David Duffy highlights the latest VAT cases and discusses recent VAT developments.

Irish VAT updates 

Brexit Omnibus Bill

At the time of writing, it is uncertain whether the United Kingdom will exit the EU on 29 March either with or without a deal. However, given the risk of a no-deal Brexit, on 22 February 2019, the Irish Government released the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019, more commonly known as the “Brexit Omnibus Bill”. The Bill contains a number of measures in relation to VAT.

Most significant is the proposal to introduce postponed VAT accounting for imports of goods coming into Ireland from non-EU jurisdictions post-Brexit. Postponed VAT accounting means that Irish VAT registered businesses could account for VAT on imports of goods into Ireland from outside the EU in their VAT return rather than at the point of import. Where the business is also entitled to full input VAT recovery, a VAT cashflow cost would be avoided as the input VAT on the import would be deductible in the same VAT return. This is similar to the VAT rules applying to acquisitions of goods into Ireland from other EU countries.

As well as helping avoid a VAT cashflow cost on post-Brexit imports from the UK, this measure would also apply to imports from other non-EU countries, thereby providing a cashflow saving compared to the current position. However, it is important to note that any customs duty arising on imports would generally still be payable at the point of importation unless a separate relieving measure applies.

The Government indicated that postponed VAT accounting would initially be available to all traders for a period to alleviate immediate cash flow issues arising from Brexit. However, continued qualification for postponed accounting may depend on Revenue authorisation from a later date to be agreed and may be subject to certain criteria and conditions.

The Bill also contains proposed changes to VAT legislation in respect of VAT56 authorisations. By way of background, a VAT56 authorisation allows qualifying taxpayers to buy-in most goods and services at the 0% rate of VAT. In order to qualify, the business must derive at least 75% of its annual turnover from 0% rated supplies of goods to other EU member states or to non-EU countries, or from certain supplies of contract work. The measures contained in the Bill appear to tighten the conditions to qualify for the authorisation and to give Revenue additional powers in cases where an authorised business no longer meets the conditions for the authorisation. 

VAT rate on food supplements

The last edition of VAT Matters advised of a proposed change in Revenue practice which was to result in the VAT rate for sales of certain food supplement products increasing from 0% to 23% with effect from 1 March 2019. Revenue has since confirmed in eBrief 034/19 that the current practice will remain unchanged until 1 November 2019. In the interim, the Minster for Finance will undertake a public consultation process to examine the policy and legislative options inthis area.

Court of Justice of the EU (CJEU) VAT Updates

VAT recovery for branches in the financial services sector

In the financial services sector, it is common for companies to have branches in other countries which both support the head office’s activities as well as supply services to customers in those other countries. Given different interpretations and rules regarding the VAT exemption for financial services between EU member states, this can give rise to complex issues when considering the VAT recovery position of the branch.

This was the case in Morgan Stanley (C-165/17), where Morgan Stanley’s French branch provided services to French customers and also supported its head office in the UK. The services supplied by the branch to its French customers were subject to VAT (as France has an option to tax for financial services). The support services to the UK head office were ignored for VAT purposes (as they were within the same legal entity) but were used to support activities which were VAT exempt in the UK. However, those services would have had VAT applied from a French perspective and, therefore, the French branch claimed full input VAT recovery on its costs. However, the French tax authorities challenged VAT recovery relating to Morgan Stanley’s activities carried on for the UK head office on the basis that the costs were used to provide services which were VAT exempt in the UK. 

The CJEU concluded that the French branch could not recover VAT on costs which were used to support the VAT exempt services in the UK. The judgment also set out certain formulae to calculate the VAT recovery position for a branch’s general overhead costs. Therefore, the application of the judgment could be complex and would need to be carefully considered by businesses which have a head office or branches in other jurisdictions.

Valuation of supplies

In most cases, the amount which is subject to VAT on a supply of goods or services is clear cut. However, in cases where goods or services are provided in exchange or part exchange for other goods or services, the issue becomes more complex.

In the A Oy case (C-410/17), the CJEU considered the taxable value of demolition services provided by A Oy to customers, where A Oy was able to sell on the scrap metal it removed from the customer’s site. The customer did not charge A Oy for the scrap materials, but A Oy factored the resale value of the scrap metal into the price of its demolition services. The question referred to the CJEU was whether there was a VATable supply of scrap metal supplied by the customer to A Oy and whether the taxable value of A Oy’s demolition services should also take account of the value of the scrap metal.

The CJEU concluded that there was a VATable supply to A Oy and the value of this supply was the amount by which A Oy reduces the demolition price it charges. The fact that this may not be the same as the amount it gets for the scrap metal when it sells the metal is irrelevant. The value of the demolition services on which VAT was due was therefore the price paid by the customer for the demolition plus the value attributed by A Oy to the scrap when it works out the price to charge for demolition. In addition, A Oy was deemed to purchase the scrap metal and this supply was also subject to VAT under the reverse charge rules. 

David Duffy FCA, AITI Chartered Tax Advisor is a VAT Partner at KPMG.