In Paul Newey (t/a Ocean Finance), the CJEU held that contractual terms may be disregarded if they constitute a wholly artificial arrangement set up with the sole aim of obtaining a tax advantage. In Revenue & Customs Brief 11/13, HMRC has issued revised guidance in light of Deutsche Bank in relation to the VAT treatment of portfolio investment management services. In Colaingrove, the FTT held that the tests in Card Protection Plan on determining whether there is a single or multiple supply are not applicable where a zero-rating provision is being considered. In RR Donnelley, the CJEU has given guidance on when storage services will constitute services connected with immoveable property.
The CJEU has given judgment in Paul Newey (t/a Ocean Finance) (C-653/11). Mr Newey originally ran a loan broking business in the UK, pursuant to which he made exempt supplies and incurred irrecoverable input VAT on supplies of advertising services.
In order to avoid this irrecoverable VAT, he set up a company called Alabaster in Jersey, which provided loan broking services under his trading name and received advertising services from a Jersey company, which were outside the scope of UK VAT. Mr Newey entered into an agreement with Alabaster under which he essentially performed all the processing tasks relating to Alabaster’s loan broking business.
HMRC challenged this structure, on the basis that Mr Newey was receiving the advertising services and providing the loan broking services in the UK. The Upper Tribunal (UT) referred the case to the CJEU, asking what weight should be given to the contractual position in determining who makes a supply of services for VAT purposes and whether this is decisive or can be departed from; and, alternatively, whether the arrangements were abusive under the Halifax (C-255/02) test.
The CJEU recognised that the contractual position normally reflects the economic and commercial reality of transactions and is therefore a factor to be taken into consideration when identifying the supplier and recipient of a supply. However, it went on to hold that the contractual terms are not decisive and (with reference to Halifax) may be disregarded if they constitute a wholly artificial arrangement which does not correspond with the economic and commercial reality of the transactions and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine. In this case, the contractual terms would have to be redefined (again, with reference to Halifax) so as to establish the situation that would have occurred in the absence of the abusive practice, so that Mr Newey could legitimately be treated as receiving the supplies of advertising services. The CJEU went on to say that it was unnecessary to consider the UT’s separate questions on the Halifax principle.
Why it matters: This is another judgment that reaffirms the importance of the consideration of economic and commercial realities in the VAT system. However, it is somewhat unclear, because the CJEU effectively elided the UT’s questions on the extent to which the contractual position can be disregarded to give effect to economic realities, and the application of the Halifax abuse principle. The CJEU decided, with reference to Halifax, that contractual terms may be disregarded if arrangements are wholly artificial and set up with the sole aim of obtaining a tax advantage (although it did not say that this advantage had to be contrary to the purposes of the VAT Directive). It is not, therefore, clear whether the CJEU is saying that contractual terms may only be disregarded where the abuse test in Halifax applies (which seems inconsistent with other cases that have referred to economic reality, such as Loyalty Management UK (C-53/09) and WHA [2013] UKSC 24, and does not really add anything to the existing jurisprudence on Halifax), or whether the approach taken in Newey is a wider one. This is a case that would certainly have benefited from an Advocate General’s (AG’s) opinion, and is likely to lead to further litigation.
In Revenue & Customs Brief 11/13, HMRC has issued revised guidance in relation to the VAT treatment of portfolio investment management services to bring the current treatment into line with the CJEU judgment in Deutsche Bank (Case C-44/11). The revised VAT treatment will apply from 1 December 2013.
Whilst all portfolio management services are subject to VAT, the UK currently treats separate charges for effecting the purchase and sale of securities as exempt from VAT, on the basis that they are consideration for separate supplies. As a result of the judgment in Deutsche Bank, however, it is clear that fees charged by portfolio managers on an annual or other periodic basis for the purchase and sale of securities can no longer be treated as exempt from VAT, regardless of whether or not a separate charge is made.
HMRC noted, however, that Deutsche Bank only considered the VAT position of periodic fees charged on a flat fee basis where there was no direct link to the transactions being executed. HMRC, therefore, considers that the VAT exemption will continue to apply where fees are charged strictly on a transaction by transaction basis (i.e. per sale or purchase), provided that the portfolio management services have been contracted for on that basis and the transaction charges are separately identified in any VAT invoice. This VAT treatment will apply regardless of whether the portfolio is managed on a full discretionary or on an advisory basis.
Why it matters: It is helpful that HMRC has now published guidance on the treatment of portfolio management services following Deutsche Bank. The clarity of the guidance should be welcomed, although the guidance is unusual in that it provides that it will be the charging mechanism which will determine the VAT treatment of the supply.
The First-tier Tribunal (FTT) has given its decision in Colaingrove Ltd [2013] UKFTT 343 (TC), concerning whether verandahs sold with caravans benefited from the zero-rating afforded to static caravans by VATA 1994 Sch 8 Group 9, on the basis that the taxpayer was making a single composite supply.
The FTT acknowledged that, under the principles set out in EU cases like Card Protection Plan (C-349/96) (CPP), there would be a single supply taxed at the same rate. However, it referred to the judgment of the CJEU in Talacre (C-251/05), which held that the CPP single supply rules do not necessarily apply where a zero-rating provision is being considered. This is because zero-ratings are non-harmonised concessions, based on a derogation from EU law and involving socio-political decisions of member states on their extent which were made before the EU tests were established. If the CPP test was allowed to extend the scope of zero-rating by including matters not covered by the relevant provision because they were part of a single composite supply, then this would breach the VAT Directive (which prevents member states from extending the scope of their zero-rating provisions).
The FTT therefore held that it should apply the domestic case law on the interpretation of UK VAT provisions from the period before CPP was decided in 1999, as this would reflect the normal principles of statutory construction based on the evident intention of parliament. Applying this case law to the facts, the FTT held that the zero-rating for static caravans was not intended to cover verandahs sold with the caravans, and so there were two separate supplies.
Why it matters: This is the fourth Colaingrove decision given by the FTT in relation to the VAT treatment of caravans. While there is some logic in the FTT’s reasoning, this decision has the potential for causing great confusion if it is correct, as it means we must look at different case law tests in determining whether there is a single or multiple supply, depending on whether that supply involves exempt, or zero-rated or reduced-rated elements. Further confusion results from the FTT’s extensive reference to its earlier decision in McCarthy and Stone, which has not yet been published.
The CJEU has published its decision in RR Donnelley Global Turnkey Solutions Poland (C-155/12) in relation to the place of supply of storage services, comprising the admission of goods to a warehouse, and the storing, unloading and loading of those goods. The question before the CJEU was whether such storage services constituted the ‘supply of services connected with immoveable property’ within art 47 of the VAT Directive.
Following the AG’s opinion, the CJEU held that it was apparent that the storage of goods was the principal supply and that the reception, placement, unloading and loading of the goods were ancillary to this principal supply.
The CJEU noted that only supplies of services which have a sufficiently direct connection with immoveable property fall within art 47 (Inter-Mark Group C-530/09). On this basis, the CJEU held that, in order for a supply of services to come within art 47, the recipients of that service must be given a right to use all or part of specific immoveable property and that property must constitute a central and essential element of the supply. If the customer had no right of access to the part of the property where their goods were stored, then the supply would therefore not fall within art 47.
Why it matters: The CJEU’s decision is consistent with Revenue & Customs Brief 22/12 and the AG’s opinion. Unlike the AG, however, the CJEU did not refer to the guidelines of the EU VAT Committee in its judgment, although it reached the same conclusion as set out in the guidelines.
