Recent Irish and Court of Justice of the European Union Cases has been saved
Recent Irish and Court of Justice of the European Union Cases
An update and our view on some recent CJEU decisions regarding VAT related cases
Case C-574/15 – Mauro Scialdone – 2 May 2018
Following a tax inspection carried out by the Italian tax authority on Siderlaghi, an Italian Company, it was discovered that the company had failed to pay VAT due of €175,272 in relation to their 2012 annual return. The company undertook to discharge the unpaid VAT, including interest and penalties, in instalments.
In May 2015, the Italian public prosecutor brought an application seeking that Mr Scialdone, the sole director of Siderlaghi, pay a fine of €22,500 on the basis that the failure of the company to pay the VAT constituted a criminal offence attributable to him as sole director and as the companies unpaid VAT exceeded the threshold of €50,000 as set by Italian law.
In October 2015, the Italian legislation in question was amended by increasing the threshold in relation to VAT from €50,000 to €250,000 while the threshold for income tax was set at €150,000. As the amended legislation had retrospective effect Mr Scialdone would no longer be liable for a fine on the basis of the increased threshold.
The referring court sought confirmation from the CJEU as to whether national law which provided for different thresholds for income tax and VAT to determine the penalty applying was compatible with EU law.
The CJEU in its judgement noted that the VAT Directive does not harmonise penalties – this is within the competence of Member States and they are required to counter fraud through effective deterrent measures.
The CJEU ruled that having different thresholds for criminalisation in relation to income tax and VAT fraud was acceptable under EU law given the differences in the two taxes.
C-566/16 – Dávid Vámos v Nemzeti Adó - és Vámhivatal Fellebbviteli Igazgatósága – 17 May 2018
The CJEU in this case considered whether the Hungarian tax authority were entitled to deny the granting of a special VAT exemption scheme to a taxpayer who fulfils all the material conditions but did not exercise the right to opt for the scheme at the time he declared the commencement of his economic activities to the tax authority.
The Court in its decision held that as Member States, in accordance with the VAT Directive, may introduce special VAT exemption schemes and that the implementation of procedural requirements for such schemes falls to the discretion Member States, they are permitted to deny a taxpayer the option to use such a scheme where the taxpayer has failed to meet one of these procedural requirements.
This case highlights the importance of ensuring that any prescribed procedural matters are followed to safeguard against a Revenue authority seeking to deny any benefits or other entitlements which otherwise may be due.
Case C-660/16 and C-661/16 – Finanzamt Dachau v. Achim Kollroβ and Finanzamt Gӧppingen v. Erich Wirtl – 31 May 2018
This case looked at the right of two taxpayers, Kollroβ and Wirtl, to claim input deduction on VAT charged by suppliers on invoices issued for payments made on account but where the underlying transactions were never subsequently carried out.
In the first instance the Court considered whether the conditions for the deduction of VAT relating to payments made on account had been met. The VAT Directive provides that the right to deduct arises at the time when VAT becomes chargeable. The general rule being that VAT becomes chargeable at the time of the supply of goods. However, by way of derogation VAT becomes chargeable on receipt of a payment made on account before the goods or services are supplied on the amount received, but only where it is certain that the supply of goods will take place. The Court determined that based on the facts of both cases the conditions had been met for the VAT to become due at the time of the payments made on account and as such the taxpayer’s right to deduct this VAT arose in the same period.
In addition, the Court confirmed that Member States are not precluded from allowing taxpayers to only adjust the input tax claimed when they have been refunded the advanced payment by the supplier. The Court considered that without such provision it could be excessively difficult or even impossible for customers to obtain refunds of VAT on payments made on account in good faith.
Case C-665/16 – Minister Finansow v. Gmina Wroclaw – 13 June 2018
In this case, The CJEU held that the transfer of ownership of immovable property by a municipality to the Public Treasury, in return for a payment of compensation, constitutes a transaction subject to VAT. The Court ruled that this treatment applied even where under national law the immovable property would continue to be managed by the mayor of the municipality, who also acts as representative of the Public Treasury, and even where the compensation was made only by way of an internal accounting transfer within the budget of the municipality.
