No major VAT changes were made in the Finance Act, except for the introduction of joint and several liability for operators of online marketplaces. However, 2016 saw not only some important court decisions but also the EU referendum. These will all have a major impact on the VAT system and are worthy of the pen of Shakespeare himself.
Michael Conlon QC and Julian Hickey (Temple Tax Chambers) review some important VAT decisions made this year, including BPP Holdings, Aspiro, Bookit and Airtours, and consider the implications of Brexit on the VAT landscape.
This year marked the 400th anniversary of the death of our greatest writer, William Shakespeare. It was also a momentous year for VAT. Shakespeare did not like paying taxes to high-spending governments, whose ‘coffers, with too great a court and liberal largess, are grown somewhat light’(2). And he liked poking fun at lawyers, who are ‘full of wise saws and modern instances’(3). Tax litigation is often likened to a war of attrition. As in Troilus and Cressida: ‘On one and other side, Trojan and Greek, sets all on hazard.’(4)
Let us see what the great word-wizard has to say about this year’s pageant of cases.
In BPP Holdings [2016] EWCA Civ 121, HMRC was barred from pursuing an appeal due to its persistent failure to comply with directions. The Court of Appeal noted that, for a taxpayer, the equivalent sanction is having his appeal struck out. HMRC did not enjoy a preferred status and must also comply with directions. A party who cannot meet a deadline must put forward alternative proposals and explain his non-compliance and the merits of his proposals. HMRC had failed to do this. The Supreme Court, however, has given HMRC permission to appeal.
In Aspiro (Case C40/15) [2016] STC 1255, the Court of Justice interpreted the insurance exemption narrowly, holding that the claims settlement services provided for an insurance company (although, it seems, an essential element of the process) were not VAT exempt. Aspiro was neither an insurance broker nor an insurance agent; it did not undertake to ensure that the insured was covered; nor did it contract directly or indirectly with the insured. This decision will undoubtedly increase the cost of insurance to consumers.
In Bookit (Case C-607/14) [2016] All ER (D) 78, which concerned credit card handling fees, the court took an equally narrow view. The taxpayer’s transactions (although forming an essential part of the payment process) did not actually effect the transfer of funds. Accordingly, the VAT exemption did not apply. The same judgment was given in National Exhibition Centre (Case C-130/15) [2016] STC 2132. Other points, namely whether ‘debt collection’ includes services to debtors (not just creditors), were not considered and are now the subject of a reference in DPAS [2016] UKUT 0373. In Bookit/NEC, the CJEU also highlighted a more fundamental point: whether card handling services are separate services at all, or merely ancillary to the principal supply for which payment is being made (and, therefore, following its liability).
In IFX Investment Company Ltd [2016] EWCA Civ 436, the Court of Appeal confirmed that ‘Spot the Ball’ is a game of chance for the purposes of the Gaming Acts and therefore VAT exempt. The aim is to win a prize from the operator or from other players. There can be a ‘game’ without the players communicating. Although skill plays a part, at best it can only estimate the ball’s approximate position; its actual position is determined by chance. Predicting the outcome of tax litigation is regarded by many as involving a similar combination of luck and judgment!
The litigation in Airtours v HMRC [2016] STC 1509 took longer! The issue was whether the company could deduct VAT on fees paid to PwC for providing a report to its bankers on the viability of a recovery plan. In rejecting the claim, the Supreme Court followed the contractual route, apparently preserving the Redrow principle. The elusive concept of ‘economic reality’ and whether this equates with artificiality were left over for another case!
The referendum vote on 23 June 2016 was a seismic shock to Europe and to the common VAT system. It also caused economic turmoil and a bear market. It will not mean the exit of VAT. However, the future shape of all harmonised taxes is now a matter of uncertainty and speculation (see ‘Confusion’ below).
In Zipvit [2016] UKUT 0294, the Upper Tribunal refused a claim to input VAT deduction by a taxable recipient of postal services. The services had been wrongly exempted. VATA 1994 s 19(4) provides that the consideration is VAT inclusive. However, the appellant held no proper VAT invoices, nor had it borne the economic burden of VAT.
In Lloyds Banking Group Plc, Standard Chartered Plc, MG Rover Group Ltd and BMW (UK) Holdings Ltd [2016] UKUT 0434, the Upper Tribunal was faced with conflicting First-tier decisions on identifying the correct claimant where, historically, a VAT group member had overpaid VAT. The Upper Tribunal held that entitlement belonged to the representative member, even if the ‘real world supplier’ had left the group. Support was to be found in VATA 1994 s 80, which directs that repayment is due to the person who has accounted for the tax. The position might be different if, for example, the group or the representative member were irrevocably dissolved. It might then be necessary to fashion some other remedy. The clear message to groups, therefore, is to avoid these problems by putting in place strong contractual protection between the companies to ensure rights are safeguarded.
