How do you distinguish between a voucher, a non-taxable payment for “credits” to be used on future supplies and a taxable supply of entitlements. These are not easy questions and they are addressed in two recent cases, Lycamobile and Go City, where the Tribunal stressed the need to consider what is the “real” supply from the customer’s perspective. The correct identification of the VAT analysis is obviously important from a timing perspective, to determine the time of supply. But it is also important from a liability perspective (who has to account for VAT) and also the amount of VAT chargeable. These cases make it clear that where there is no immediate supply (because, for example, what is supplied is simply in the nature of a “currency” to acquire the “real” subject of the supply) then there will be no supply at all to the extent that that “currency” (or credits or points) are not actually used. This is clearly not something that HMRC are comfortable with, however, seeing their inability to charge VAT on the full amounts paid by a customer as being distortative and contrary to the general principles of VAT as a tax on final consumption. Expect to see the Go City case (where HMRC lost) to go further through the court system!
In this edition, in addition to the Lycamobile and Go City cases, we also cover the following recent VAT and indirect tax developments:
A decision on the application of the VAT grouping rules to overseas entities and HMRC’s powers to deny VAT grouping
An FTT decision confirming that certain charitable funds were entitled to rely on the direct effect of Article 135(1)(g) to benefit from exempt management, despite not falling within the UK VAT exemption;
A reminder of the changes to the VAT treatment of voluntary carbon credits from 1 September 2024;
Further details on the introduction of VAT on private school fees.
We also have updates from across our European network, including from Spain.
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.
Credits, vouchers and VAT
It is clear that Go City (previously Leisure Pass) has had a difficult relationship with HMRC down the years. The correct VAT treatment of its London Pass (entitling entry to various sites and activities) has been the subject of a number of cases and disputes. The most recent iteration of these cases may, however, be the most interesting.
Go City restructured the terms of its London Pass in 2019 so that it provides customers with “credits” which are used to gain entry to those sites/activities, with the local sites contracting with Go City directly and Go City assigning those rights to customers. Go City contended that VAT was only due when the Passes are used and only to the extent they are used. HMRC argued that VAT was due in full on the purchase of the London Pass.
In a lengthy and detailed judgment, the FTT accepted Go City’s arguments that either the Pass was a multi-use voucher or (more interestingly) that the acquisition of “credits” did not give rise to a supply at all and it was only when those credits were redeemed (and to the extent they were redeemed) that VAT became payable.
Finally, the decision is also notable for determining that HMRC’s assessments which were made protectively at the time it was still determining the correct (in its view) VAT treatment were not valid. HMRC did not have the power to make such “protective” assessments in the absence of a determined view that the VAT returns were incorrect.
Read our Insights article here
Telecom plan bundles
The FTT in Lycamobile has also considered the argument that the acquisition of allowances under a telecom plan bundle (for minutes, texts and data) was correctly seen as a non-taxable acquisition of rights only subject to VAT when those rights are used. However, in this case, the FTT rejected that analysis on the facts. The question was what was the “real” supply from the customer’s perspective. Was it the bundle of allowances or was it the actual use of the data/minutes etc. In this case, the FTT had little doubt that customers were seeking to acquire the bundle of allowances as an aim in itself, such that this was the VATable supply.
Whilst recognising that this analysis could give rise to some problems (as some bundles allowed roaming where the place of supply may be outside the UK under the “use and enjoyment” override), the FTT considered that (even in the absence of any express provisions) it would be possible for the taxpayer to retrospectively adjust the liability of the single supply to the extent necessary to comply with the “use and enjoyment” override.
Read our Insights article here
VAT grouping and overseas entities
The UK has historically operated a “whole entity” approach to VAT grouping. That means that the UK has treated the whole of the overseas entity that has been UK grouped as a result of its UK fixed establishment as being part of the UK VAT group. That approach was called into question in Danske Bank, but the UK, following a 2020 consultation, decided to maintain the UK “whole entity” approach. However, in Barclays Service Corporation v HMRC [2024] UKFTT 785, HMRC did not like the result of that approach and attacked the particular arrangements on three fronts. HMRC argued that BSC did not, on the facts, have a UK fixed establishment when it sought registration, even if it did then the UK rules should be read consistently with Danske Bank (and inconsistently with HMRC’s settled position) and finally that HMRC could, in any event, deny VAT grouping for protection of the revenue reasons.
