Recent Irish and Court of Justice of the European Union Cases
An update and our view on some recent ECJ decisions on VAT
VAT recovery on costs related to share transactions
Ryanair Limited v Irish Revenue Commissioners, 27 March 2017, Appeal No 290/2013
The case concerns the deductibility of professional fees paid by Ryanair in relation to the failed takeover bid for Aer Lingus in 2006. Ryanair sought to claim the VAT paid on professional fees on advice sought in relation to the takeover bid as an input deduction. This gave rise to a question concerning one of the qualifying requirements specified in the Cibo case which requires that in order for a right to deduct arise, “the goods or services purchased must have a direct and immediate link with the output transactions in respect of which VAT is deductible”.
ECJ precedent set in the “Cibo” (Case C-16/00  ECR 6663) established that the purchase of shares by a holding company for the purposes of engaging in an economic activity consisting of the provision of management and other like services to its subsidiaries constitutes an economic activity. In Rompelman (Case C-268/83) the ECJ held that initial investment activity which predated the carrying out of taxable supplies also constituted economic activity in itself and qualified for input deduction if the intended activity was subject to VAT.
There was a finding of fact in the Irish courts that Ryanairs intention was to be an active participant in Aer Lingus and intended to provide taxable management services to Aer Lingus if its bid was successful. The High Court surprisingly held that input deduction was not available on the basis that the bid was unsuccessful and no taxable supplies were made by Ryanair. The Irish Supreme Court is now referring the case to the Court of Justice of the European Union to resolve the matter. We would expect that the CJEU will allow input deduction on the grounds that granting input deduction cannot depend on the whether a particular venture is successful or not.
CJEU rules that “Certain Cultural Exemptions” do not have direct effect
HMRC v British Film Institute, 15 February 2017, Case C-592/15
Under Article 13A(1)(n) of the Sixth Directive 77/388/EEC 'certain cultural services' were exempt from VAT from January 1990. While the UK enacted this exemption, the enactment took place with effect from 1996 onwards. During 1990-1996, BFI had paid VAT at the standard rate on rights of admission to showings of films. BFI sought to rely on the direct effect of the Article above to claim back VAT paid during 1990-1996.
The CJEU ruled that the exemption in Article 13A(1)(n) from VAT for ‘certain cultural services’ was not sufficiently clear and precise to have direct effect for the company in the absence of national implementing legislation. As such, BFI was not entitled to reclaim VAT paid at the standard rate during the period 1990-1996.
This case highlights the limitation on a taxpayer’s right to rely directly on EU law against State Authorities. The Directive provision on which the taxpayer wishes to rely must be unambiguous as to its scope and provisions which permit the Member States to define bodies which are to be exempted are not sufficiently unambiguous to be relied upon.
Substance over Formality in the CJEU
Euro Tyre BV v Autoridade Tributária e Aduaneira, 9 February 2017,
Euro Tyre is a Portuguese branch of a company incorporated under Netherlands law. It is engaged in the exportation, importation and marketing of tyres to retailers in Portugal and Spain. Sales in Spain were made directly as well as through a distributor.
The dispute arose in relation to the zero-rating of sales as an intra-community supply made to the Spanish distributor between 2010 and 2012. At the time of the sales, the purchaser (distributor) had a VAT registration number but was not registered for VIES. While the cumulative material conditions for an intra-Community supply were fulfilled, the purchaser was not registered for VIES.
The CJEU ruled that formal technical requirement such as inclusion in VIES should not prevent Euro Tyre from treating the sales as a zero-rated dispatch. The judgment relies on the principle of proportionality and highlights the importance of the underlying economic reality in determining intra-Community VAT treatment.
While the case provides a basis for claiming entitlements where all formalities have not been strictly observed the case also highlights the importance of compliance with formal requirements in order to avoid disputes with national tax authorities.
No Competition with Private Providers means no need for Public Authorities to Charge VAT
National Roads Authority v The Revenue Commissioners, 19 January 2017, C-344/15
The issue in this Irish case was whether the National Roads Authority (the NRA), which holds responsibility for the national road network in Ireland and runs two of the eight toll roads in Ireland (the other eight being operated by private entities), should charge VAT on its tolls. In contradiction to the AGs opinion on this matter, the CJEU ruled that on the basis that there was no actual competition and on the basis of the unlikelihood of future competition in this instance between the NRA and private operators and as a result the NRA, as a public body did not have to charge VAT on its tolls.