Case C-421/17 – SZEF Krajowej Administracji Skarbowej v. Polfarmex Spolka Akcyjna w Kutnie – 13 June 2018
In this case, Polfarmex planned to restructure the company’s share capital through a buy-back (by way of redemption) of shares from a shareholder in return for a transfer of property.
Polfarmex made an application to the Minister for a tax ruling to determine the VAT treatment of the transaction. In its application, Polfarmex submitted that it was a single transaction and VAT should not be chargeable on the basis the transaction was not exercised in the course of its economic activity. The Minister disagreed and considered the transaction a supply of goods for consideration subject to VAT.
The CJEU held that the transfer satisfied the conditions for a supply of goods subject to VAT provided that immovable property in question was used in the economic activity of Polfarmex. However, the Court in its ruling also pointed out that the National Court would have to consider whether the exemption for the supply of property would in any case apply to the transaction.
Case C-108/17 – UAB ‘Enteco Baltic’ v. Muitinēs departamentas prie Lietuvos Respublikos finansų ministerijos – 20 June 2018
In this case, the CJEU considered the criteria which must be met by taxpayers in order to import goods at the zero rate of VAT under the Onward Supply Relief provisions. Onward Supply Relief provides that taxpayers may be relieved from paying VAT at point of import into the EU where it can be demonstrated to the customs authority that the goods will be sold to a VAT registered company in another EU Member State.
Enteco Baltic, a company established in Lithuania which operates a wholesale fuel trade, imported fuel into Lithuania, applied VAT at 0% and provided the Lithuanian customs authorities with the VAT numbers of its customers in other EU Member States. The company subsequently sold the fuel on to companies in other EU Member States but some was also sold to companies other than those which had been indicated to the customs authorities on import. Enteco Baltic provided the tax authorities with the VAT numbers of the customers that the goods had actually been supplied to.
Following a tax inspection, the tax authorities sought to deny the application of the 0% VAT and issued an order for Enteco Baltic to pay VAT of over €3.2m plus interest and penalties.
The CJEU ruled that that relief on import could still apply even where the goods are eventually supplied to taxpayers different to those originally identified at the time of importation as long as the substantive conditions for the relief had been met and the supplier provided the tax authority with the correct information including the tax number of the final customer.
Case C-364/17 – ‘Varna Holideis’ EOOD v. Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Varna pri Tsentralno upravlenie na Natsionaltnata agentsia za prihodite – 27 June 2018
This case concerned the right of Varna to deduct VAT incurred on the acquisition of a building in Bulgaria in December 2004. In February 2015, 11 years after the original transaction, the Supreme Court of Bulgaria held that the sale of this building was null and void, ordered Varna to return the property to the seller and the seller to reimburse Varna for the purchase price. The Bulgarian National Revenue Agency issued a tax adjustment notice to adjust the VAT deducted by Varna in 2004 on the acquisition.
The CJEU held on the basis that right of the taxpayer to deduct the VAT arose at the same time the tax became chargeable in 2004 and as this occurred before Bulgaria’s accession to the European Union on 1 January 2007 that the Court had no jurisdiction to answer the questions referred.
Case C-459/17 and C-460/17 – SGI, Valériane SNC v. Ministre de l’Action et des Comptes publics - 27 June 2018
The French tax authority challenged SGI and Valériane’s right to deduct VAT incurred on multiple invoices for the purchase of equipment as there had been no actual delivery of goods.
The French Court sought a ruling from the CJEU on whether, in order to deny a taxable person in receipt of an invoice the right to deduct the VAT appearing on that invoice, was it sufficient that the authorities establish that the transactions covered by that invoice have not actually been carried out or whether those authorities must also establish that taxable person’s lack of good faith.
THE CJEU in its ruling held that the right to a deduction of VAT by a taxpayer is conditional on the corresponding transactions having actually been carried out. Therefore on this basis alone it was sufficient to deny an input credit and that the good or bad faith of a taxable person seeking deduction of VAT had no bearing in the case at issue.