On the specific facts of the case, HMRC were successful as the evidence showed that BSC did not, at the date of the request, have sufficient human and technical resources available to it in the UK to give rise to a fixed establishment. (The FTT dodged the more interesting question of what exactly is required to amount to a “fixed establishment” for the grouping rules.) However, the FTT rejected both of HMRC’s back up arguments. The clear UK rules could not be read in a way that conformed to the Danske Bank case and HMRC would not have been within its powers to deny grouping on protection of the revenue reasons if BSC had had a fixed establishment. It was clear to the tribunal that the VAT grouping rules were intended as a general administrative easement for businesses to be taxed as a single entity and HMRC were not entitled to deny grouping simply due to the normal and inevitable VAT consequences of that treatment.
Read our Insights article in full
VAT exempt investment management: funds equivalent to UCITS
You may recall that back in April 2024, HMRC published Revenue and Customs Brief 4 (2024) on VAT and excise duties following the coming into force of the Retained EU Law (Revocation and Reform) Act 2023 (REULA), confirming that "HMRC policy for VAT and excise is unchanged" and that UK VAT and excise legislation will continue to be "interpreted" in the same way.
At the time, we pointed out that, despite that, some aspects of VAT will be different going forwards, including the inability of taxpayers to rely on direct effect of EU VAT Directives. And on that topic, the FTT recently held in CCLA Investment Management Ltd v HMRC [2024] UKFTT 636 that certain charitable funds were able to rely on the direct effect of Article 135(1)(g) of the Principal VAT Directive to qualify for VAT exempt supplies of investment management, despite the fact that such funds do not fall within the provisions of the UK VAT exemption in Schedule 9 Group 5 item 10. CCLA Investment Management Ltd v HMRC [2024] UKFTT 636 provides important guidance on how to determine whether a fund which is not a UCITS will meet the equivalence conditions for State supervision and appeal to retail investors for these purposes.
The decision relates to pre-Brexit supplies and is historically important on the scope of the direct effect of Article 135(1)(g). However, the principle of direct effect of EU Directives no longer applies by virtue of the Retained EU Law (Revocation and Reform) Act 2023 from 1 January 2024. As such, it is unclear whether the decision has any continuing relevance after 1 January 2025 or whether the government may be minded to bring the UK legislation into line with the historically correct position.
Read our Insights article here
Carbon credits
A reminder that HMRC previously published Revenue & Customs Brief 7 (2024) announcing that from 1 September 2024, VAT will need to be accounted for on certain trades of voluntary carbon credits at the standard rate. Voluntary carbon credits were previously treated as outside the scope of UK VAT. This is a significant change in policy by HMRC and any businesses involved in this sector should carefully review their terms of business to ensure that they are not adversely affected by the imposition of VAT. HMRC updated guidance has now been published at VATSC06584.
Read the Revenue & Customs Brief here
VAT and private school fees
On 29 July 2024, the Chancellor announced that the policy of levying VAT on education provided by private schools would be introduced with effect from 1 January 2025. Alongside the announcement and draft legislation, HM Treasury published a Technical Note to provide an overview of the scope and design of the change and to invite comments on some technical aspects of the change.
Private schools that are not already VAT registered will need to do so and consider their input VAT recover position going forward, including any capital goods scheme implications. The announcement includes anti-forestalling measures so that fees paid after 29 July that relate to education provided after 1 January 2025 will be subject to VAT.
The policy change has, of course, been long trailed by the Labour Party, but the decision to add VAT to private school education part way through a school year may give rise to some difficulties. Private schools will have already set their fees for the 2024-25 academic year and, in principle, will need to charge an additional 20% VAT from 2025. However, as the government points out, schools will be able to recover input VAT on their costs as a result of this change and so the government does not expect actual VAT inclusive fees to go up by 20%. Accordingly, if schools wish to limit the impact for the 2024-25 year, it would appear that they will need to revisit the level of those 2024-25 fees..
The Policy Paper can be found here
Spain: VAT on certain business expenses
The Spanish Supreme Court has referred a question to the CJEU concerning Spanish tax regulations that prevent companies from deducting VAT on expenses, such as business meals and corporate events. This type of deduction is prohibited in Spain and the fact that it is more restrictive than the limitation on recovery of input VAT on business entertainment in other EU countries has led to disputes between companies and the tax authorities.
