VAT Insights - December 2024

> Sign up to VAT Insights

It is now clear, following the CJEU decisions in Vodafone Portugal (Case C 43/19) and MEO (Case C 295/17), that a payment provided for within a contract to compensate for the customer’s early termination of the contract will generally be treated as consideration for the supplies made by the supplier under the contract. This makes sense as it is a payment that the parties have agreed upon essentially to provide a minimum level of payment to the supplier. HMRC has provided its take on the consequences arising from these cases in Revenue & Customs Brief 2 (2022). The guidance deals mostly with contractually agreed provisions for compensation. The VAT treatment of a payment of damages for breach of contract would still depend on the proper analysis of what that payment was for and it is in this scenario that the recent CJEU decision in t rhtb: projec gmbh v Parkring 14-16 Immobilienverwaltung GmbH (Case C-622/23) may be relevant. The payments made in that case were not provided for in the contract as a cancellation fee or liquidated damages, but rather made as a consequence of Austrian general law. Despite that, the CJEU held that the Vodafone/MEO approach applied to treat the payments as additional consideration for the contractual supplies. This may be an important decision if followed in the UK, albeit that the decision is not without its uncertainties.

In this edition, as well as looking at the decision of the CJEU on compensatory payments for the termination of a contract, we also cover the following developments:

• An Upper Tribunal decision where HMRC conceded that the Tribunal should find against it on the law, but on the basis that it would seek leave to appeal to the Court of Appeal.
• Further details on the proposed UK CBAM contained in the government’s response to consultation submissions.
• A decision of the CJEU highlighting that the VAT system may restrict the right of a taxable person to input VAT recovery with appropriate procedural restrictions.
• The most recent OECD publication on consumption taxes worldwide.

We also have updates from across our European network, including from 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 on this page.

Finally, please note that VAT Insights will be taking a short seasonal break and will return in February 2025. In the meantime, all of us at VAT Insights wish our readers a very happy and peaceful seasonal break.

Early termination of contracts, VAT and damages

In its decision in rhtb: project gmbh v Parkring 14-16 Immobilienverwaltung GmbH (Case C-622/23), the CJEU has reconfirmed that a payment of by a customer on early termination of a contract will generally amount to consideration for a supply for VAT purposes. However, the interesting feature in this case is that the relevant payment appears not to have been part of the contractual arrangements between the parties but a payment required by the Austrian General Civil Code in cases of, essentially, breach of contract by the customer. As such, it raises the question whether the approach that is now accepted as applying to treat contractually agreed payments on termination of contract as consideration for the supplies made by the supplier under the contract should also apply to damages for breach of contract where there is no such liquidated damages clause.

Unfortunately, however, the Court's judgment does not explicitly recognise the difference between contractual provisions specifically agreed by the parties (as in Vodafone/MEO) and payments, such as damages, required under general law. Indeed, despite the fact that the payment in this case appears to have been based on the General Civil Code, the dispositive paragraph in the case states that the VAT rules must be interpreted as meaning that "the amount contractually due following the termination" must be treated as consideration for a supply. As such, we may need to await clarification either through the courts or from HMRC as to whether a payment of damages for financial loss in such circumstances should be treated as additional consideration for VAT purposes or outside the scope of VAT as a compensation payment.

Read our Insights article here

Effectively leapfrogging the Upper Tribunal

The position of the Upper Tribunal in HMRC v Colchester Institute Corporation [2024] UKUT 397 is an extremely unusual one. In essence, HMRC admitted that its appeal in the case should be dismissed, but reserved the right to seek leave to appeal the case to the Court of Appeal. In essence, HMRC accepted that the situation in this case was covered by an earlier UT decision but took the view that that decision was wrongly decided. However, rather than seeking to persuade the current UT that the earlier decision was incorrect, HMRC seeks to take the issue to the Court of Appeal through the UT without arguing the issue in the UT. In this case, the UT has been persuaded that such an approach, designed to save on judicial time and resource, is appropriate and has dismissed the appeal.

The decision itself concerns the VAT treatment of grant funded services. The case demonstrates that HMRC do not accept that the grant-funded payments in these circumstances are consideration for a supply of services. In particular, HMRC argue that an earlier decision concerning the same taxpayer wrongly identified the degree of specificity required for there to be a direct link for VAT purposes between the funding and actual services provided.

Read our Insights article here

UK CBAM consultation response

Alongside the October 2024 Budget, the government published a response to its March 2024 CBAM consultation confirming that the UK will introduce a UK carbon border adjustment mechanism (CBAM) with effect from 2027. In particular, the UK has chosen not to follow the example of the EU CBAM in using tradeable CBAM certificates, but will simply apply a domestic CBAM charge on importers of goods within the scope of the charge. However, the response document confirms that the government has restricted the scope of the proposed CBAM by removing glass and ceramic products, at least initially.

The UK CBAM will be a charge on the carbon emissions embodied in relevant imports into the UK that take place on or after 1 January 2027. The first accounting period will run for 12 months and cover imports of CBAM goods from 1 January to 31 December 2027, with the first returns and payments due by 31 May 2028. From 2028, the government proposes that accounting periods become quarterly.

Read our Insights article here

Procedural restrictions on input VAT recovery

The right of a taxable person to deduct input VAT is fundamental to the operation of the VAT system, but that right is not absolute and can, in particular, be restricted by appropriate procedural measures. This is again demonstrated in the recent CJEU decision in Modexel (Case C-680/23). The VAT Directive Article 183 provides that excess input VAT must either be refunded or carried forward to the following period. Portuguese VAT legislation provides for the carry forward option, albeit with a fallback position that a taxable person may claim a refund after 12 months or when ceasing activities.