Case C-544/16 – Marcandi Ltd v Commissioners for Her Majesty’s Revenue and Customs - 5 July 2018
Marcandi (‘Madbid’) is a UK company which operates online sales. The majority of the products sold on its website are ‘high-tech’ goods, such as computers, televisions, mobile phones and tablets and occasionally it sells higher value goods such as cars. Prior to the court proceedings, Madbid was registered as a taxable person both in the UK and in several other EU member states.
Customers buy goods either for a fixed price in the online store or through online auctions. Customers wishing to participate in the online auctions are required to purchase ‘credits’ from Madbid. These credits are necessary in order to bid in the auctions and cannot be used for any other purpose. Notably, they cannot be used to purchase goods in the online store or be converted into cash.
Customers that take part in online auctions also have the option to ‘buy now’. This feature allows the customer to buy a product identical to the one in the auction at the price of the item less the value of the credits which the customer has spent during the auction.
A customer that does not win the auction and does not make a ‘buy now’ purchase receives an ‘earned discount’ that can be used to buy any goods in the Madbid online shop. The earned discount corresponds to the value of the credits that the customer used to bid in the auction.
The first question referred to the Court concerned whether Madbid’s issue of ‘credits’ to users in return for payment constituted a supply of services for consideration or rather was a ‘preliminary transaction’ (as per MacDonald Resorts C‑270/09) before a supply of goods which falls outside the scope of VAT.
The CJEU found that the issue of ‘credits’ did in fact constitute a supply of services for consideration, the consideration being the amount paid in return for these credits.
The second question referred to the CJEU concerned whether the value of the ‘credits’ used in order to bid was included in the consideration received by Madbid in return for the supply of goods to the winning customers in an auction or to customers who purchased a product through the ‘buy now’ or ‘earned discount’ features.
The court found that the value of credits used in order to bid was not included in the consideration received by Madbid in return for its supply of goods and that the customer was paying for a separate service of being allowed to bid for the goods concerned.
The final question referred to the court concerned whether, where two Member States treat the same transaction differently for the purposes of VAT, are the courts of one of those Member States required to take into account the need to avoid double taxation or double non-taxation of the transaction, keeping in the mind the principle of fiscal neutrality, when interpreting the relevant provisions of both EU and national law.
The CJEU found that, when interpreting the relevant provisions of EU and national law, the courts of a Member State that find that the same transaction has been subject to different tax treatment for the purposes of VAT in another Member State, have the power and sometimes the obligation, to refer a request for a preliminary ruling to the CJEU.
Case C-320/17 – Marle Participations SARL v. Ministre de l’Économie et des Finances – 5 July 2018
This case concerned the VAT recovery position of a holding company on costs relating to the acquisition of shares and follows the Court’s judgement of 16 July 2015 in the case of Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14, EU:C:2015:496). In that case, the Court held that expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in their management and which, on that basis, carries out an economic activity must be regarded as belonging to its general expenditure and the tax paid on that expenditure must, in principle, be deducted in full, unless certain output economic transactions are exempt from tax.
From 2009, Marle Participations, a holding company, conducted a restructuring and recovered in full the VAT incurred on associated costs. The only services that Marle Participations provided related to the letting of buildings. The tax authorities during the course of an audit challenged Marle Participation’s VAT input entitlement on the transactions in question on the basis that these costs did not relate to an economic activity. The Court was asked to consider whether the letting of the buildings to the subsidiary constituted “involvement in the management” of that subsidiary, as provided for under the Larentia + Minerva case.
The Court held that the letting of a building by a holding company to its subsidiary amounts to ‘involvement in the management’ of that subsidiary, which must be considered to be an economic activity giving rise to the right to deduct VAT on the expenditure incurred on acquiring the shares in that subsidiary, where that supply of services is made on a continuing basis, is carried out for consideration and is taxable (i.e. not exempt). The Court held that the expenditure connected with the acquisition of the shareholding was to be regarded as belonging to the holding companies general expenditure and the VAT paid on was deductible based on the company’s general overhead VAT recovery entitlement.
Case C-154/17 – SIA ‘E LATS’ v. Valsts ienemumu dienests – 11 July 2018
This case looked at the application of the margin scheme to the sale of goods containing, gold, silver and precious stones.
