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
C-664/16 – Lucreţiu Hadrian Vădan v Agenţia Naţională de Administrare Fiscală - 21 November 2018
This case looked at a taxpayer’s right to deduct VAT incurred and the substantive requirements which must be met in order to support an input VAT reclaim.
In this case the taxpayer, in the absence of invoices and with only illegible receipts available, sought to rely on expert reports to support a reclaim of VAT incurred. The referring court sought a ruling from the CJEU as to whether a taxpayer has a right to deduct in the case where the substantive conditions for that right have been met but where no invoices are available to evidence that VAT paid and if so, can a court-commissioned expert be used as an acceptable and appropriate measure for the determining the extent of the taxpayer’s right to deduction.
The Court held that while the right of deduction of taxpayers cannot be denied as a result of a mere breach of formal conditions once the substantive requirements are satisfied, the taxpayer is still required to provide objective evidence of the expenditure incurred for the purpose of his taxable business. The Court considered that although an expert report might supplement that evidence it could not replace it. The Court ruled that an expert report was not sufficient on the basis that it would not be able to establish that the taxpayer had actually paid the VAT in question.
This case highlights that while taxpayers have had recent success in supporting input deduction despite deficiencies in their records/invoices, there are limits to this approach i.e. national authorities may accept incomplete records but are unlikely to overlook their absence.
C-648/16 – Fortunata Silvia Fontana v Agenzia delle Entrate - 21 November 2018
The Italian tax authority issued a tax adjustment notice to the taxpayer for VAT underpaid on the basis of a sectoral study which was used to estimate the VAT that should have been paid by a taxpayer in this industry.
The CJEU in its judgement considered that Member States have a margin of discretion in preventing tax avoidance or evasion and the use of sectoral studies is permissible provided that it respects the principles of fiscal neutrality and proportionality.
In this instance the Court considered that the principle of fiscal neutrality would be met provided that the taxpayer’s right to deduct VAT paid was maintained. In the case of proportionality, the Court considered that the study in question must be correct, reliable and up-to-date, that the taxpayer’s must have a right to rebut the accuracy and relevance of the study and that the standard of proof on the taxpayer to rebut the study should not be excessively high.
C-295/17 - MEO – Serviços de Comunicações e Multimédia SA v Autoridade Tributária e Aduaneira - 22 November 2018
The Court held in this case that where a business charges a customer a pre-determined fee for early termination of a contract and the amount paid over by the customer is equal to the amount due under the contract if the customer had continued for the agreed minimum period, then such payments constitute consideration for services and are subject to VAT.
In coming to this decision the court considered that the economic and commercial reality of these early termination arrangements indicated that the payments were in fact consideration for VAT purposes and not compensation due as a result of breach of contract.
The approach adopted by the court in this case appears to be very specific to the facts. However, whilst confirming that the contractual provisions are important, the Court appears to give overriding importance to the “commercial and economic reality” of the provider receiving exactly the same payment from a customer terminating the contract as one continuing to enjoy the services for the minimum period. It will be interesting to track the CJEU’s application of this “economic reality” test in future cases brought before it.
C-264/17 – Harry Mensing v Finanzamt Hamm- 29 November 2018
The taxpayer in this case, Mr Mensing, was an art dealer operating galleries across Germany who acquired works of art from artists in other EU Member States. The artists themselves had treated the sales as intra-community supplies. The German tax authority sought to deny the taxpayer the right to apply the margin scheme for works of art on his intra-community acquisition of these artworks from other EU Member States.
Mr Mensing challenged the refusal of the margin scheme to the acquisitions and also sought a right to deduct input VAT on the intra-Community acquisition on the basis that the provision in the EU VAT Directive restricting input VAT deduction in relation to margin scheme goods had not been transposed into national law.
The Court concluded that the margin scheme applied. But that if the taxpayer was relying on the direct effect of the optional margin scheme to his supplies that he was then also bound by its associated input tax block.
C-548/17 - Finanzamt Goslar v baumgarten sports & more GmbH - 29 November 2018
This case centred on the rule for accounting for VAT on payments made in successive instalments, paid by a German football club to an agent who had successfully placed a player at the club. The payments would continue successively and would only continue if the player remained at the club. The German tax authority argued that the agent’s services were complete when the contract was signed and that therefore VAT should be accounted for on the full commission up front on fixed term contracts.
The Court in its judgement rejected this approach stating that even if the agent’s services were completed at that stage, the rules on successive payments for services applied meaning that VAT should only be accounted for, and paid, when the commission was received by the agent rather than all up-front.
C-672/17 – Tratave – Tratamento de Águas Residuais do Ave SA v Autoridade Tributária e Aduaneira- 6 December 2018
The Portuguese system for VAT bad debt relief requires suppliers to notify insolvent business customers that they are cancelling the VAT on an invoice, which allows the tax authority to pursue the customer for VAT which has been recovered but not been paid. Tratave, which operates sewage and water purification systems, adjusted the VAT paid in respect of debtors which had been declared insolvent but the Portuguese tax authority sought to deny its right to adjust the VAT payable on the basis that Tratave had failed to issue the required notifications to its debtors.
