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
C – 132/16, Director of the ‘Appeals and Tax and Social Insurance Practice’ and ‘Iberdrola’, 14 September 2017
Iberdrola developed 300 holiday apartments on land in Tsarevo, Bulgaria. Before they could be connected to mains sewage, the municipal pumping station needed extensive work, and so Iberdrola agreed to arrange and pay for the work. The ECJ held that Iberdrola was entitled to recover VAT on this work. It was clear that, without the work on the pumping station, Iberdrola would not have been able to develop the apartments. That in itself was "likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality of Tsarevo and a taxed output transaction by Iberdrola". The fact that the municipality also enjoyed a benefit did not mean that Iberdrola could not enjoy input tax recovery, provided that the work was limited to what was necessary to connect the apartments to the mains and therefore allow Iberdrola to carry out its economic activities.
The CJEU has therefore analysed the VAT recovery position of Iberdrola by stating that a direct and immediate link between the reconstruction services and the taxable output transaction by Iberdrola existed, the supply of free services by Iberdrola to the municipality should not have prevented recovery. With this decision the Court has analysed VAT recovery in conventional terms.
C – 326/15, ‘DNB BANKA’ AS v Valsts ienemumu dienests,
C - 605/15, Minister Finansów v Aviva Towarzystwo Ubezpieczeń na Życie S.A. w Warszawie, and
C – 616/15, European Commission v Federal Republic of Germany, 21 September 2017
The Court rendered its judgments in the VAT cases involving DNB Banka (C-326/15), Aviva (C-605/15), and EC vs. Germany (C-616/15) on 21st September 2017. The key questions for the CJEU was whether the cost sharing exemption could be extended to the financial/insurance services sector and if it could only operate as an extension to the public interest exemptions in the German case where the activities in the public interest were restricted to health care services.
In the first two cases the Court found that services supplied by a group whose members carry on an economic activity in the area of financial or insurance services do not constitute an activity in the public interest and thus are not within the scope of the exemption for independent groups of persons carrying on VAT exempt activities.
The Court declared that in the context of this exemption, only those activities specifically referred to in Article 132(1)(f) of Council Directive 2006/112/EC will constitute activity in the public interest (which financial and insurance services are not). It is important to note that the Court’s decision clarified some confusion resulting from its Taksatorringen (C-8/01) decision which led some Member States to exempt services supplied by independent groups of persons made up of entities such as insurance companies or undertakings active in the area of financial services.
In the EC vs. Germany case, the EC challenged German legislation that, by restricting the exemption for independent groups of persons (‘IGPs’) carrying on VAT exempt activities to those whose members exercise a limited number of activities or professions in the health sector, Germany has failed to fulfil its obligations under the VAT Directive.
The ECJ ruled that Germany had failed to fulfil its obligations as the Directive does not limit the IGP VAT exemption to a limited number of professions. The Court went on to say that the Directive envisages other exempt transactions in the public interest such as those related to welfare, social security, education, sport and culture which would come within the scope of the exemption.
Regarding the claim that the restriction was necessary to prevent the distortion of competition in certain sectors, the Court stated that the condition relating to the absence of distortion of competition set down in the Directive does not allow the scope of the exemption to be limited in a general manner such as it was under German law.
This decision prevented the scope of activities that IGP VAT exemption applies to from being unduly narrowed by reference to the condition relating to the absence of distortion of competition while confirming that the cost sharing exemption only applies to exempt activities in the public interest, covered by the Directive Article 132, and not to other activities which are exempt under Article 135 (such as insurance and financial services).