E LATS sold precious metals and items containing gold and/or silver to other traders and applied the margin scheme whereby it only paid VAT on the difference between the purchase price and the sale price of the items. The tax authorities carried out a VAT inspection and found that E LATS resold the items made of precious metals as scrap and not as second-hand goods and therefore denied the application of the margin scheme and imposed an additional amount of VAT.
The CJEU considered the definition of second-hand goods in the VAT Directive being ‘movable tangible property that is suitable for further use as it is or after repair, other than works of art, collectors’ items or antiques and other than precious metals or precious stones’
The Court held that the concept of ‘second-hand goods’ does not cover used goods containing precious metals or precious stones if those goods are no longer capable of performing their initial function and have retained only the functionalities inherent in those metals and stones. They held that it was for the National Court to determine whether the goods in question met this definition.
Case C-5/17 – Commissioners for Her Majesty’s Revenue and Customs v. DPAS Limited – 25 July 2018
The Court considered in this case whether the services provided by DPAS, a UK-based company providing dental plan administration for patients, were exempt from VAT. Under the plans, DPAS received a fixed amount each month by direct debit from patients and would subsequently request its bank to transfer the funds to the dentist (less it’s service charge). The key issue was whether the service charge was exempt as a payment/money transfer service as provided for in the VAT Directive.
The Court in its judgement considered that, as based on case law, in order for a transfer transaction to be exempted under the VAT Directive it must change the legal and financial situation existing between the parties to the transfer and must also be distinguished from the supply of physical, technical or administrative services.
The Court held that while the supply of services at issue in this case were essential in facilitating the payments owed by patients to their dentists they were simply administrative in nature as DPAS merely asks the banks to carry out the transfer and as such the service carried out by DPAS was merely a step prior to the VAT exempt transfer transaction carried out by the bank.
This case further narrows the scope of the application of the VAT exemption to payment services following the CJEU’s 2010 judgement in the AXA case (C 175/09).
Case C-140/17 – Szef Krajowej Administracji Skarbowej v Gmina Ryjewo – 25 July 2018
During 2009/2010, a Polish municipality, a taxable person which was registered for VAT, incurred VAT on expenditure relating to the construction of a community centre. Once complete, the municipality used the building for the purpose of non-taxable activities and didn’t reclaim the VAT incurred on construction.
In 2014, the municipality expressed its intention to use the building for both non-taxable and commercial activities for which it would charge VAT. It sought a tax ruling from the tax authority as to whether it was now entitled to an adjustment of the right to deduct the VAT incurred on the construction even though it did not express an intention to use the building for taxable purposes when the building was originally constructed.
The CJEU found that whilst at the time of acquisition of the building the municipality had not expressly stated its intention to use those goods for a taxable activity, it had also not excluded the possibility that they might be used for such as purpose in the future and therefore it was entitled to an adjustment of deductions of VAT paid on the building.
The case highlights the importance of monitoring the use to which assets are utilised to capitalise on any VAT adjustments that may arise. This is particularly important in the context of property assets where Irish VAT rules dictate that a Capital Goods Record should be maintained, in certain circumstances, and adjustments are required when there is a change in the exempt/taxable use of the property.
Case C-475/17 – Viking Motors and Others v. Tallinna linn, Maksu-ja Tolliamet – 7th August 2018
This case concerned the introduction of a local sales tax in Estonia. Viking Motors and the other appellant parties believed that they had unduly paid this sales tax and requested repayment on the basis that the sales tax was not compatible with the VAT Directive.
The CJEU in its ruling considered whether the sales tax shared the four essential characteristics of VAT, being:
- It applies generally to transactions relating to goods and services,
- It is proportional to the price charged by the taxable person in return for the goods and services which he has supplied,
- It is charged at each stage of the production and distribution process, and
- The amounts paid during the preceding stages of the production and distribution process are deducted from the VAT payable by a taxable person.
The CJEU held that as the sales tax in question did not satisfy the third and fourth characteristics, it was not a turnover tax and as such not prohibited by the VAT Directive.
An update and our view on some recent CJEU decisions regarding VAT