VAT Insights - March 2024

Over recent years, the UK has introduced a number of measures which impose due diligence responsibilities on businesses to ensure that they or their associates do not facilitate tax offences. In 2017, the UK government introduced the offence of failing to prevent the facilitation of tax evasion and in 2023, a further offence of failing to prevent fraud was enacted, which includes failing to prevent the offence of cheating the public revenue. Although there are considerable overlaps between these offences, there are differences. For example, under the failure to prevent fraud offence, it is the associated person of the business who commits the offence of cheating the public revenue with no requirement for tax evasion by a third party. As a result, the failure to prevent fraud offence also looks at tax evasion closer to home (i.e. tax evasion by a business itself rather than the facilitation of tax evasion by third parties). The introduction of this new offence highlights the importance for businesses of reviewing and re-assessing their procedures to ensure that they have in place the necessary reasonable prevention procedures to have a defence against the offences.

Quite apart from these specific UK offences, the CJEU has recently held, in a VAT context, that a business may be responsible for fraudulently evaded VAT where it failed to have in place sufficient controls to ensure its employee did not engage in VAT fraud in its name.

As well as looking at these offence and decisions highlighting the risks of failing to have sufficient controls and safeguards in place, in this edition we also cover the following recent VAT and indirect tax developments:

• A further opinion of the AG highlighting that it will only be in exceptional circumstances that a subsidiary might be treated as a fixed establishment of its parent company.
• The Supreme Court decision in Jersey Choice concerning the UK's removal of low value consignment relief from imports from the Channel Islands.
• An Upper Tribunal decision on the circumstances where a floorspace based allocation might (and might not) be used to determine partial exemption VAT recovery rather than the standard method.
• An instructive case of non-monetary consideration where an existing customer received a discount for referring a friend to its energy supplier.

We also have updates from across our European network, including from Spain and Italy.

In addition, this month we will be hosting our international tax conference in London. We are very pleased to be joined by the OECD's representative, Jonathan Fraser, who will discuss the status of Pillar II from a dispute resolution perspective, as well as other speakers who will address some of the major tax challenges facing businesses today. You can view the full agenda and register here.

Furthermore, 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.

The Economic Crime and Corporate Transparency Act 2023

The UK Economic Crime and Corporate Transparency Act (ECCTA) received Royal Assent on 26 October 2023 with the first changes coming into force in late 2023 and the remainder due to come into force in stages during the course of 2024. The ECCTA introduces a  wide range of reforms and is a key part of the UK Government's ongoing legislative strategy to tackle economic and financial crime.

In a tax context, the most significant aspect of the ECCTA may be the introduction of a new offence of failure to prevent fraud, adding to the existing offence of failure to prevent the facilitation of tax evasion.  Under both the failure to prevent fraud offence and the facilitation of tax evasion offence, the relevant body must have reasonable prevention procedures in place to have a defence against any offences.  Tax teams may want to assess the ECCTA legislation and how it might impact, or be assisted by processes and procedures in place to address the facilitation of tax evasion offence, many of which will be aligned. It may also be an opportunity for the tax team to review its procedures, and ensure that it maintains, or improves the preventative procedures in place to address the facilitation of tax evasion offence. The facilitation of tax evasion offence may be given renewed focus by HMRC, given the introduction of ECCTA and recent press coverage in relation to HMRC not yet having charged anyone under the facilitation of tax evasion offence.

In addition, HMRC has recently been engaging with different industry sectors on the failure to prevent fraud offence and the facilitation of tax evasion offence through HMRC's counter fraud forums.  We have participated in one of these forums giving us a up to date and practical insight into HMRC's latest thinking on these offences.

Read our Insights article for an overview of the ECCTA here

Fraudulent VAT invoices issued in a business' name

Should a business be liable for VAT shown on invoices issued fraudulently and without its knowledge by one of its employees? One might assume that the business should have no VAT liability as the invoices are not truly issued by that business. The CJEU has, however, taken a more nuanced approach in P sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Lublinie (Case C‑442/22). Whilst agreeing that "the person who enters the VAT" on the invoice for the purposes of Article 203 may be the individual employee rather than the business, the CJEU nevertheless held that an employer cannot be regarded as having acted in good faith if it failed to exercise the due diligence reasonably required of it to monitor the conduct of its employee and, in so doing, prevent the latter from issuing fake invoices. In those circumstances, the employee's fraudulent conduct may be imputed to the employer such that it is seen as the person who entered the VAT on the invoice.

It is notable that, unlike the Kittel line of cases, P was not seeking any advantage or even any involvement in the matters covered by the false invoices and fraud in this case. As such, the decision appears to extend the existing jurisprudence concerning VAT fraud and the responsibilities of businesses in this regard. The CJEU's decision highlights the need for businesses to review their processes to ensure that they would have a defensible position if challenged by tax authorities.

