Spring update: Indirect taxes and VAT John Brooks (LV=) has produced the following update on VAT and indirect taxes for the ILAG Tax Practitioner Group and ILAG members. Financial Transactions Tax France and Austria have joined forces to urge the 11 Member States towards agreement on the principles of a financial transactions tax. In an open letter, the Finance ministers of France and Austria urged agreement on low rate broad based tax, including derivatives. The letter called for support from the EU institutions to provide more technical support in developing the proposals. The open letter was issued prior to a meeting of the Economic and Financial Affairs Committee on 27 January. 10 participating members, excluding Greece, subsequently released a joint statement reaffirming their commitment to implementing the FTT on 1 January 2016. Detailed proposals have still not been agreed but there is an indication that the tax should be at a lower rate and on a broader base than the original 2013 proposals, as suggested by France and Austria. The statement acknowledges the danger of relocation of the finance sector posed by the FTT. The Austrian finance minister suggested a phased implementation over 2016- 17, starting with a tax on equities and some derivatives with others following in a second phase. 1 January 2016 may be a tight deadline to meet given that concrete proposals have not yet been put forward let alone agreed. However, the recent developments suggest that there is a willingness to take proposals forward. Announcements of further progress will be made in future ECOFIN meetings. VAT grouping rules following Skandia: Revenue and Customs Brief 2/15 HMRC has published a business brief explaining how its interpretation of VAT grouping rules is to change consequent to the decision of the CJEU in the Skandia case. Under national laws in Sweden and many other EU Member States a branch included in a VAT group is regarded as a separate legal person distinct from a branch of the same company established elsewhere. The CJEU upheld the view that under these conditions transfers between different branches of the same entity are treated as supplies for VAT purposes where one branch is included in the VAT group. This is contrary to the UK view which is that branches of the same company established in different countries are not separate legal entities and transfers between the two are disregarded for VAT purposes unless the result leads to the avoidance of VAT on a transaction which would have taken place if the VAT group was not in place. HMRC has said that starting from 1 January 2016 a UK branch of a company that is included in a “Swedish” VAT group will be treated as a separate legal entity for VAT purposes. In short, this means that taxable services transferred into a UK branch from a “Swedish” VAT group will be subject to reverse charge VAT treatment on the full value of the service transferred in. For branches not included in a Investment & Life Assurance Group Limited. Registered in England and Wales: company no 06295782 Registered office: 300 Pavilion Drive Northampton Business Park Northampton NN4 7YE “Swedish” VAT group, or included in a VAT group in a country that has adopted VAT grouping rules along the same lines as the UK, or established outside the EU, the current rules will remain applicable. This appears to lead to some apparently anomalous results. For example: Supplies subject to reverse charge under the rules applicable from 2016 Supplies between UK branch and branch included in a VAT group in Sweden Supplies between UK branch and branch in a VAT group in another EU member state operating Swedish style VAT grouping rules Supplies remaining subject to current rules from 2016 Supplies between UK branch and branch not in a VAT group (all EU states) Supplies between UK branch and branch included in a “UK style” VAT group Supplies between UK branch and branch outside the EU (including Norway which has adopted “Swedish” VAT grouping rules) Potentially this will lead to a result under which a supply received from an EU member state operating Swedish VAT grouping rules will effectively be subject to less favourable VAT treatment than a supply received from a country outside the EU operating identical rules. EU member states that adopt “Swedish” VAT grouping rules: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Latvia, Slovakia, Spain, Sweden EU member states that adopt UK style VAT grouping: Ireland, the Netherlands, the UK EU member states that do not allow VAT grouping: Bulgaria, Croatia, Cyprus, France, Greece, Italy, Lithuania, Luxembourg, Malta, Poland, Romania, Slovenia HMRC maintain that it is able to apply the new rules without changing national VAT legislation and that the application of the new rules as a reinterpretation of existing law following the judgment given by the CJEU in Skandia. Judgment of the Court of Appeal in the case of Investment Trust Companies (ITCs) (2015) EWCA Civ 28 This is a long standing case following claims for refunds of VAT by a number of ITCs in a joint representative action against HMRC. The management of investment trust companies was treated as taxable in the UK until 2008 when the ECJ in JP Morgan Claverhouse held that the management of ITCs should have been treated as exempt from VAT from 1990. In this case the managers of the ITCs had submitted claims to HMRC for refunds of VAT charged to their customers. These were restricted by the amount of input VAT the companies had offset against their original payments to HMRC, and by the effect of changes in legislation in 1996 and 1997. This reduced the time limit for making claims from six to three years after the end of the relevant VAT period; this was subject later to the decisions in Marks and Spencer and Fleming which held that HMRC had not given a sufficient length of time for taxpayers to make claims before the amendments came in force. The effect of all this was to leave the ITCs with a Investment & Life Assurance Group Limited. Registered in England and Wales: company no 06295782 Registered office: 300 Pavilion Drive Northampton Business Park Northampton NN4 7YE dead period between 1996 and 2001 when the managers were prevented from making any claims at all to HMRC under the changed legislation, and in the remaining periods the claims had been reduced by the input VAT the managers had claimed back from HMRC, i.e. their claims were limited to the amount they had paid HMRC and not the amount of VAT the ITCs had paid the managers. The ITCs case was on two footings: Firstly they claimed restitution against HMRC under common law for the full amount of tax not recovered by the managers under VAT legislation; They also claimed a direct right to a refund of the tax paid under EU VAT law on the basis that the UK VAT legislation did not provide a proper remedy. The Court held that for the period when the managers were unable to claim VAT under VAT legislation the ITCs were entitled to common law restitution from HMRC for the amount of VAT that had been paid over by the managers. However the ITCs were not entitled to claim an amount equivalent to the managers input VAT which had reduced the total amount of VAT payable to HMRC. HMRC had not been unjustly enriched by refunding only the net amount the managers had paid and not the full amount of output VAT. Any claims the ITCs had in respect of the difference in VAT which they had paid to the managers was against the managers and not HMRC. Although this case dealt with historic claims it does have current implications. Under current VAT legislation claims for overpaid VAT must be made within four years of the end of the VAT period in which the tax became due and payable to HMRC. The Court has now established that there is a common law right of restitution for overpaid VAT for which claims must be made within six years of discovery of the mistake (or within six years of when the mistake could have been reasonably expected to be discovered). This opens the potential for claims to be made much later than four years after the end of the relevant tax period. The remedy is available to the person who ultimately paid the tax but limited to the amount of tax received by HMRC from the VAT registered supplier and where any rights to recover VAT under VAT legislation have been exhausted. CJEU Attorney General’s opinion that mechanical warranties are VAT exempt insurances not taxable service contracts In the case of DGFP France v Marpfre Asistencia and Mapfre Warranty (C-548/13) the question concerns whether mechanical warranties supplied at the same time as the sale of motor vehicles are taxable guarantees or VAT exempt insurances. The warranties are sold by dealers with vehicles. The price of the warranty is based on the age and condition of the vehicle and the “premium” collected from the customer when the vehicle is sold. The customer is a party to the warranties and in the event of repairs being needed obtains a quote from a repairer and submits it for approval to Mapfre, who authorises the repairs and pays the repairers directly. In the AG’s opinion the warranties sold by Mapfre are not the same as guarantees given by manufacturers. The latter are an ancillary part of the sale of the manufacturer’s product. Mapfre’s warranty was sold to customers independently of the supply of the car by the dealer and had the essential elements of a supply of insurance.