In such circumstances, public authorities are only required to charge VAT on their activities when they are in competition with private providers.
Margin Scheme for Sale of End-of-Life Car Parts
Sjelle Autogenbrug I/S v Skatteministeriet, C-471/15, 18th January 2017
It was found in this case that the sale of spare car parts, which were otherwise to be scrapped, should be sold under the margin scheme and that the full resale proceeds should not be chargeable to VAT.
The Court found that the parts do not change their nature once they are removed from the vehicle, and as such should be dealt with under the margin scheme for second hand goods.
The findings in the case could potentially result in complex VAT accounting requirements.
Importance of Holding and Management Companies charging fees to subsidiaries
(MVM) v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatóság, C-28/16, 12th January 2017
The ECJ determined that where a holding company manages its subsidiaries and does not charge those subsidiaries for the cost of the services procured in the interest of the group of companies as a whole, or in the interest of certain of its subsidiaries, nor charges the relevant VAT for such services, the activities are not defined as economic activities. As a result, the holding company does not have a right to deduct VAT paid in respect of those services.
This is quite a strange decision in so far as the Court appears to ignore the taxing provisions contained in the Directive which apply VAT to free services supplied by a taxable person for a purposes other than its business. The Court appeared to acknowledge that the holding company could be a taxable person but that this taxing provision still did not apply in the circumstances. This makes it quite difficult to see where the free service taxing provision does apply.
In any event the case reiterates the importance of having agreements in place and having the right resources in place in order for management and holding companies to charge fees to its subsidiaries so as to be eligible to deduct the related VAT costs of providing those services to its subsidiaries.
Loan Administration as Incidental to Main Activities
Mercedes Benz Italia SpA v Agenzia delle Entrate Direzione Provinciale Roma 3, C-378-15, 14th December 2016
The case concerned interest generated from loans to associated companies. Over 70 percent of Mercedes Benz income was generated from interest on loans to associated companies. Mercedes Benz excluded this income from its partial exemption calculations, considering it to be incidental to its main. The Italitan tax authorities considered that the €1.7m could not be disregarded as incidental.
While the CJEU found that the quantum of the income was an element for consideration by the national authorities, whether the loans were direct, permanent and necessary extension of Mercedes activities and whether they entailed large amount of use of its VAT-bearing costs.
The findings in the case highlight the possibility of categorising financial services as incidental financial transactions even when the transactions are of considerable value.
Supply of Goods and Credit as a Single Supply
Stock ’94 Szolgáltató Zrt. v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága, C-208/15, 8th December 2016
The CJEU ruled in the case that a farmer, who received a loan from another ‘farmer’ and could only use the proceeds of the loan to purchase agricultural products from the lender could not treat the loan as a separate, exempt granting of credit.
The CJEU ruled in favour of the Hungarian authorities that the supply of the goods and the granting of credit were one supply, and as such the same rate of VAT chargeable on the supplies of the assets and was chargeable on the relevant interest.
Yet another strange decision by the CJEU. Providing loans and selling goods seem to be about as far apart an activity that you could possibly have. Ruling that they are a single supply seems to strain logic and reason.
Odvolací finanční ředitelství v Pavlína Baštová, C-432/15, 10th November 2017
In this case, the operator of a horse stable claimed input deductions for the cost of running her stable, which included costs which related to her own horses. It was found in the case that these deductions were allowable to the extent that the costs were linked to the operations of the business as a whole. The CJEU further ruled in relation to prize money received for the placing of her own horses and the horses of other owners in races.
The CJEU determined that in a situation where a right to deduct for the cost of the stable exists, any prize won by the taxable person on account of the placing of one of his horses in a race is not to be included in the taxable amount for VAT purposes. As such, the CJEU found that prize money is not liable to VAT and that horseracing is not an economic activity for VAT purposes.
Compliance with Substantive Conditions Trumps Formalities
Josef Plöckl v Finanzamt Schrobenhausen, C-24/15, 20th October 2016
The Court demonstrated its preference for compliance with the substantive requirements of VAT law in order to become eligible for a deduction, even when attendant formalities have not been complied with. In this case, Mr Plöckl, a sole trader in Germany, acquired a vehicle which he assigned to his undertaking. In 2006, he dispatched the vehicle to a dealer established in Spain with a view to selling it in Spain.
