Summary
This month we have the long awaited approval of the VAT in the Digital Age (ViDA) proposals by the EU finance ministers, and this will have an impact on entities doing business in the EU.
The Upper Tribunal has dismissed a calim for judicial review by an NHS Trust, and on a simialr subject we are reminded that another NHS Trust is heading to the Supreme Court over the VAT liability of its car parking charges.
We also report on the outcome of cases from the European Court, but do not envisage the judgements will have significant impact in the UK.
News from the UK Courts and Tribunals
Upper Tribunal
[2024] UKUT 334 (TCC) Midlands Partnership University NHS Foundation Trust v HMRC - Judicial Review
Background: The Trust made a claim for VAT incurred on its free services comprised of health visiting services for children, integrated sexual health services, and services relating to infection prevention and control (“IPC”) that were financed, not by the department of Health and Social Care, but by the Local Authority under contracts for services.
HMRC ruled that the services were supplies for consideration and exempt or standard rated, and because they were business activities, VAT recovery under the special “contracted out services” (COS) rules was blocked. There is no right of appeal against a COS decision, so the Trust sought judicial review to quash HMRC's ruling.
The Tribunal narrowed the dispute to three issues of interpretation of the Principal VAT Directive (PVD):
Were the relevant supplies in return for consideration (Article 2 PVD)?
The Tribunal spent some time reviewing the evidence on this question, but ultimately found very clearly that the contracts with the Local Authority were for specific supplies and were paid for by monetary consideration. It found the assertions that public money was being provided as grants to be unconvincing.
Did the supplies constitute economic activities (Article 9 PVD)?
The Tribunal found that the money derived from the activities was significant, the Trust had gone through a detailed tender process, and there was no evidence that the Trust would have carried on the activities with the Local Authority funding, so it held that the supplies constitute economic activities.
When making the supplies, was the Trust doing so as a public body acting as such (Article 13 PVD)?
The Tribunal ultimately decided the Trust was not acting as a public body, but the reasons were less clear cut than those given for issues 1 and 2.
Comment: This is an important decision for those involved with VAT in the public sector. It is worth noting the Tribunal mentioned the Northumbria Trust which won at the Court of Appeal, which concluded that its car parking is not taxable, however that case has been appealed to the Supreme Court
First Tier Tribunal
TC09330 Procurement International Ltd (PIL)
Background: PIL is a reward recognition programme fulfiller. In essence, it supplies goods to customers who run reward recognition programmes on behalf of their customers who, in turn, want to reward to their customers and/or employees.
The Reward Programme Operators (RPOs) provide a platform through which those entitled to receive rewards (Reward Receivers (RR)) who can choose and order such rewards. The RPO will then place orders with the Appellant for requested goods some of which are delivered (by a third party carrier) directly to the RR.
HMRC denied PIL the right to zero rate reward goods sent directly to RR’s who lived outside the UK. However, the FTT concluded that the place of supply is the UK (where the goods are when picked from the warehouse), title passes according to the documents and incoterms to the RPO immediately before delivery to the RR. Where the RR delivery address is outside the UK, both of these title changes also take place outside the UK so the supplies can be treated as a zero-rated export.
Court of Justice of the European Union
Case C‑622/23 rhtb: projekt gmbh - Austria
Background: rhtb entered into a contract to provide construction services to another business. However, very soon after the works had started the customer informed rhtb it no longer wanted to move forwards with the work. When rhtb requested payment for these services, the customer did not make payment and contended that it was only liable to the net amount and not the VAT due.
The tax authority asserted the payments received by rhtb should be treated as consideration for the supply of construction services and therefore taxable, rather than outside the scope as akin to compensation.
The Austrian courts were satisfied that, as there was an unjustified termination of the contract for services by the customer, rhtb was entitled to the contractually agreed amount, after deducting an allowance for costs not incurred.
This case concerned the interaction between Article 73 of the VAT Directive and the Austrian national law relating to the VAT treatment of payments received after the termination of a contract.
CJEU decision
In a short judgement the court considered the interaction between Article 73 of the PVD (value of supply) and the Austrian national law. It concluded that the remuneration received for a supply of services that was not delivered due to the customer terminating the contract must be interpreted as further consideration for the original supply, and is therefore subject to VAT.
Is this relevant for the UK?
The UK currently maintain the position outlined in the CJEU decision in Vodafone Portugal that termination payments are further consideration for the original supply unless they are punitory in nature or clearly identified as damages for losses suffered by termination of the contract, this case aligns with that position. There is no indication the HMRC wishes to digress from this position.
Case C‑624/23 SEM Remont EOOD - Bulgaria
Background: Remont is a railway infrastructure contractor in Bulgaria. It used a Russian company (before sanctions were implemented) to provide dredging services. The Russian company issued invoices without VAT but shortly afterwards discovered it should have been VAT registered in Bulgaria about a year before. It seems Bulgarian law does not allow the supplier to issue amended invoices in these circumstances but must still pay the output tax.
Remont loaned money to the Russian company so it could pay the output tax (the reasons for this loan are not explained), then Remont claimed input tax based on a report of the Russian company's taxable activity.
The Bulgarian tax authority denied input tax recovery, because it did not have a tax invoice, and the CJEU has ratified this treatment.
Comment: The Bulgarian law, not allowing the supplier to issue amended invoices when it has a retrospective registration liability seems equivalent to a 100% penalty for late registration. The UK does not operate in the same way, so there do not appear to be any UK implications of this case, but any businesses operating in Bulgaria should beware.
Case C-594/23 Lomoco Development ApS and Others – Denmark
Background: This case looks at building plots with foundation slabs ready for the construction of residential dwellings. The Court confirmed that Article 12 of the PVD means that a supply of land that, at the date of that supply, has only the foundations of residential housing structures in place, constitutes a supply of ‘building land’ and is therefore standard rated.
Comment: The UK does not include the concept of “building land” in its VAT law, so the case is of limited application here. However, we often see the debate in relation to “golden brick” arrangements as to when a building or part of a building exists (HMRC say this is once above foundation level) and whether the transaction can be zero rated as a residential building in the course of construction.
HMRC and HM Treasury
On 12 November 2024, HMRC published the following policy papers announcing measures, which come into effect on 3 December 2024, allowing the recovery of VAT that relates to their non-business activities by the bodies:
HMRC have also published a number of minor updates to their guidance on private schools’ VAT, charities, the flat rate scheme and annual accounting.
European Union
VAT in the Digital Age (VidA)
On November 5, 2024, the ViDA proposal was approved by EU Finance Ministers. The agreement clears the way for the European Council to formally adopt the measures after consulting the European Parliament.
The ViDA marks an important step to more uniform digitized VAT system in the EU. Most importantly, e-invoicing becomes the new standard for intra-EU transactions from 2030. Businesses find most welcome the extension of the One-Stop-Shop (OSS), e.g. reducing of the VAT registration obligations in various EU countries and possibility to report movement of goods within the EU via a single VAT registration. This will apply from 2028.
The latest changes contain extensions of several important deadlines. The main difference, as compared to the previous compromise text of June, concern VAT treatment of sales of non-VAT-registered sellers of short-term accommodation and road transport via platforms. EU countries must start applying the platform fiction or so-called ‘deemed supplier rule’ to these sales (it means that the platforms should pay VAT on these sales) from 1 January 2030, but can voluntarily implement it from 1 July 2028. Additionally, the deadline for the extension of the OSS to all B2C transactions and the mandatory reverse charge is postponed to 1 July 2028.