C – 441/16, SMS group GmbH v Regional Directorate-General of Public Finance, 21 September 2017
A German established company SMS Meer contracted with an Austrian company (Zimekon Handels GmbH) to construct and supply a pipe-welding system, the consignee of the system was a Ukrainian company (OOO Zimekon). The contract was to be paid in instalments but as some payments were not made, the performance of the contract was suspended in lieu of receiving the outstanding payments. During this time SMS Meer contracted with a supplier established in Turkey for the supply of equipment needed to manufacture the pipe-welding system. This equipment was imported from Turkey to Romania and VAT was charged and accounted for on import. Following importation, the equipment was stored in a warehouse located in Romania. Subsequent to this import it became clear that the purchaser was unable to make the remaining payments and the performance of the contract was never resumed. SMS stated that the equipment could not be used for other projects and it intended to sell it for scrap. SMS subsequently applied for a refund of the import VAT paid on the basis that upon import it intended to exports those goods onward to Ukraine. However the Romania tax authorities refused to refund the import VAT on the basis that SMS had failed to provide any supporting documentation to demonstrate the specific destination and date on which the exportation was to take place.
The Court held that as the importation of the goods had taken place for the purpose of, ultimately, exportation; SMS had acquired the right to a refund of the VAT paid on import. It went on to state that where a taxable person has been unable to use goods or services which gave rise to a refund due to circumstances beyond their control and in the absence of fraud or abuse, the right of refund, once it has arisen, is retained. Also the Court stated that the imposition of additional documentation requirements such as those in the present case added a substantive condition to the eligibility for refund which is not provided for by the VAT system and cannot be used as an excuse to refuse a refund.
C- 164/16, Commission v Mercedes-Benz Financial Services UK Ltd, 4 October 2017
The Directive’s definition of the supply of goods includes “the actual handing over of goods pursuant to a contract for the hire of goods….which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment”. While a supply of services is any transaction which does not constitute a supply of goods.
This case concerned the classification of the handing over of vehicles pursuant to a hybrid hire-purchase agreement, and whether this was considered a supply of services on which VAT would be chargeable on each monthly instalment or a supply of goods on which VAT would be chargeable on the total price of the supply upon handing over of the vehicle.
In this case the ECJ ruled that it is for the national court, to assess the facts and determine, on a case-by-case basis and in the light of the circumstances of each individual case whether the contract pursuant to which a vehicle is handed over meets the definition of a supply of goods. Regarding the case at hand the Court held that the handing over of vehicles under a leasing contract with an option to purchase the vehicles is a supply of goods if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for it full term.
This decision upholds the principle of legal certainty by providing some definition to the provision set down in the Directive for individuals who face a decision about entering into similar hybrid hire-purchase agreements in assessing if the handing over of the goods will be considered a supply of goods.
C – 262/16, Shields & Sons Partnership, 12 October 2017
This case concerns the UK Commissioners decision to cancel the certificate entitling an individual farmer to use the flat-rate scheme on the grounds that the earnings derived from the application of the flat-rate compensation percentage substantially exceeded the input tax which the farmer would have been able to deduct if they had been in normal VAT arrangements.
The Court rejected the Commissioners arguments that allowing the farmer in this case to continue benefitting under the scheme in this way would undermine the principle of fiscal neutrality. The Court went on to state that the flat-rate scheme cannot ensure complete fiscal neutrality since the scheme is intended precisely to reconcile that objective with the objective of simplification of the rules which flat-rate farmers are subject to. Moreover the Court stated that the VAT Directive must be interpreted as laying down exhaustively all the cases in which a Member State may exclude a farmer from the flat-rate scheme.
C – 404/16, ‘Lombard’ v Appeals Directorate of the National Taxation and Customs Authority, Hungary, 12 October 2017
In this case request was made to the Court in proceedings between a Hungarian company called ‘Lombard’ and the ‘Appeals Directorate’ concerning the latter’s refusal to allow the correction of invoices which Lombard had made with a view to obtaining a reduction of the taxable amount for VAT following the termination of several financial leasing agreements owing to breaches of contract by the lessees.