Tratave argued that the notification condition was disproportionate, relying on various cases which established limits on tax authority’s ability to restrict the relief.
However, the Court ruled that a simple notification requirement is acceptable where the notification is within the supplier's control and provided that there was no prescribed format that had to be followed by the supplier which would be excessively onerous to fulfil. The Court considered in its decision that the notification required under Portuguese law falls within the margin of discretion given to national tax authorities to ensure the proper functioning of the VAT system and that by requiring a notification to be made, which would inform the debtor of the need to adjust the input VAT recovered, that such notification would contribute not only to ensuring the correct collection of VAT but also to the avoidance of tax evasion and eliminating the risk of loss of tax revenue.
C-51/18 - European Commission v Republic of Austria - 19 December 2018
The VAT Directive 2001/84 imposes a “droit de suite” (a resale right) in favour of graphic and plastic artists, so that they receive a royalty each time their artwork is resold commercially.
The CJEU in this case ruled that such royalties are not subject to VAT.
The Court in reaching its conclusion considered the fact that unlike musicians who can retain and exploit copyright in their work, the rights of use and exploitation in graphic and plastic art are exhausted when they are first placed on the market. Artists do not therefore have any way of intervening in subsequent sales and the royalties are a benefit which stems from EU legislation and not from any involvement in the resale. Simply benefitting from the transaction does not mean that the artist is making a supply and nor should the receipt of royalties (produced by an event outside the artist’s control) be attributed to the original sale.
The decision is an alternative take on other recent court decisions, notably the recent judgment in MEO (see above), which seeks to attribute amounts payable under the terms of a contract to the original taxable supply.
C-17/18 – Criminal proceedings against Virgil Mailat and Others - 19 December 2018
Apcom Select, operated a restaurant in Romania and recovered VAT on capital works undertaken. Apcom leased the property to a third party in December 2007 along with the capital equipment and inventory of the restaurant business. The lessee continued to operate the restaurant business.
Criminal proceeding were brought against the company and it managers, Mr and Mrs Mailat, for tax avoidance on the basis that the lease transaction was exempt from VAT and as such the company had failed to adjust the VAT previously recovered on the capital works. The defendants submitted that the letting constitutes a transfer of a business which is not considered a supply for VAT purposes and as such no input tax adjustment was required.
The Court held that the transaction could not qualify as a transfer of business. The key factor, in its view, was that while the lessee did continue to operate the restaurant business as an independent economic activity, the lessee “could not liquidate the economic activity concerned” as all the property, equipment and inventory necessary to operate that activity were not owned but leased and as such the transaction did not constitute the transfer of a totality of assets which qualifies for relief.
In addition to the above, the Court ruled that the transaction was a single supply, being the letting of property and that the inclusion of the capital equipment and inventory in the lease agreement was to be treated as ancillary to that principal supply.
C-552/17 - Alpenchalets Resorts GmbH v Finanzamt München Abteilung Körperschaften - 19 December 2018
During 2011, Alpenchalets rented residences in Germany, Austria and Italy from their owners and then, on its own behalf, rented them to private customers. In addition to accommodation, Alpenchalets supplied some customers with services including cleaning, laundry and delivery of bread rolls.
On the assumption that the owners were subject to VAT the CJEU concluded that the tour operators’ margin scheme (TOMS) applied to Alpenchalets’ services stating that the provision of accommodation was so central to TOMS that the scheme applied regardless of the extent of any ancillary services.
The Court also confirmed that the reduced rate of VAT applicable to the supply of holiday accommodation did not apply to a TOMS supply of accommodation.
C-422/17 – Szef Krajowej Administracji Skarbowej v Skarpa Travel sp. z o.o.- 19 December 2018
Another case looking at the operation of the tour operators' margin scheme (TOMS) with its judgement released on 19 December 2018.
Under TOMS agents have to account for VAT on their margin, but cannot calculate that margin until they know their final costs. In this case the German taxpayer was a travel agent who frequently took deposits from customers when they book a holiday, with the balance payable prior to departure.
The Court adopted a strict approach, stating that TOMS is not an exhaustive VAT scheme and cannot overrule the basic tax point rules which require VAT to be accounted for on payments on account. The Court recognised that this will require travel agents to estimate their margin and correct those estimates when final costs are known, but considered that such calculations would be feasible for a travel agent of average diligence.
While this rationale is sound, the administrative obligation it imposes will make travel agents VAT compliance much more complicated.
