CDs given to journalists, radio stations and “pluggers” for promotional purposes and the application of the UK rules on gifts and samples. The CDs were given in various forms e.g. digital watermarks, white cardboard slieves etc. and sometimes multiple copies were given to pluggers or to multiple recipients in one organisation. The ECJ was asked to define the essential characteristics of “samples” and if member states could impose limits and conditions (such as those imposed in Ireland) e.g. value, number, must they be given to a taxable person, could they be given to different people in the one organisation, must they be in a form not available for sale etc. The Court decided it was impossible to give a uniform definition of a sample and that the specific circumstances in each case had to be examined. To qualify as a sample, it did not need to be given to a potential buyer or a taxable person (i.e. it could be given to a journalist whose review would promote sales). While member states are entitled to impose limits, they cannot limit the VAT free treatment of samples totally to specimens “not in a form for sale” as the purpose of a sample is to assess a product (e.g. in the case of CDs, the complete CD is required in order for a reviewer to make a valid judgement) and its purpose is not to satisfy consumer need. The court found that samples may also be given to different people in the one organisation.

Dankowski

One of the necessary elements of a valid VAT invoice in all EU member states is that the invoice shows the supplier's VAT registration number. The validity of a VAT number can be checked on an EU website http://ec.europa.eu/taxation_customs/vies/ and is more likely to be the subject of scrutiny when it is examined in connection with a VAT refund claim. This case involved VAT input credit claimed on the basis of invoices issued by a supplier, who charged VAT but was not registered for VAT at the time the invoices were issued. The invoices included the supplier's tax identification number and VAT was shown separately on the invoice but an input tax deduction was refused by the local VAT authorities. The ECJ concluded that VAT input credit should be allowed as the invoice appeared to contain all of the elements of a valid VAT invoice. Although the tax identification number was not a VAT number, it was possible for the authorities to identify the supplier who had charged the VAT and it was their responsibility to collect the tax from the supplier (and oblige him to register for VAT). This case could be a useful defense where Revenue refuses input credit on the basis of an invalid VAT number on a supplier invoice. A detailed summary of this case is available in the February 2011 issue of tax.point.

Weald Leasing

The Churchill group predominantly carries on VAT-exempt insurance activities. In order to improve cash flow, it entered into certain leasing arrangements with a third party. It purchased goods, leased them to the third party and then other companies within the group leased the goods from that party. The group therefore acquired goods but was able to pay the VAT over to HMRC on the leasing amounts charged rather than paying the VAT upfront (as it would have done had it simply purchased the goods for own use). HMRC argued that the arrangements constituted an abusive practice and that the resultant VAT treatment should be set aside. However, the ECJ ruled that the transaction was not abusive, as long as the leasing charges were at ‘arms length’. A business is free to choose whether to purchase or lease an asset and even though one of the aims of the structure was to obtain a cash-flow advantage, the arrangement was not in itself ‘abusive’.

The judgement is important as it appears to support the view that ‘drip feed’ schemes which achieve VAT cash-flow savings are not necessarily abusive (from a VAT perspective) although the amounts charged within such schemes would need to be carefully considered.

Leo Libera

In this case, a German taxpayer contended that the German Government did not have the power to make some forms of gambling subject to VAT while allowing other forms of gambling to remain exempt from VAT. However, EU legislation in this area allows each member state significant discretion in setting the extent to which activities fall within the general exemption for betting and lotteries. Accordingly, the German authorities were found by the ECJ to have been entitled to restrict the exemption to a narrow range of activities. Following this case, the Irish Revenue Commissioners issued a tax briefing highlighting the fact that the relevant exemption within the Irish VAT Act is restricted to the activities of bookmakers and lotteries and noting that other forms of gambling (e.g. casinos) are subject to VAT. Readers may be aware that the laws surrounding gambling and gaming are likely to be subject to significant change in this country and it will be interesting to see how Revenue intend to apply VAT to these activities.

David Baxendale Ltd

Although this was not an ECJ case, it should be of interest to an increasing number of Irish people (if recent reports on obesity levels in Ireland are accurate). This was a UK case involving supplies of weight-loss food as well as counseling to assist customers with losing weight. The case hinged on the distinction between multiple and composite supplies. The company argued that the supply in question was either the supply of food with an ancillary element of counseling (and zero-rated accordingly) or a multiple supply of food and counseling (at least partly zero-rated). Unfortunately for the taxpayer and the number of large clients it had, the Court dismissed the appeal and found that there was a single taxable supply of a service.

Finbarr O'Connell is VAT Director with Grant Thornton Financial and Taxation Consultants Limited.

T: +353 (0)1 6805 5771

Email: finbarr.oconnell@ie.gt.com.