In this case the ECJ ruled that the concepts of ‘cancellation’ and ‘refusal’, which under the Directive confer a right to a reduction in the taxable amount, must be interpreted as including a situation in which, under a financial leasing agreement with a definitive transfer of ownership, the lessor may no longer claim payment of the leasing instalment from the lessee because the lessor has terminated the agreement owing to breach of contract by the lessee. The Court justified this ruling by reference to the definitive nature of the reduction in consideration due to the lessor in this case and pointed out that Member States may only derogate from the provisions of the Directive in cases of total or partial non-payment which are characterised by inherent uncertainty stemming from the difficultly in establishing the non-payment or that it may only be temporary non-payment.
C – 101/16, SC Paper Consult SRL, 19 October 2017
This case concerned a Romanian company which was denied the right to deduct VAT which had been paid on supplies of services on the grounds that the supplier of those services had been declared inactive by the Romanian tax authorities prior to the date the contract was entered into between the two parties.
The ECJ held that the right to deduct VAT exists regardless of whether the supplier has been declared inactive, provided there is no evidence of tax evasion or loss of tax revenue.
C – 90/16, The English Bridge Union, 26 October 2017
The English Bridge Union (EBU) is a non-profit body responsible for regulating and developing duplicate bridge in England. Duplicate bridge is a card game that requires a degree of mental skill while the physical element of the game is considered negligible. The dispute in this case involves the EBU contending that the fees they receive from players entering organised duplicate bridge competitions should benefit from the exemptions allowed by the VAT Directive in respect of the supply of certain services closely linked to sport or physical education. The tax authorities refused to grant the exemption on the ground that the provisions pursuant to which the supply of certain services ‘closely linked to sport or physical education’ are exempt mean that a ‘sport’, within the meaning of that provision, must have a significant physical element.
The ECJ agreed with the tax authorities and held that the interpretation of the concept of ‘sport’ appearing in the Directive is limited to activities satisfying the ordinary meaning of that concept’, which are characterised by a not negligible physical element.
The Court went on to state that the fact that an activity promotes physical and mental health is not, of itself, a sufficient element for it to be concluded that that activity is covered by the concept of ‘sport’ within the meaning of the provision in question.
In providing its judgement the Court did comment that this interpretation is without prejudice to the question of whether an activity with a physical element that appears to be negligible may be covered by the concept of ‘cultural services’ within the meaning of the Directive, if the activity, in the light of the way in which it is practised, its history and the traditions to which it belongs, holds such a place in the social and cultural heritage of a country that it may be regarded as forming part of its culture.
The case highlights that activities with a physical element that appears to be negligible are not considered “sports” within the meaning of the VAT Directive but may fall in within the cultural services exemption.
C – 534/16, BB Construct, 26 October 2017
Under Slovakian law, when the turnover of a taxable person with a place of business in Slovakia exceeds €49,790 in the 12 preceding calendar months they will be obliged to file a tax registration. Any taxable person filing such a registration is required to lodge a tax guarantee if a director or associate member of that taxable person had a personal/proprietary connection with another legal person which has outstanding tax debts. The guarantee takes the form of a cash deposit or bank guarantee in the amount of €1,000 to €500,000 which will remain at the disposal of the tax authorities for a period 12 months. The authorities’ rationale for imposing this guarantee is to prevent fraud and tax evasion by enabling the authorities to recover the amounts of tax due if they are not paid.
In this case BB Construct breached the registration threshold and was ordered to provide a guarantee in the amount of €500,000 which was calculated automatically by an information technology system. The tax authorities justified the imposition of this guarantee by pointing out that another company in which a director or associate member of BB Construct had a personal/proprietary connection had VAT arrears.
BB Construct disputed the imposition of the guarantee on the grounds that it was disproportionate in view of its turnover to the point that it interferes with the freedom to conduct a business and it therefore resembles a retroactive sanction based on past facts. The question was thus referred to the ECJ whether that guarantee is compatible with EU law.
The ECJ ruled that the VAT Directive and the Charter of Fundamental Rights of the EU must be interpreted as allowing tax authorities to impose an obligation on a taxable person to provide such a guarantee provided the provision of the guarantee does not go beyond what is necessary in order to attain the objective of ensuring the correct collection of VAT and the prevention of tax evasion.