The Supreme Court reserved judgment in HMRC v Investment Trust Companies ([2015] EWCA Civ 82, CA). Key issues are: whether the ITCs (as ultimate consumers) have a direct, mistake-based, restitution claim against HMRC because HMRC was enriched at the ITCs’ expense by the overpayment of VAT; whether VATA ousts such common law remedy; and, if not, the extent of HMRC’s enrichment. In HMRC v Littlewoods ([2015] EWCA Civ 515, CA), the Supreme Court gave both parties permission to appeal. The issues are: whether the claimant may claim restitution of the time value of the principal sum of VAT overpaid (measured by compound interest, but net of any notional liability to corporation tax); or whether statutory (simple) interest provides an adequate indemnity. The hearing is not until July 2017.
The formal process for a member state to leave the EU is provided for in article 50 of the Lisbon Treaty. The government asserted that article 50 can be triggered by using the royal prerogative. This was challenged by judicial review in R (oao Miller and Another) v Secretary of State [2016] EWHC 2768 (Admin). The claimants succeeded. The court held that, as EU membership was effected by an Act of Parliament which conferred rights on individuals, only parliament can nullify those rights. The decision provoked angry squawks from the ‘Leave’ flock. The tabloid press ridiculed the judges as ‘enemies of the people’.
The Supreme Court heard the government’s appeal on 5–8 December. Its case is that EU law is not ‘UK law’ but ‘an ambulatory system created on an international plane’. The European Communities Act 1972 is not a source of law but a conduit only; and it does not, therefore, prevent use of the royal prerogative to exit the EU. Alternatively, amending legislation (notably the European Union Referendum Act 2015) creates a balanced separation of powers between Parliament and the government. The claimants’ case is that ECA created a new legal order embedding rights in UK law; and the government’s case is flawed because it gives greater primacy to purely domestic statutes (such as the Dangerous Dogs Act 1991), which cannot be nullified by use of the prerogative. The referendum and the House of Commons motion of 7 December (directing the government to trigger article 50) are, according to the claimants, ‘of considerable political significance, but legally irrelevant’. Judgment will be given in January. Meanwhile, a new legal challenge has been launched claiming that the EU referendum did not mandate the UK’s exit from the European Economic Area (single market). This would require primary legislation.
If a full Brexit goes ahead, the UK will no longer be part of the single market or the customs union. In principle, unless some special deal can be negotiated with the EU, this means that goods moving between the UK and the EU will be subject to import/export rules; third country goods in free circulation will not necessarily be free of duties when imported into the UK; and UK services providers will encounter regulatory obstacles when doing business in the EU. One point can be made with certainty. Individuals may currently invoke EU law to override inconsistent domestic rules. This right will cease.
How much of the VAT system will be retained? It is tempting to compile two ‘wish lists’: one for taxpayers; and one for HMRC. HMRC will undoubtedly wish to follow case law on matters such as ‘single supply’ (since the weight of authority usually results in a single, standard rated supply). Taxpayers generally wish for a multiple supply analysis, as it gives scope for benefiting from reliefs and exemptions. Will governments have more flexibility to retain, or even re-introduce, zero or reduced rating, to achieve their social aims or to win votes? Will VAT exemptions narrow still further? Or will the government throw the UK financial and insurance sectors a lifeline by reversing the effects of some of the EU case law on outsourced services?
Another certainty is that for the rest of this decade at least, businesses and their advisers will face some major challenges. Let us hope we can echo Macbeth and say: ‘Present fears are less than horrible imaginings.’(17)
(1) The Winter's Tale, Act III, iii
(2) Richard II, Act I, iv
(3) As You Like It, Act II, vii
(4) Troilus and Cressida, Prologue
(5) The Merchant of Venice, Act IV, i
(6) King John, Act II, i.
(7) Julius Caesar, Act III, i.
(8) Henry V, Act III, i.
(9) A Midsummer Night’s Dream, Act II, i
(10) Twelfth Night, Act III, iv.
(11) King Lear, Act I, i.
(12) Richard II, Act III, iii.
(13) Coriolanus, Act III, i.
(14) Measure for Measure, Act II, i.
(15) The Merchant of Venice, Act III, iii.
(16) Macbeth, Act II, iii.
(17) Macbeth, Act I, iii.