C-414/17 - AREX CZ a.s. v Odvolací finanční ředitelství - 19 December 2018
Arex CZ purchased fuel from an Austrian company via a chain of Czech intermediaries. The fuel was transported from Austria to the Czech Republic under a duty suspension arrangement and the first Czech intermediary was responsible for and paid the excise duty when the fuel came out of duty suspension in the Czech Republic. Transport of the fuel from Austria to the Czech Republic was arranged by Arex by means of its own vehicles. The CJEU was asked to consider whether the acquisition by the first intermediary, which was liable to the payment of excise duty, should also be considered to be the intra-Community acquisition.
The Court ruled that the acquisition by Arex was to be regarded as the intra-Community acquisition if the transfer to Arex of the right to dispose of the goods as owner occurred before the intra-Community transport. Furthermore the Court considered that the fact that the goods in question were excise goods could not change the classification of the transaction in order for the acquisition made by the first Czech intermediary, which was liable to pay the excise duty, to be considered to be the intra-Community acquisition because the transport could not be attributed to that transaction.
C-410/17 – A Oy - 10 January 2019
A Oy (A) contracted to demolish obsolete factories in Finland. The contract involved several elements and in addition to providing demolition services A was responsible for proper disposal and processing of waste and materials. Part of this waste and materials included scrap metal A was entitled to keep and resell. In determining the price for its demolition services and in order to provide a competitive quote A would factor the estimated value of this scrap metal into its contract tender quote. While A would factor this cost into its quote it did not share this information with its potential customer either before or after being awarded the contract (the demolition contract).
In addition to providing demolition services, A also purchased old machinery and equipment pursuant to a contract for dismantling, whereby A agreed to dismantle and dispose of the goods and waste within an agreed period. In determining the price of the acquisition of the goods, A would also factor the cost of dismantling, disposing and processing the goods and the disposal of waste. Similar to the first contract, while A would factor these costs into the purchase price (by reducing the price A was willing to pay) these costs were not shared with the supplier or included in the contract (the dismantling contract).
Firstly, in relation to the demolition contract, the Court held that the contract consisted of a supply of services for consideration, being the supply of demolition services and also a supply of goods for consideration, being the supply of scrap metal, if the purchaser of the scrap metal (the demolition company) attributes a value to the acquisition of the scrap metal which it factors into the price it charges for the demolition services by reducing the price quoted. The Court ruled that the supply of goods was subject to VAT only if it was made by a taxable person acting as such.
Secondly, in relation to the dismantling contract, the Court held that the contract consisted of a supply of goods for consideration, being the supply of the goods to be dismantled, which is subject to VAT only if it is made by a taxable person acting as such. The Court also held that insofar as the purchaser of the goods is obligated to dismantle and dispose of the goods and any waste, thereby specifically meeting the needs of the seller, that the contract also includes a supply of services for consideration if the purchaser attributes a value to that supply of services which it factors into the purchase price of the goods acquired and to be dismantled.
The Court in its judgement considered that the fact that A’s customers did not know the price of the scrap metal factored into the price under the demolition contract or the fact that vendors did not know the costs of dismantling/disposing of the goods factored into the price under the dismantling contract did not affect its conclusions.
The judgment illustrates of how contracts for complex supplies require dissemination to identify supplies of goods/services flowing in different directions which may be subject to VAT.
C-310/16 - Dzivev and Others - 17 January 2019
In this case, in order to gather evidence in a criminal investigation in relation to VAT fraud, authorisations for the interception of telephone conversions were obtained. However, it transpired that some of the authorisations issued were defective and others were granted by a court which lacked jurisdiction and as a result the evidence obtained, which proved that the defendant’s committed the offences, were obtained unlawfully.
Recognising the importance of the phone taps to the prosecution, the Bulgarian authorities argued that its domestic rules should be interpreted in light of its obligations under EU law to counter VAT fraud. The Court rejected this argument stating that while it was true that national measures against VAT fraud had to meet the standards demanded, that EU law, when read in conjunction with the Charter of Fundamental Rights, also demands respect for the rule of law and therefore Bulgaria could not dis-apply its own national rules which prevents reliance on evidence that was obtained unlawfully.
C-165/17 - Morgan Stanley & Co International plc v Ministre de l'Économie et des Finances- 24 January 2019
The CJEU ruled in this case that a French branch must take its UK head office’s activity into account when calculating its VAT recovery entitlement in France. Morgan Stanley’s French branch had been recovering VAT in full given that its French supplies, being banking and financial transactions, were VATable on the basis of an option to tax allowed under French law. In determining its VAT recovery entitlement the French branch disregarded support services provided to its UK head office which were used by the head office for the purpose of making largely exempt supplies.
In the Court’s judgment it ruled that the recovery of VAT on costs associated with supporting the head office had to take into account the UK activity of the head office and that the method for calculating VAT recovery on costs will depend on whether the costs are exclusively for supporting the head office, or for the benefit of both branch and head office.
As well as diluting the VAT recovery for the French branch, the judgment creates significant additional administrative burdens for any partially exempt businesses operating through international branch structures.