UK VAT legislation treats services provided by a person in business working as an office holder as being supplied in the course of an economic activity and subject to VAT. But is this correct? Clearly, if a person, such as a director, is an employee of the company then there is no independent economic activity, but what about other circumstances? The UK has taken the view that a person such as a lawyer or accountant operating as an office holder should be treated as making a supply in the course of its business (VATA 1994 section 94(4)), but that treatment has been called into question in a recent CJEU decision. In TP v Administration de l'Enregistrement, des Domaines et de la TVA (Case C‑288/22), the CJEU held that a lawyer acting as a director of a number of Luxembourg companies was not carrying on an independent economic activity, even though he was not an employee. Whilst the decision is no longer binding in the UK, it remains influential and it is to be hoped that HMRC might provide their take on this important case and its impact on section 94(4).
As well as looking at this CJEU decision, in this edition we also cover the following recent VAT and indirect tax developments:
A decision on the application of TOMS to taxi services.
An FTT decision on the exception to the land VAT exemption for supplies in premises similar to a hotel.
The long-awaited government response on VAT and the fund management exemption.
The government's response on proposals for the expansion of the VAT scheme for energy saving materials.
We also have updates from across our European network, including from Germany and Luxembourg.
In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with links to our more detailed reports.
If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch. Our contact details are at the bottom.
Supplies by office holders
In Luxembourg, a member of a board of directors is required to charge and account for VAT. TP, a lawyer, was a member of the board of directors of several companies in Luxembourg. TP argued that his remuneration as a member of the board of directors was not subject to VAT as his activity was not carried out independently, but as a member of the board. The CJEU has agreed with this analysis in TP v Administration de l'Enregistrement, des Domaines et de la TVA (Case C‑288/22). A member of a board of directors does not carry out an economic activity independent of the company of which it is a board member and, accordingly, is not required to charge and account for VAT on their fees, as they do not act on their own behalf or under their own responsibility and do not bear the economic risk linked to their activity.
Each case is fact specific and it may be that it is necessary to distinguish between different scenarios. HMRC take the view that this provision applies only to people such as solicitors, accountants and other practising consultants who are already in business to provide professional services and continue to supply their services and skills in the course of their duties as office holder, rather than being appointed on grounds of their personal merit, occupational expertise or experience, for example. The nature of TP's services for the company in question are not entirely clear from the case, but perhaps it can be distinguished on the basis that TP was not providing his legal services to the company, but rather acting as a director in a much broader advisory manner. As HMRC's guidance states, "In general, only people who are in business to provide professional services, and who continue to provide their services as office holders" fall within this provision.
More generally, recent decisions of the CJEU have emphasised the typical aspects of an independent economic activity, focussing in particular on risk and reward. However, it is not clear that all businesses typically follow this pattern and this approach could, in principle, call into the question the VAT treatment of services provided by other persons who may not in practice take on the risk of financial losses.
Read our Insights article here
Taxi services and TOMS
The VAT treatment of taxi services has long been a matter of contention. Taxi firms have long sought to restrict their supplies to the services they provide the drivers such that VAT is only accounted for on their commission, rather that the full fare. Perhaps only hair dressers have a longer history of VAT disputes!
The latest iteration of these disputes involves Uber and similar businesses providing mobile ride-handling services and the latest twist is provided in Bolt Services UK Ltd v HMRC [2023] UKFTT 1043. Having essentially lost their case that drivers were independent operators rather than workers, the FTT has now held that their supplies of mobile ride-handling services to end customers fall within the Tour Operators Margin Scheme (TOMS). This may seem surprising on the face of it (with the lack of any connection with travel in the broader sense), but the FTT placed reliance on TOMS being broadly aimed at supplies of accommodation and transport services and since there is clear authority that accommodation alone is sufficient to fall within the scheme, so is transport alone.
Given the sums at stake if VAT is only chargeable on the margin under TOMS, this case has some way to travel yet!
Read our Insights article here
Serviced apartments and VAT
The decision in Realreed Ltd v HMRC [2023] UKFTT 1042 is an instructive one on the restriction on the VAT exemption for supplies of sleeping accommodation in a hotel or similar establishment. In this case, supplies of the accommodation and the services similar to those provided by a hotel were split between different entities. Despite this, the FTT held that this did not prevent the premises (with the benefit of third party services) being similar to a hotel. In fact, splitting the services resulted in a worse outcome, as the FTT also held that the provision in VATA 1994 Sch 6 para 9 (which limits the value of taxable supplies where a person is provided with such accommodation for more than four weeks) was compromised. Since Realreed only provided the accommodation and para 9 is subject to a minimum level of 20% taxable consideration, it was necessary to apply that 20% to the whole of the accommodation costs (with the other third party services also being subject to VAT).
In an earlier application, Realread were unsuccessful in challenging HMRC's decision to assess VAT on supplies of serviced accommodation on the basis that HMRC's failure during inspections to query the correct treatment gave rise to a legitimate expectation. The FTT also rejected Realreed's application that the level of penalty applied on the late payments of VAT should be reduced to reflect this factor.
