Previous VAT cases

Here you will find details of previous VAT cases which affect charities.

ECJ opinion: VAT and the construction and sale of buildings - 18 June 2009

Under Danish law the construction of buildings is a taxable transaction whereas the subsequent sale is exempt. NCC Construction is a building business who carry out work for others, and construct some buildiNgs for sale on their own account. NCC contended that the sale of the building was an 'incidental transaction' under Article 19(2) of the Sixth Directive, but the Danish ministry of taxation submitted that a transaction might be regarded as 'incidental' only if it was not an integral part of the taxable person's economic activity or connected with it as a direct, permanent and necessary extension of the taxable activity and if it involved only a very limited use of the common goods and services.

The Advocate General was of the opinion that the criterion of the very limited use of the goods and services put to mixed use could not apply where, as in the present case, the activity of selling real property, which is VAT-exempt, constituted one and the same transaction together with the building activity. It could not constitute an 'incidental transaction' for the purposes of Article 19(2) of the Sixth Directive, since the sale was 'the direct, permanent and necessary extension of the building activity'. As NCC had itself stated, the sale of the buildings (which was exempt from VAT) and their construction (which was subject to VAT) derived from the same economic transaction, since NCC constructed buildings in order to sell them. It was therefore an artificial distinction to attribute the turnover from the sale of buildings constructed by NCC on its own account only to the activity of the sales department, because that turnover also stemmed in part from the building activity, which is subject to VAT.
» Full case details

ECJ case: VAT and services supplies by landlords - 11 June 2009

RLRE Tellmer Property is a Czech company that owns residential apartments. It charged its tenants rent and separately for cleaning the common parts of the property, treating both charges as exempt from VAT as indivisible transactions. The ECJ found that they could be separated. Ernst & Young noted that communal service charges (for shared costs) will be treated as payment for separate supplies. Some may remain exempt or perhaps even become lower-rated, but most would be standard-rated. Ernst & Young expects that HMRC will need to amend its treatment of such service charges from a future date, rather than implementing a revised interpretation retrospectively. The judgment and revised interpretation will also mean that some landlords will need to become VAT registered for the first time.

It is not clear whether the judgment applies to service charges in relation to buildings where there is only one tenant; this will probably depend on whether or not such charges are seen as integral to the leasing which the ECJ held 'essentially consists in the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy property as if that person were the owner' (paragraph 20) Unless an option to tax applies, when service charges will already be treated as taxable, most communal service charges are likely to become taxable instead of being treated as exempt. Insurance service charges in relation to opted buildings are likely to become exempt rather than being treated as taxable.
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ECJ case: VAT and the status of public bodies - 4 June 2009

SALIX is a property letting company. In 1995 it constructed an office building with an underground car park and, in accordance with a prior agreement, leased the property for a term of 27 years to IHK, a Chamber of Industry and Commerce and a body governed by public law. IHK sub-let part of the offices on a long-term basis to parties subject to VAT and sub-let part of the car park, some on a long-term basis to the sub-lessees and some on a short-term basis to other persons. Under the option to tax rules in Germany, SALIX waived exemption from turnover tax in order to be able to deduct input tax on construction of the building. Under the German law the waiver of exemption is only effective 'if the transaction is performed for another trader for the purpose of his business'. Hence, in the view of SALIX, the VAT charge on rent and the consequential ability to deduct input tax would only apply to that part of the property which IHK sub-let to parties subject to VAT, ie what SALIX considered to be for a business purpose of IHK, notwithstanding IHK's general status as a body governed by public law.

The German tax inspector disagreed, arguing that only short-term letting was an activity carried out in the context of a 'commercial operation': long-term letting was property management rather than a commercial operation and hence not for the purpose of a business under the option to tax rules. SALIX was then assessed for input tax on that part of the property subject to long-term sub-letting. The local tax court found for SALIX; however, the Bundesfinanzhof sought the opinion of the ECJ about the interpretation of Article 4(5).