Read our Insights article here

Subsidiaries as fixed establishments (again!)

Reading the AG's opinion in SC Adient Ltd & Co KG (Case C-533/22) is likely to give you an overwhelming sense of déjà vu! The toll manufacturing arrangements in this case are so close in nature to those considered in earlier cases (such as Berlin Chemie A (Case C-333/20) and especially Cabot Plastics Belgium v Belgium (Case C-232/22)) that it is hard to see why there was any need for an Opinion in this case. There is a real sense of exasperation in the Opinion, which seeks to put to bed, once and for all, some of the wider arguments recently put forward by tax authorities for treating a subsidiary as a fixed establishment of its parent entity.

It is, however, less clear that the attempt by the AG to provide comprehensive guidance has been particularly successful. In particular, it would have been helpful if the AG had dealt head-on with the DFDS case, rather than seeking to marginalise it. Equally, perhaps greater clarity could have been provided in the opinion around the differing nature and requirements for a fixed establishment in the context of making and receiving supplies.  

At the very least, however, it is to be hoped that this case will be the last we will see of the frankly non-sensical argument that a subsidiary making supplies to its parent can at the same time represent a fixed establishment of that parent for the purposes of receiving those supplies!

Read our Insights article here

Removal of LVCR from Channel Islands

Many will remember the arrangements put in place by large online businesses prior to 2012 to round-trip sales of small items, such as CDs and DVDs, via the Channel Islands. These arrangements took advantage of the exemption from VAT for imports of goods from outside the UK provided that those imports were below a specified value (£15) under the low value consignment relief (LVCR) provisions. In 2012, the UK government took action to prevent such "round tripping" by removing LVCR on mail order imports to UK customers from the Channel Islands.

The failure of the UK to prevent such arrangements earlier were unsuccessfully challenged in Allen v HM Treasury and HMRC [2019] EWHC 1010 and now a Jersey retailer has equally failed in its challenge that the removal was itself illegal. The Supreme Court has held that the claim had no reasonable prospect of success and struck out the claim in Jersey Choice Ltd v HM Treasury [2024] UKSC 5. It was clear that the imposition of import VAT was not to a charge having equivalent effect to a customs duty in violation of Articles 28 and 30 of the TFEU. Nor was there any basis for arguing the UK had breached general principles of EU law by removing LVCR from the Channel Islands but leaving it in place for imports from other third countries. Jersey was a third country for the purposes of the VAT Directives and EU law did not impose any obligation on Member States to accord equal treatment to third countries.

Read the Supreme Court decision in full

Partial exemption override and floorspace

The Upper Tribunal has held that the FTT was wrong to accept the argument that a floor space based allocation of expenditure was a more accurate method of allocating expenses than the standard turnover based method in HMRC v Hippodrome Casino Ltd [2024] UKUT 27. Hippodrome had succeeded before the FTT in arguing that it should be allowed a more beneficial floorspace based allocation, taking into account the discrepancy in floorspace needed to generate turnover between its exempt casino gaming activities and its taxable activities (such as restaurants).

The Upper Tribunal has, however, accepted HMRC's argument that the FTT's reasoning was flawed. In particular, there was in reality dual use of the areas making taxable supplies of hospitality and entertainment. A substantial purpose of providing those taxable elements was for the furtherance of the gaming activities. Moreover, the floorspace based allocation was distortive because it assumed that the unallocated area of the premises (the majority of the space) was used int eh same proportion as the exempt and taxable areas, when this was not the case.

The decision is a reminder that to use a method other than the standard turnover-based method, it must guarantee a more precise determination of the deductible proportion of input VAT than that arising from the application of the turnover-based method. That hurdle had not been cleared in this case where there was duality of use.

Read the decision in full

Refer a friend scheme

Does a "refer a friend" scheme result in the provision of non-monetary consideration by referrers? This question was important in Simple Energy Ltd v HMRC [2023] UKFTT 976 where Bulb Energy encouraged customers to refer a friend with a £50 discount on their energy costs for each successful referral. Did that discount reduce the consideration provided by customers for their energy or was it the case that their energy was provided to them for the discounted price plus the value of their non-monetary consideration in the form of the successful referral?

The FTT had little trouble in determining that such a scheme results in additional non-monetary consideration provided by the customer. The position was different to the situation where a recruit signs up and is rewarded with a discount for doing so and where no service was provided by the recruit. Here, the referring customer receives a reduction in their energy costs to reward them for doing something which was additional to what was required of them as a customer of Bulb. Neither the fact that it required very little of referrers and the fact that the discount was contingent on those referred signing up for energy prevented the activity amounting to non-monetary consideration.