Read our Insights article here
VAT and fund management
The government's much vaunted review of the VAT treatment of fund management, as part of its wider review of opportunities for the fund management industry post-Brexit, has petered out with something of a damp squib. HM Treasury's long-awaited response to its consultation on changes to the VAT exemption for the management of special investment funds (SIFs) has confirmed that, despite the suggested approach in the original consultation, it will retain its current, list-based approach to identification of the funds which fall within the definition of a SIF. The government accepted points made by respondents that a principle based approach would have introduced a greater degree of uncertainty. Since the "simplification" proposed would have provided less clarity, the retention of a list based approach is ultimately to be welcomed.
This follows on from HM Treasury making very clear its refusal to contemplate zero-rating - which may, in practice, inhibit the UK's ability to be seen as a jurisdiction in which to domicile investment funds and other vehicles, particularly where those funds and vehicles are managed domestically with the UK based investment manager suffering input VAT restriction that may not apply where a non-UK vehicle is involved that is not intended for retail investors.
Whilst there is no mention of the VAT treatment of model portfolios in the response, separate guidance from HMRC on this is expected in early 2024.
Read our Insights article here
Energy saving materials: government response
It is clear that tax has a potentially important role to play in encouraging environmentally positive developments. One example is the VAT relief available for energy saving materials (ESMs). December saw the publication of the government's response document on potentially expanding the scheme and confirmed that it would be extended to electrical battery storage, water-source heat pumps and certain other items. The relief will also be extended with effect from 1 February 2024 to the installation of all qualifying ESMs in buildings used solely for a relevant charitable purpose and will continue to apply when these ESMs are installed in residential buildings by the Value Added Tax (Installation of Energy-Saving Materials) Order 2024 (SI 2024/24).
Read the response document here
Germany: parking charges
The VAT treatment of parking charges has been subject to inconsistent treatment in Germany, with different decisions from tax offices in different districts. However, a favourable ruling has recently been obtained by a major operator in the digital parking business with the help of our German tax team. The team obtained a ruling that all companies operating within the parking space management sector in Germany are equally subject to VAT on their fees, achieving welcome clarification and important consistency to this area of business.
Other issues we have recently covered
TP, PEs and DPT consultation response
HMRC has published its Summary of Responses to the consultation that it published on possible reforms to transfer pricing, permanent establishment (PE) and diverted profits tax (DPT) rules in June 2023. The proposed changes were largely put forward to modernise the UK rules, increase certainty and bring them more into line with international standards. On the basis of the responses received, the government will be taking forward some of the proposed reforms, whilst others will be subject to further consideration and consultation.
HMRC crypto-asset voluntary disclosure service
HMRC has publicised a voluntary disclosure service for individuals who may have failed to pay tax on any income or gains from crypto-assets. The announcement suggests that HMRC see crypto-assets as an area of significant focus, potentially involving large amounts of unpaid tax.
HM Treasury has announced that the UK will introduce a carbon border adjustment mechanism (CBAM) "by 2027". A consultation response document has been published alongside the announcement that provides a summary of responses to the March 2023 consultation that sought feedback on a number of measures to support decarbonisation, including a CBAM, but also other measures such as mandatory product standards and demand side policies to help grow the market for low carbon goods.
Taxation of payments to commute future pension benefits
The Court of Appeal has held that a payment made to employees in part to compensate for changes to their future pension scheme rights were earnings from their employment and so subject to income tax and NICs: HMRC v E.ON UK Plc [2023] EWCA 1383. The Court rejected the arguments that the payment replaced tax-free pension contributions and so should be free from tax. In essence, the payments were simply an inducement to continue to provide their services in the future under altered employment conditions and taxable as such.
Payments by third parties to employees
The FTT has held that a lump sum payment made to employees by the outgoing chairman of the employer on the sale of his interest in the company was not earnings from the employment but was nevertheless taxable as having been made by reason of employment: OOCL UK Branch v HMRC [2023] UKFTT 996.
Update to Pillar One timeline and Pillar Two guidance
The OECD has published a statement updating the timetable for finalisation of the Multilateral Convention (MLC) for the implementation of the Pillar One agreement. The proposal is that the MLC should now been finalised by March 2024 with a signing ceremony taking place by the end of June 2024. In addition, further guidance has been published on the application of the Pillar Two rules.
Spain: extension of Beckham law finally approved
On 6 December 2023, the Spanish government passed Royal Decree 1008/2023 which includes the necessary regulations to give effect to the improved expatriate tax regime. This will be particularly welcomed by those who have recently relocated to Spain and whose tax position was left uncertain by the delay in enacting the expected changes to the regime. However, significant questions remain over the scope and application of the regime.
Join us at our Christmas table: our fiscal feast of the Top 10 Tax Cases of 2023. We'll start with some neat little cases on interesting technical points; work through the complex main course of heavy VAT and direct taxes cases; and still manage to find room for a trio of desserts released in the past couple of weeks. Bon appétit!
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