The Court ruled as follows:
1. The Member States must lay down an express provision in order to be able to rely on the option provided for in the fourth subparagraph of Article 4(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment, according to which specific activities of bodies governed by public law that are exempt under Article 13 or Article 28 of that directive are considered as activities of public authorities.
2. The second subparagraph of Article 4(5) of Sixth Directive 77/388 must be interpreted as meaning that bodies governed by public law are to be considered taxable persons in respect of activities or transactions in which they engage as public authorities not only where their treatment as non-taxable persons under the first or fourth subparagraphs of that provision would lead to significant distortions of competition to the detriment of their private competitors, but also where it would lead to such distortions to their own detriment.
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Tour Operators Margin Scheme: Dutch Supreme Court ruling - May 2009

The Dutch Supreme Court has upheld a challenge to the Dutch practice of refusing VAT refunds to foreign tour operators who incurred Dutch VAT on transport, accommodation and so forth in the Netherlands. The Dutch law does not apply the margin scheme set out in the VAT Directive and, to prevent foreign tour operators from benefiting from full VAT recovery in the Netherlands while accounting for VAT in their home country under the margin scheme, the Netherlands authorities have been refusing VAT refund claims by foreign tour operators. The Supreme Court has now decided that the failure to implement the margin scheme in the Netherlands cannot be used as a basis for denying refunds.

FJ Chalke etc. & Anor vs. HMRC: compound interest on overpaid tax - 8th May 2009

FJ Chalke, motor vehicle dealers contended that they should receive compound interest on several years of VAT overpayments (less simple interest already received). In this case the claimants lost, but because their claims were time-barred. Ernst & Young LLP have comments that it may well be worth submitted claims for compound interest, where the size of the claims merit it.
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HMRC vs. Garsington Opera: production costs - 28th April

The recent decision of the First Tier Tribunal in the case of Garsington Opera gives many theatres and similar businesses the opportunity to seek repayments of input tax incurred on production costs.
» Briefing from SOC VAT
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ECJ opinion: RCI Europe vs. HMRC: place of supply of services - 2nd April 2009

RCI Europe facilitates and organises the exchange of timeshare interests held by its members in holiday homes abroad. RCI’s registered office is in the United Kingdom and a large proportion of its members are UK nationals. On the other hand, a large proportion of the properties which are subject to the RCI Weeks Exchange Programme is in Spain. RCI and HMRC are in dispute over the assessment for VAT cross-border supplies of services; both HMRC and the Spanish tax authorities take the view that the services supplied by RCI were subject to their respective national VAT rules, and each demanded that RCI pay the VAT on the transactions effected, which would be double taxation.

The Opinion of Advocate General Trstenjak is that RCI’s services which the are not directly connected with immovable property within the meaning of Article 9(2)(a) of the Sixth Directive and therefore fall within the scope of the general rule in Article 9(1) of the Sixth Directive. Therefore, as regards the services which RCI supplies in return for payment of the exchange fees, it is for the national court to examine whether or not RCI uses the supplies and services of other taxable persons. If so, the special rule in Article 26(1) of the Sixth Directive applies. The place of supply must then be the place where RCI has established its place of business or has a fixed establishment from which it supplies the services. It should be remembered that the Opinion of the Advocate General is not binding on the Court.
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M&S vs. HMRC: Unjust enrichment - 4th February 2009

HMRC and M&S have been involved in a long-running case of the reclaiming of overpayments of VAT. HMRC conceded that there had been an overpayment of VAT. But they argued that M&S were only eligible for 10% of their £3.5m repayment claim because 90% of the improperly charged tax had been passed on by M&S to their customers, and M&S would therefore be ‘unjustly enriched’ by repayment in full. The case was eventually passed to the European Court of Justice, who decided that the repayment must be made in full, to provide compensation for the infringement of the principle of equal treatment. This decision was upheld by the House of Lords.