Read the decision in full here

Spain: free use of company car is not a VATable supply

The Spanish Tax Authorities (STA) have traditionally taken the position that the free provision of a company car to an employee for private purposes should be considered a supply of services subject to VAT. In most such cases, the STA has increased the deductibility of input VAT on the leased/purchased vehicles from 50% (i.e. the standard presumption for the STA) to 100% but, at the same time, assessed output VAT on a deemed supply of services of the vehicle to the employee.

This issue was analysed by the Court of Justice of the European Union (CJEU) in its 2021 judgment in QM v Finanzamt Saarbrücken (C-288/19). The Court held that the free car use does not give rise to a supply for VAT purposes if the employee: (i) does not make any payment, (ii) does not use part of his remuneration in cash, or (iii) does not choose between different benefits offered by the company, in accordance with the relevant employment contract. Following the CJEU decision, the Spanish Supreme Court has recently issued its decision of 29 January 2024, which expressly acknowledges that the free provision of vehicles to employees for private use cannot be considered a supply of services and does not qualify as a self-supply of services (the main argument put forward by the STA to circumvent the CJEU case law) for VAT purposes, even if the company had deducted the input VAT as a consequence of the lease or the acquisition of the car.

Although this decision should shed some light on this issue in prospective tax audits, other issues relating to the deductibility of the input VAT or the remuneration in kind attributable as personal income for the employee remain to be clarified by the Supreme Court.

Other issues we have recently covered

Tax in the technology and telecoms sectors: Q&A

Our high-level overview for Practical Law of the taxes and reliefs of particular relevance to the technology and telecom industries, the sources of those tax rules, the policy context, and developments on the horizon.

EU list of non-cooperative jurisdictions for tax purposes updated

The EU Council announced further changes to the EU list of non-cooperative jurisdictions for tax purposes on 20 February 2024. The most recent update removed Bahamas, Belize, Seychelles and Turks and Caicos Islands from the black list. The black list now contains twelve jurisdictions.

Pillar One: Amount B

The OECD Inclusive Framework has published a report incorporating changes to the OECD Transfer Pricing Guidelines on Amount B of Pillar One. The report deals with the optional rules for applying a simplified approach to transfer pricing on so-called baseline marketing and distribution activities between related entities and is particularly aimed at aiding tax administrations in low capacity jurisdictions. It is important to note that unlike Amount A, which will only apply to about 100 of the largest multinational enterprises (MNEs), Amount B is intended to apply to all MNEs that are engaged in "in-scope arrangements".

As a result of the report, additional sections are added to the OECD Transfer Pricing Guidelines as an Annex to Chapter IV covering special considerations for baseline distribution activities and jurisdictions may adopt this approach from 2025.

Pillar One: updated agreement on withdrawal of digital taxes

In October 2021, the US, UK, Austria, France, Italy and Spain agreed a transitional approach to the removal of existing digital taxes before Pillar One comes into effect. The statement had an assumed an end date for the transitional period of 31 December 2023 (if Pillar One was not implemented by that time), but given the delays to the finalisation of Pillar One, the participants have now agreed to extend the transitional period to 30 June 2024 (since the OECD has called for the formal signing of the Pillar One multilateral convention by that date).

HMRC transfer pricing and DPT statistics for 2022/23

HMRC has published their most recent transfer pricing and Diverted Profits Tax (DPT) statistics for the period 2022 to 2023, following on from the release of similar data for periods since the DPT legislation came into effect from April 2015. The UK's transfer pricing rules and DPT are important elements in a range of measures implemented by the UK to ensure multinationals are subject to tax on the share of their profits from their UK activities. The statistics provide valuable insights into HMRC's approaches and priorities to international taxation, which should be carefully considered by any multinational operating in the UK.

Capital interests under LLP agreement taxed as income

The FTT has held that the disposal proceeds received in respect of "capital interests" issued to members of a UK LLP fell to be treated as miscellaneous income for tax purposes: The Boston Consulting Group UK LLP and others v HMRC [2024] UKFTT 84.

New Italian inpatriate workers regime

The new Italian inpatriate workers regime, which has effect for individuals moving their tax residence to Italy from 1 January 2024, contains significant changes to the scope of tax benefits available to workers moving to Italy compared to the pre-2024 regime as well as bringing the concept of Italian tax residence more into line with international practice. Whilst it is to be hoped that the Italian tax authorities will publish further clarifications on the new regime, the changes are broadly welcomed and bring a degree of certainty to the position of workers moving to Italy to work within the same multinational group.

Tax podcasts

Our contentious tax podcast series covering tax controversy and transfer pricing issues can be found here. More general tax podcasts can be found here.