The Tax Office in Germany took the view that the transfer of the vehicle to Spain in 2006 was subject to VAT and was not exempt, since Mr Plöckl had not provided a VAT identification number issued by Spain and had not, therefore, produced the accounting evidence required for the purposes of exemption from VAT.
The CJEU found in favour of the taxpayer that in the absence of specific evidence of tax evasion, the exemption from VAT cannot be refused where the substantive conditions for such exemption are met, as they were in the case before it, the production of a VAT identification number did not constitute substantive condition. This case fallows a line of decisions in which the Court has held that a breach of formality such as invoicing should not lead to the loss of a substantive right such as input deduction. This is a significant change for tax authorities who have traditionally insisted on disallowing input deduction for breach of VAT invoicing formalities. These cases are directly binding on tax authorities and can be relied upon to resist refusal of input deduction by the tax authorities.
National Authorities not Permitted to Treat Numerous Partnerships as a Single Taxable Person
Christine Nigl and Others v Finanzamt Waldviertel, C-340/15, 12th October 2016
The national court was not entitled to deem, for the purposes of VAT, separate partnerships which conduct themselves outwardly as such, but which market a large proportion of their products under a common trade mark through a limited company as a single taxable person. However, such partnerships could be withdrawn from the flat rate farmers scheme with retrospective effect.
Goods Presumed Sold when Received and No Longer in Ledger
Маya Маrinova ET v Direktor na Direktsia, C-576/15, 5th October 2017
It was discovered by the Bulgarian tax authorities that Maya Marinova ET had received goods from her suppliers and that they were no longer in her possession. The goods in question did not appear in her purchases ledger.
The CJEU permitted the national tax authority to assume that the goods in question had been subsequently sold on by Maya Marinova ET and assessed the relevant output VAT liability for her by applying a mark-up calculated using the prices of similar goods sold by her.
TMD Gesellschaft für transfusionsmedizinische Dienste mbH v Finanzamt Kassel II – Hofgeismar, C-412/15, 5th October 2016
The business in this case was engaged in collecting blood plasma from donors and subsequently using it in pharmaceutical supplies. TMD applied for recognition of the right to deduct input taxes in relation to the supplies of plasma.
The CJEU ruled in the case that the exemption of human blood did not include supplies of plasma obtained from human blood where that plasma is intended to be used, not for direct therapeutic purposes, but exclusively for the manufacture of medicinal products. As such, the entity was entitled to claim the relevant input credits.
This case supports the taxation of supplies of blood plasma which is not used for therapeutic purposes. This provides a basis for blood banks to recover VAT input deduction and for the pharma customers to recover that VAT.
Use of Machinery by Local Authority
Landkreis Potsdam-Mittelmark v Finanzamt Brandenburg, C‑400/15, 15th September 2016
The case concerned the right to recover VAT on the purchase of machinery by a local authority. The local authority used the machine less than 10 percent for its ‘business’ activities.
The CJEU concluded that a German 'simplification' derogation that permitted denial of input tax if 'private' or 'non-business' use exceeded 90 percent was not appropriate in the context of the case of a local authority, as most of its activities were outside the scope of VAT.
Corrected Invoices Valid from Date of Deduction
Senatex GmbH v Finanzamt Hannover-Nord, C-518/14, 15th September 2016
The case concerned the German tax authoritys refusal to allow the deduction of input VAT paid by Senatex for the years in which the invoices held by Senatex were issued, on the ground that in their original form they did not satisfy the requirements of national tax legislation. The German tax authorities would only allow the invoices to be deducted once they included all the requirements of a valid VAT invoice (including the relevant VAT numbers). This resulted in the imposition of interest on the relevant assessments for which the invoices did not meet the full formal requirements.
The CJEU held that input deduction could not be refused based on a breach of invoicing formality.
Provision of Adequate Information to make a VAT Deduction
Barlis 06 – Investimentos Imobiliários e Turísticos SA v Autoridade Tributária e Aduaneira, C-516/14, 15th September 2016
The CJEU held that Barlis could deduct VAT on foot of an invoice which did not contain all of the details required under VAT law to be included on an invoice provided the Revenue authorities have all the information necessary for ascertaining whether the substantive conditions for VAT deduction had been met.
This is a welcome development in favour of taxpayers, however, to avoid disputes with the tax authorities and delays in obtaining VAT deduction it is still important to ensure that the invoices, both received and issued, are in compliance with legislative and regulatory requirements.