Legal experts have suggested that HMRC will now find it harder to refuse to refund overpaid VAT on the grounds that the original customer cannot be traced in order to be given a refund. However, HMRC’s response to the judgement suggests that M&S were appealing to a specific discrimination within the unjust enrichment rules, which meant that this defence could only be brought against certain categories of claimants. This discrepancy was removed on 26th May 2005. HMRC have stated that any claims made on grounds on unjust enrichment before this date will now be paid. In cases where the unjust enrichment defense was not challenged, or was upheld on appeal, HMRC are inviting resubmission of the claims so that they can be reconsidered ‘subject to the relevant time limits’, presumably a reference to the 31 March 2009 deadline for filing claims under the legislation implementing a proper transitional period for the capping provisions, which was introduced following the House of Lords decision in the Fleming and Condé Nast cases. Any cases stated on or after 26th May 2005 will not be affected by the outcome of the M&S case.
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ECJ case: VAT and services supplied by independent groups - 11th December 2008

The European Court of Justice (ECJ) has given a preliminary ruling concerning the interpretation of Article 13A(1)(f) of the Sixth VAT Directive 77/388/EEC, in the case of Stichting Centraal Begeleidingsorgaan voor de Intercollegiale Toetsing v Staatssecretaris van Financien (Taxation) [2008] EUECJ C-407/07 (11 December 2008).The Stichting is a group of hospitals and other establishments in the health sector which supplies services for consideration to its members whose activities are exempt from or not subject to VAT. Article 13A(1)(f) exempts: 'Services supplied by independent groups of persons whose activities are exempt from or are not subject to value added tax, for the purpose of rendering their members the services directly necessary for the exercise of their activity, where these groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to produce distortion of competition;…'

The ECJ concluded that the Article could not be interpreted as making exemption from VAT conditional upon the services being offered to all the members of the independent group concerned. Provided the other conditions in that provision were met, services supplied by independent groups to their members were covered by the exemption contained in that provision even if those services were supplied only to one or several of those members.

The ECJ seems to be taking the view that EU Member States should not try unnecessarily to restrict the scope of the exemption by preventing it from achieving its purpose. However, the exemption is still yet to be implemented in the United Kingdom. This case provides more evidence as to how that provision should be used.
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East Norfolk Sixth Form College vs. HMRC: zero-rating on buildings - 03 October 2008

In this case the college were arguing for zero-rating on new two-story block of classrooms and an IT suite. The college argued that the new block could be classified as an annexe because it could function independently if the bridge connecting it to the main building were closed. HMRC argued, successfully, that the new block relied on facilities provided in the rest of the school buildings and could not therefore be defined as an annexe.
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Bath Festivals Trust ltd. (‘the Trust) vs. HMRC: supply of services

The Bath Festivals Society (‘the Society’), which ran and owned the intellectual property rights to the Bath International Music Festival, ran into financial difficulties in the early 1990s. Bath City Council, who were funding the Society with an annual grant of £50,000 at the time, did not want to see the music festival stop, so it was decided that a new (charitable) company should be formed, who would run and own the rights to the festival – the Bath Festivals Trust ltd. Various service agreements were signed between the City Council and the Trust between 1994 and 2006. HMRC refused to treat funds received by the Trust from its local council (now Bath and North East Somerset Council) as consideration for a supply of services within the meaning of section 5 VATA 1996, as opposed to a grant, and so outside the scope of VAT. However, the tribunal noted that section 2 of the Local Government Act 2000 empowers local authorities to do anything to ‘likely to achieve… the promotion or improvement of the social well-being of their area’. The Tribunal concluded from this that the Commissioners accepted that agreeing to take over a job previously undertaken by a local authority could amount to a supply of services. If the Trust had not assumed a key role in the provision of the Council’s cultural strategy, the onus would have fallen on the Council to do so. The payments made were therefore within the scope of VAT.
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ECJ case: imported services for non-business

AN ECJ decision had confirmed that Kollektivavetalsstelesen tir Tryghetsradet (“TRR”) has to account for Swedish VAT on services it imported from a supplier in Denmark in connection with its non-business activities. TRR is a foundation which undertakes a mixture of taxable business activities and non-business activities that are outside the scope of VAT. It received some services from a supplier in Denmark in connection with its non-business activities and the Swedish authorities decided that TRR must account for Swedish VAT under the reverse charge rules there. The ECJ has now agreed that the supplies were subject to Swedish, and not Danish VAT. The decision may have implications for the UK’s practice in this area.
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Canterbury Hockey Club and Canterbury Ladies Hockey Club vs. HMRC: affiliation fees - 16 October 2008