The key issue is whether the Spanish regulation is protected by the "standstill clause," which allows certain restrictions to remain if they were in place before a country joined the EU. The lawyers who brought the case to the Supreme Court argue that this restriction was not in fact enforced before 1986 and is therefore contrary to EU law.
The CJEU will need to determine whether this Spanish regulation violates EU legislation, which could allow companies to claim refunds for VAT paid in previous years. The CJEU's decision could have a significant impact on the numerous pending claims in Spain.
Other issues we have recently covered
Taxation of carried interest: consultation
The new Labour government has announced “A call for evidence” on the tax treatment of carried interest. In making the case for reform, the government states its belief that the current tax regime “does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it”. Whilst the government goes on to acknowledge that the government will seek to protect the UK’s position as a world-leading asset management hub, it is nonetheless committed to taking action. It acknowledges that any change will be “impactful”. The purpose of the call for evidence is to gather insights and input from stakeholders.
The Court of Appeal has applied the Ramsay approach to a circular and entirely tax motivated capital allowances scheme in HMRC v Altrad Services Ltd [2024] EWCA 720. The decision, whilst not surprising on its facts, contains significant analysis of the Ramsay principle drawing in particular on the recent Supreme Court decision in Rossendale. These cases appear to re-emphasise the scope of the principle and its potential to ignore arrangements which might clearly meet the technical wording of legislation but fail a broader, real world, purposive interpretation.
Expenses of management of a capital nature
The Supreme Court has held that expenses incurred by a holding company relating to the sale of the business of a subsidiary were excluded from deduction as "expenses of management" as those expenses were capital in nature: Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25. The Court has held that the normal test for whether expenditure is capital or revenue in nature applies in this context and that where a capital asset can be identified, the starting point is to assume that money spent on the acquisition or disposal of that asset should be regarded as capital expenditure.
Special Capital arrangements and miscellaneous income
The Court of Appeal has dismissed the taxpayer's appeal in HMRC v HFFX LLP [2024] EWCA 813 against HMRC's decision to tax reallocations of Special Capital as miscellaneous income. The Court has rejected the argument that a taxpayer must have a legal right to receive the income for it to fall within this category. Furthermore, the Court did not consider that contractual arrangements providing, in principle, for complete discretion in relation to the allocation of Special Capital were not in practice unfettered. Taken together, the contractual arrangements in the Partnership Deed, together with the reallocation process, gave rise to income in the hands of the individual members.
Changes to the Italian Flat Tax Regime
The Italian government has announced that it will increase the amount of the flat tax for persons transferring their tax residence to Italy to €200,000. The increase in the annual flat tax for individuals transferring their residence to Italy from €100,000 to €200,000 applies to individuals who transfer their residence to Italy for civil law purposes (under Article 43 of the civil code) starting from 10 August 2024.
In 2019, the CJEU held that the provisions of DAC6 requiring the reporting of cross-border tax avoidance arrangements were invalid to the extent that they required a lawyer acting as an intermediary to notify other intermediaries of reporting obligations under the rules as a result of their inability to report due to legal professional privilege (LPP). The Belgian Association of Tax Lawyers and a number of other associations have now returned to court in Case C-623/22 arguing that the provisions incorporating DAC6 into Belgian law are contrary to their fundamental human rights or infringe general principles of EU law and should be set aside. The CJEU has now rejected those arguments.
Tax changes for nomad employees
In this article published in Bloomberg’s Tax Management International Journal, our tax expert Monique van Herksen discusses her personal perspectives on the tax changes needed to accommodate the employment of nomad employees.
Dubai introduces new law on the taxation of foreign banks
A new piece of legislation (Law No. (1) of 2024 on Taxation of Foreign Banks Operating in the Emirate of Dubai (the "2024 Law")) was issued into law by His Highness Sheik Mohammed bin Rashid Al Maktoum, the Ruler of Dubai on 1 March 2024. This law repeals the existing legislation governing the taxation of branches of foreign banks operating in the Emirate of Dubai, which had been in force since 1996. This new legislation should serve to address concerns regarding the potential increased tax burden on branches of foreign banks operating in Dubai, following the introduction of UAE Corporate Tax from 1 June 2023.
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