No major VAT changes were made in the Finance Act, except for the introduction of joint and several liability for operators of online marketplaces. However, 2016 saw not only some important court decisions but also the EU referendum. These will all have a major impact on the VAT system and are worthy of the pen of Shakespeare himself.
Michael Conlon QC and Julian Hickey (Temple Tax Chambers) review some important VAT decisions made this year, including BPP Holdings, Aspiro, Bookit and Airtours, and consider the implications of Brexit on the VAT landscape.
This year marked the 400th anniversary of the death of our greatest writer, William Shakespeare. It was also a momentous year for VAT. Shakespeare did not like paying taxes to high-spending governments, whose ‘coffers, with too great a court and liberal largess, are grown somewhat light’(2). And he liked poking fun at lawyers, who are ‘full of wise saws and modern instances’(3). Tax litigation is often likened to a war of attrition. As in Troilus and Cressida: ‘On one and other side, Trojan and Greek, sets all on hazard.’(4)
Let us see what the great word-wizard has to say about this year’s pageant of cases.
In BPP Holdings [2016] EWCA Civ 121, HMRC was barred from pursuing an appeal due to its persistent failure to comply with directions. The Court of Appeal noted that, for a taxpayer, the equivalent sanction is having his appeal struck out. HMRC did not enjoy a preferred status and must also comply with directions. A party who cannot meet a deadline must put forward alternative proposals and explain his non-compliance and the merits of his proposals. HMRC had failed to do this. The Supreme Court, however, has given HMRC permission to appeal.
In Aspiro (Case C40/15) [2016] STC 1255, the Court of Justice interpreted the insurance exemption narrowly, holding that the claims settlement services provided for an insurance company (although, it seems, an essential element of the process) were not VAT exempt. Aspiro was neither an insurance broker nor an insurance agent; it did not undertake to ensure that the insured was covered; nor did it contract directly or indirectly with the insured. This decision will undoubtedly increase the cost of insurance to consumers.
In Bookit (Case C-607/14) [2016] All ER (D) 78, which concerned credit card handling fees, the court took an equally narrow view. The taxpayer’s transactions (although forming an essential part of the payment process) did not actually effect the transfer of funds. Accordingly, the VAT exemption did not apply. The same judgment was given in National Exhibition Centre (Case C-130/15) [2016] STC 2132. Other points, namely whether ‘debt collection’ includes services to debtors (not just creditors), were not considered and are now the subject of a reference in DPAS [2016] UKUT 0373. In Bookit/NEC, the CJEU also highlighted a more fundamental point: whether card handling services are separate services at all, or merely ancillary to the principal supply for which payment is being made (and, therefore, following its liability).
In IFX Investment Company Ltd [2016] EWCA Civ 436, the Court of Appeal confirmed that ‘Spot the Ball’ is a game of chance for the purposes of the Gaming Acts and therefore VAT exempt. The aim is to win a prize from the operator or from other players. There can be a ‘game’ without the players communicating. Although skill plays a part, at best it can only estimate the ball’s approximate position; its actual position is determined by chance. Predicting the outcome of tax litigation is regarded by many as involving a similar combination of luck and judgment!
The litigation in Airtours v HMRC [2016] STC 1509 took longer! The issue was whether the company could deduct VAT on fees paid to PwC for providing a report to its bankers on the viability of a recovery plan. In rejecting the claim, the Supreme Court followed the contractual route, apparently preserving the Redrow principle. The elusive concept of ‘economic reality’ and whether this equates with artificiality were left over for another case!
The referendum vote on 23 June 2016 was a seismic shock to Europe and to the common VAT system. It also caused economic turmoil and a bear market. It will not mean the exit of VAT. However, the future shape of all harmonised taxes is now a matter of uncertainty and speculation (see ‘Confusion’ below).
In Zipvit [2016] UKUT 0294, the Upper Tribunal refused a claim to input VAT deduction by a taxable recipient of postal services. The services had been wrongly exempted. VATA 1994 s 19(4) provides that the consideration is VAT inclusive. However, the appellant held no proper VAT invoices, nor had it borne the economic burden of VAT.
In Lloyds Banking Group Plc, Standard Chartered Plc, MG Rover Group Ltd and BMW (UK) Holdings Ltd [2016] UKUT 0434, the Upper Tribunal was faced with conflicting First-tier decisions on identifying the correct claimant where, historically, a VAT group member had overpaid VAT. The Upper Tribunal held that entitlement belonged to the representative member, even if the ‘real world supplier’ had left the group. Support was to be found in VATA 1994 s 80, which directs that repayment is due to the person who has accounted for the tax. The position might be different if, for example, the group or the representative member were irrevocably dissolved. It might then be necessary to fashion some other remedy. The clear message to groups, therefore, is to avoid these problems by putting in place strong contractual protection between the companies to ensure rights are safeguarded.