A VAT tribunal from 2005 has been supported by the European Court of Justice in the qestion of the treatment of affiliation fees paid by Canterbury Hockey Club and Canterbury Ladies Hockey Club to England Hockey. The tribunal and the ECJ found that because Canterbury is a member club is it transparent, and thus the supplies by England Hockey could be seen as being to members, rather than the clubs, and are therefore exempt from VAT. The High Court had disagreed on the transparency point, and the ECJ took the argument further than the VAT tribunal by holding that,... to determine whether supplies of services are exempt, the identity of the material recipients of those services and the legal form under which they benefit from them are irrelevant. ... To be eligible for ... exemption, the services must, in accordance with Article 13A (1) (m) and the first indent of Article 13A (2) (b) of the Sixth Directive, be supplied by a non-profit-making organisation and they must be closely linked and essential to sport, since the true beneficiaries of those services are the persons taking part in sport.
» Case details of the ECJ judgement
» Case details of the original VAT tribunal decision

Adath Yisroel Synagogue vs. HMRC: zero-rating on buildings - 18 September 2008

The VAT tribunal has found against Adath Yisroel Synagogue, who contended that the perimeter wall around their cemetery hould qualify for zero-rating as a building. The Legislation Monitoring Service for Charities note that this ruling presumably applies to any kind of free-standing wall, including garden walls and walls erected to secure the property.
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Leisure Group Pass (LPG) ltd. vs. HMRC: entry to multiple tourist attractions - 12 September 2008

The LPG sell the 'London Pass', which gives free entry to a large number of attractions in and around London. The issue was whether LPG was liable to account to HMRC for VAT on the receipts from sales of the Passes, or whether no VAT was payable at that stage because of a provision in Schedule 10A to the VATA 1994 about 'face-value vouchers'. If the provision applied VAT was payable by the attractions themselves and LPG was not liable to pay VAT at all. The Tribunal agreed with HMRC that 'face-value voucher' did not apply to the Passes because they represent the right to receive services, but not that right, 'up to the value of an amount.'
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Leisure Pass Group ltd. vs. HMRC: face-value vouchers - 11 September 2008

The VAT tribunal have ruled against the London Pass Group, agreeing with HMRC that the London Pass does not meet the statutory definition of face-value voucher. The tribunal found that the London Pass could be regarded as a voucher and it represented a right to receive services, i.e. admission to the various attractions, but it did not represent that right 'up to the value of an amount'.
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Age Concern Leicestershire and Rutland vs. HMRC: welfare services - 6 August 2008

Age Concern Leicestershire and Rutland has lost an appeal at the VAT tribunal where it argued against the application of the welfare services exemption. Deloitte suggest that this was to enhance its input VAT recovery. Age Concern argued that, contractually, the services were supplied to the council/PCT so they could not be welfare services within the scope of the exemption. The Tribunal concluded that the services provided by the Appellant ... constitute supplies of welfare services and are thus exempt from VAT.
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Oxfam vs. HMRC: fundraiser's fees - 30 July 2008

Oxfam appealed against HMRCs rejection of a claim for a repayment of VAT on the fees of professional fundraisers engaged to procure regular donations from members of the public, usually by approaching them in the street. The appeal was dismissed, and the High Court only went as far as ruling that some of the VAT incurred on unrestricted fundraising expenditure may count as input tax dependent upon whether the expenditure was used for business purposes and for taxable supplies.
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Whitechapel Art Gallery: Renovating buildings - 15 July 2008

The VAT and Duties Tribunal have ruled that Whitechapel Art Gallery should be able to use a VAT saving scheme when renovating property. We have a briefing on the case from SOC VAT director Socrates Socratous, who represented Whitechapel Art Gallery in their appeal to the Tribunal.
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Third Sector story

HMRC vs. BASC: zero-rating subscription income - 10 July 2008

The tribunal also dismissed an appeal brought by the British Association for Shooting and Conservation (BASC). BASC have zero-rated subscription income from the supply of magazines and the supply of making insurance arrangements. They contended that the remaining subscription income should also be zero-rated because it was the consideration for an exempt supply consisting of supplies to members of ‘a body which has objects which are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic or civic nature.’ The VAT tribunal rejected the implicit claim that BASC’s representation of its members' interests could be said to be of a political, philanthropic or civic nature, and in the public interest.
» Full case details

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