Modexel ceased economic activity in 2015 with a VAT credit of over €12,000. In 2016 it resumed its economic activities and sought to deduct that credit in its first VAT return. The Portuguese tax authorities denied that credit on the basis that Modexel should have claimed a refund when it ceased its activities. The CJEU has now held that the Portuguese VAT provisions are, in principle, compatible with EU law in denying Modexel the carried forward VAT credit. The ceasing of activity meant that there was no longer a “following period” for the purpose of Article 183 for carrying input VAT credits forward and the Portuguese rules allowing a refund to be claimed met the principles of equivalence and effectiveness. Those rules provided Modexel with an option to recover the excess input VAT by making a claim for a refund when it ceased its activities and Modexel should have availed itself of that option at the appropriate time.

Read the decision in full here

OECD report on consumption tax trends

If you are looking for a last minute stocking filler or just some light reading to see you through the Christmas lull, you surely can’t do better than the OECD’s latest annual publication on consumption taxes (VAT, GST and excise duties), Consumption Tax Trends 2024. In relation to VAT, the report notes that VAT revenues have slightly increased in OECD countries between 2020 and 2022 on average, at 7% as a share of GDP in 2022, up from 6.9% in 2021 and 6.7% in 2020. VAT accounts for more than one-fifth of total tax revenues (20.8%) on average, representing 20% or more of total taxes in 21 of the 37 OECD countries that operate a VAT. Standard VAT rates across OECD countries slightly increased in 2024 at 19.3% on average, up from 19.1% in 2023 and 19.2% in 2022. All OECD countries with a VAT system have introduced rules that reflect the recommended OECD VAT standards on online sales of services and digital products from non-resident e-commerce vendors and marketplaces. Digitalisation, and the resulting increased availability of data provide tax authorities with opportunities for greater access to VAT relevant information. Over the last decade, most OECD countries have implemented electronic transactional information reporting obligations.

Read the report in full here

Luxembourg: VAT and directors’ fees

On 22 November 2024, the Luxembourg District Court issued a judgment following the preliminary ruling by the CJEU issued on 21 December 2023 (C-228/22). This judgment confirms and applies the CJEU's interpretation of the VAT treatment applicable to directors’ fees in which the CJEU's interpretation on two key issues concerning directors of public limited liability companies (sociétés anonymes) governed by Luxembourg law was sought:

• Whether the activity carried out by these directors constitutes an "economic activity" within the meaning of Article 9 of the VAT Directive
• Whether this activity is carried out "independently".

The District Court, applying the CJEU judgment, concluded that directors do not meet the independence criterion as they do not act under their own responsibility and do not bear personal economic risk. The economic risk arising from the board’s decisions is borne by the company itself, not by the individual directors, regardless of their role in the decision-making process. Thus, their remuneration—whether fixed or profit-based—does not involve personal financial losses or expose them to entrepreneurial risks. Given these factors, the District Court ruled that the directors’ activity, while being of economic nature, did not meet the independence criteria required to be subject to VAT.

Following the decision, the Luxembourg VAT Administration has issued Circular N°781-2 on 11 December 2024 providing further guidance on the application of this ruling. 

For further details read our Insight article

Other issues we have recently covered

Tax treatment of a payment for in-work discrimination
The FTT has held that payments made to a former employee under a compromise agreement that related to discrimination that they had faced in work were not subject to tax: L v HMRC [2024] UKFTT1044. The FTT decided that the payment was not for services performed by the employee, but rather by reference to the fact that they were deprived of the opportunity to perform their role to the full.

Taxpayer anonymity and tax appeals
The Upper Tribunal has rejected the contention that a taxpayer denied anonymity should be regarded as having a right to withdraw from a tax appeal to maintain their anonymity: HMRC v The Taxpayer [2024] UKUT 364. The principle of open justice is a fundamental feature of the judicial system and there was no principle that the making of an application for anonymity when combined with a tax appeal should not lead to loss of anonymity if that application is refused in the absence of strong factual considerations to the contrary. (The decision has since been published in unanonymised form as HMRC v Dettori.)

SDLT group relief and tax avoidance
The Upper Tribunal has held that arrangements involving an inserted step to obtain a corporation tax advantage had a main purpose of avoidance of tax such that SDLT group relief was not available in relation to the transfer of a property as part of those arrangements: The Tower One St George Wharf Ltd v HMRC [2024] UKUT 373. The UT held that neither the fact that the arrangements failed to achieve the hoped for corporation tax advantage nor the fact that the ultimate aim of the transaction had a commercial motive prevented the application of the anti-avoidance provision in this case.

Scope of APAs
The Court of Appeal has upheld the decision of the Upper Tribunal in R (on the application of Refinitiv Ltd) v HMRC [2024] EWCA Civ 1412 and rejected the argument that an Advance Pricing Agreement (APA) covering periods to 2014 prevented HMRC issuing DPT notices for the 2018 period calculated in part on services provided during the period covered by the APA and using a different basis of calculation (profit split versus cost plus). The Court agreed that the APA only covered the taxation of profits in earlier periods and did not prevent HMRC taking a different approach to the transfer pricing of the same services for taxation purposes in later periods.

Unallowable purpose and debt pushdown arrangements
The FTT has held that an acquisition by a new UK holding company of UK group subsidiaries for a combination of shares and debt involved an unallowable purpose: Syngenta Holdings Ltd v HMRC [2024] UKFTT 998. The FTT rejected, on the facts, the argument that the directors of the new holding company were purely motivated by a desire to enter into the deal on its own merits from the acquiring company’s point of view. Viewing the evidence in the round, including all of the group planning documentation from an early stage, it was clear that the directors were motivated by their desire to “play their part” in the group arrangements provided only that they satisfied themselves as to the correct valuation of the subsidiaries and the ability to service the interest payments. In these circumstances, their objective was the same as the over-arching group motivation for the arrangements.