The Supreme Court reserved judgment in HMRC v Investment Trust Companies ([2015] EWCA Civ 82, CA). Key issues are: whether the ITCs (as ultimate consumers) have a direct, mistake-based, restitution claim against HMRC because HMRC was enriched at the ITCs’ expense by the overpayment of VAT; whether VATA ousts such common law remedy; and, if not, the extent of HMRC’s enrichment. In HMRC v Littlewoods ([2015] EWCA Civ 515, CA), the Supreme Court gave both parties permission to appeal. The issues are: whether the claimant may claim restitution of the time value of the principal sum of VAT overpaid (measured by compound interest, but net of any notional liability to corporation tax); or whether statutory (simple) interest provides an adequate indemnity. The hearing is not until July 2017.
The formal process for a member state to leave the EU is provided for in article 50 of the Lisbon Treaty. The government asserted that article 50 can be triggered by using the royal prerogative. This was challenged by judicial review in R (oao Miller and Another) v Secretary of State [2016] EWHC 2768 (Admin). The claimants succeeded. The court held that, as EU membership was effected by an Act of Parliament which conferred rights on individuals, only parliament can nullify those rights. The decision provoked angry squawks from the ‘Leave’ flock. The tabloid press ridiculed the judges as ‘enemies of the people’.
The Supreme Court heard the government’s appeal on 5–8 December. Its case is that EU law is not ‘UK law’ but ‘an ambulatory system created on an international plane’. The European Communities Act 1972 is not a source of law but a conduit only; and it does not, therefore, prevent use of the royal prerogative to exit the EU. Alternatively, amending legislation (notably the European Union Referendum Act 2015) creates a balanced separation of powers between Parliament and the government. The claimants’ case is that ECA created a new legal order embedding rights in UK law; and the government’s case is flawed because it gives greater primacy to purely domestic statutes (such as the Dangerous Dogs Act 1991), which cannot be nullified by use of the prerogative. The referendum and the House of Commons motion of 7 December (directing the government to trigger article 50) are, according to the claimants, ‘of considerable political significance, but legally irrelevant’. Judgment will be given in January. Meanwhile, a new legal challenge has been launched claiming that the EU referendum did not mandate the UK’s exit from the European Economic Area (single market). This would require primary legislation.
If a full Brexit goes ahead, the UK will no longer be part of the single market or the customs union. In principle, unless some special deal can be negotiated with the EU, this means that goods moving between the UK and the EU will be subject to import/export rules; third country goods in free circulation will not necessarily be free of duties when imported into the UK; and UK services providers will encounter regulatory obstacles when doing business in the EU. One point can be made with certainty. Individuals may currently invoke EU law to override inconsistent domestic rules. This right will cease.
How much of the VAT system will be retained? It is tempting to compile two ‘wish lists’: one for taxpayers; and one for HMRC. HMRC will undoubtedly wish to follow case law on matters such as ‘single supply’ (since the weight of authority usually results in a single, standard rated supply). Taxpayers generally wish for a multiple supply analysis, as it gives scope for benefiting from reliefs and exemptions. Will governments have more flexibility to retain, or even re-introduce, zero or reduced rating, to achieve their social aims or to win votes? Will VAT exemptions narrow still further? Or will the government throw the UK financial and insurance sectors a lifeline by reversing the effects of some of the EU case law on outsourced services?
Another certainty is that for the rest of this decade at least, businesses and their advisers will face some major challenges. Let us hope we can echo Macbeth and say: ‘Present fears are less than horrible imaginings.’(17)
(1) The Winter's Tale, Act III, iii
(2) Richard II, Act I, iv
(3) As You Like It, Act II, vii
(4) Troilus and Cressida, Prologue
(5) The Merchant of Venice, Act IV, i
(6) King John, Act II, i.
(7) Julius Caesar, Act III, i.
(8) Henry V, Act III, i.
(9) A Midsummer Night’s Dream, Act II, i
(10) Twelfth Night, Act III, iv.
(11) King Lear, Act I, i.
(12) Richard II, Act III, iii.
(13) Coriolanus, Act III, i.
(14) Measure for Measure, Act II, i.
(15) The Merchant of Venice, Act III, iii.
(16) Macbeth, Act II, iii.
(17) Macbeth, Act I, iii.
