The key VAT developments this month are: in Wheels, the First-tier Tribunal (FTT) made a reference to ECJ on VAT liability of investment management services provided to occupational pension schemes; a Dutch court made a reference to ECJ on VAT treatment of transfers of shares in property companies; in Payless Cash & Carry, the High Court held that a director who fraudulently caused his company to incur a VAT liability was liable to the company for that amount; in Field Fisher Waterhouse, the FTT made a reference to ECJ on whether service charges are consideration for a separate supply to the exempt letting of property; and HMRC Brief 32/11 set out HMRC's view on the VAT treatment of provision of workers following Reed Employment.
Occupational pension schemesIn Wheels Common Investment Fund Trustees Ltd [2011] UKFTT 534 (TC), the First-tier Tribunal made a reference to the ECJ in relation to the VAT liability of investment management services provided to defined benefit (DB) occupational pension schemes (or common investment funds in which the assets of several such schemes are pooled).
The case turns on whether such schemes are ‘special investment funds’ within Art 135(1)(g) Directive 2006/112/EC (formerly Art 13B(d)(6) Sixth VAT Directive), in which case the supply of management services to them is exempt.
Why it matters: If Wheels is successful then this could mean that DB pension schemes (where pension benefits are calculated by reference to a formula based on the employee's length of service and salary – so-called ‘final salary’ or ‘career average’ schemes) no longer have to pay an estimated £100m a year in VAT.
The reference does not cover defined contribution (DC) schemes (where members are provided with such pension benefits as can be purchased with the assets that are referable to the member).
If Wheels is successful then this could mean that defined benefit pension schemes no longer have to pay an estimated £100m a year in VAT |
Our recent experience is that HMRC will object to appeals before the Tribunal being stood over behind Wheels if they relate to DC schemes.
HMRC have also indicated that they will be writing to taxpayers who already have stood over appeals to seek confirmation on whether they relate to DB or DC schemes.
This may suggest that they expect another appeal to go forward on whether the exemption applies to DC schemes.
A Dutch court has referred questions to the ECJ (DTZ Zadelhoff, Case C-259/11) on whether the exemption for transactions in shares in Art 13B(d)(5) Sixth VAT Directive (now Art 135(1)(f) Directive 2006/112/EC) covers a transaction where the aim is the indirect transfer of immovable property held by the company whose shares are transferred.
The second indent of Art 13B(d)(5) excludes from the exemption ‘the rights or securities referred to in Art 5(3)’ (now Art 15(2) Directive 2006/112/EC).
Article 5(3) provides that:
‘Member States may consider the following to be tangible property: … (c) shares or interests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over immovable property or part thereof.’
The Dutch court has also asked whether the exception to the exemption in Art 13B(d)(5) is applicable even where a Member State has not availed itself of the possibility of treating the shares referred to in Art 5(3)(c) as tangible property, and if so how Art 5(3)(c) should be interpreted.
Why it matters: If the ECJ were to rule that the transfer of shares in companies that own immovable property did not benefit from VAT exemption then this would clearly have wide implications for the sale of shares in such companies, although it seems unlikely that the ECJ would go this far.
The second question is more interesting and raises a difficult question of interpretation.
The outcome could be that, even where a Member State does not treat the shares referred to in Art 5(3)(c) (now Art 15(2)(c)) as tangible property (the UK does not do so), transactions in those shares should be outside the scope of VAT exemption.
In Payless Cash & Carry Ltd (In Liquidation) v Patel and others [2011] EWHC 2112, the High Court held that a director who had wrongfully and fraudulently caused his company to incur a VAT liability to HMRC by wrongfully claiming input tax on various purchases was liable to the company for the amounts wrongly claimed.
HMRC assessed Payless for £3.9m VAT and obtained a winding-up order.
The liquidator relied on HMRC's evidence to establish that, on the balance of probabilities, the input tax claimed did not relate to genuine transactions but contrivances.
The director was responsible for the false claims and was liable to the company for the amounts assessed.
Why it matters: The case demonstrates that where a company is liable to HMRC for VAT debts, it may have a claim against directors or others if they wrongfully caused the liability.
The company remains primarily liable and the remedy is only worth pursuing if the defendant has the assets to compensate the company.
The First-tier Tribunal has published its order in referring five questions to the ECJ for a preliminary ruling in Field Fisher Waterhouse LLP [2011] UKFTT 524 (TC).
The case concerns whether service charges under a lease of a non-opted building are consideration for a separate supply subject to VAT.
The Tribunal is, in effect, asking the ECJ whether RLRE Tellmer (Case C-572/07) applies to FFW's situation.
In RLRE Tellmer, the ECJ held that the letting of apartments in a block and the cleaning of the common parts of the building must, ‘in circumstances such as those at issue in the main proceedings’, be regarded as independent, mutually divisible operations for the purposes of VAT and the cleaning services should have been treated as a separate taxable supply rather than part of the exempt supply of letting.
Why it matters: The case will confirm whether or not landlords are making single or multiple supplies.
This will be significant only in cases where the rent and service charge have different VAT liabilities eg non-opted properties and taxable services such as cleaning, security and maintenance and taxable properties and exempt services such as insurance.
Landlords and tenants who may be affected by a change in liability should consider making protective claims as appropriate.
On 24 August 2011, HMRC issued HMRC Brief 32/11 on its policy following the First-tier Tribunal decision in Reed Employment [2011] UKFTT 200 (TC).
The Tribunal held that in providing temporary staff Reed (an employment bureau) was supplying introductory services rather than making supplies of staff.
This meant that it only had to account for VAT on the commission it earned rather than the overall amount paid by the client, which included the wages paid to the temp and associated employers’ NICs.
HMRC say that Reed was decided on its specific facts (which concerned tax periods up to 1996) and so does not have ‘any wider impact’ on the VAT treatment of employment bureaux operating in the current market conditions and regulatory regime.
HMRC's view is that its current guidance in VAT Information Note 03/09 is correct (under which, on the facts in Reed, there would be a supply of staff as principal).
Why it matters: The distinction between providing staff as principal or agent is very significant since the withdrawal of the Staff Hire Concession in April 2009.
HMRC Brief 32/11 is clearly disappointing for both employment bureaux and their clients who are unable to fully recover the VAT charged, but does not come as a surprise.
The position is now rather unclear, because while there have been changes to the regulatory regime since the period covered by Reed, it is not obvious that these should be determinative of the VAT analysis.
There may still, therefore, be opportunities for employment bureaux to make VAT refund claims (or to change their current charging practice) on the basis of the reasoning in the FTT decision, although it seems that this is likely to lead to a dispute with HMRC.
In addition, as noted in last month's VAT briefing, the Advocate General's opinion in ADV Allround Vermittlungs AG (Case C-218/10) may cast some doubt on the analysis in Reed.
The Bundesfinanzhof in Germany has referred a question to the ECJ for preliminary ruling on the meaning of ‘management of special investment funds’ in Art 13B(d)(6) Sixth VAT Directive (now Art 135(1)(g) Directive 2006/112/EC) in GfBk Gesellschaft für Börsenkommunikation (Case C-275/11).
The question asks whether the services of a third-party manager of a special investment fund are exempt only:
Why it matters: This reference is a further exploration of issues first raised in Abbey National plc v HMC&E (Case C-169/04) and could lead to a reappraisal of liability in this area.
The decision of the ECJ should provide important guidance on the meaning of management and the scope of the exemption.
The consultation on draft revised VAT Notices 708 (Buildings and Construction) and742 (Land and Property) as well as revised sections of the Manuals on the same areas has now completed.
New Notices and revised Manuals should be issued in the next couple of months (no publication date has yet been given).
On 15 September, the ECJ gives judgment in Slaby (C-180/10) on whether a natural person who carried out an agricultural activity on land and subsequently, on account of a change to urban management plans for reasons beyond his control, ceased that activity and reclassified his property as private property and developed it as holiday homes and began to dispose of them, is a taxable person liable to account for VAT.
Greg Sinfield, Tax Partner, Hogan Lovells
Lee Squires, Senior Associate, Hogan Lovells
