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

IRISH VAT UPDATES

Budget and Finance Bill

Budget 2018 and the Finance Bill, as initiated on 19 October 2017, contained a small number of VAT-related measures. The principal measures are summarised below:

• VAT rates: the current Irish VAT rates remain unchanged. However, an increase in the VAT rate applying to sunbed services from the reduced rate of 13.5% to the standard rate of 23% will take effect on 1 January 2018.
• Education and vocational training: the Finance Bill contained measures amending the legislative provisions regarding the VAT exemption for certain education and vocational training services. The main impact of the changes is to clarify the scope of the VAT exemption for vocational training and retraining, and to place on a statutory footing general Revenue administrative practice in respect of the application of the VAT exemption to such services. There are also a number of technical amendments to clarify the application of the VAT exemption to certain educational services and to update legislative references. The Bill also provides that regulations may be introduced to further define the scope of the exemption. Providers and recipients of educational and vocational training services should consider the impact of these amendments on the VAT treatment of their services.
• Charities: the Budget speech and supporting documentation included details of the introduction of a VAT compensation scheme for charities. This compensation scheme will come into effect in respect of VAT incurred by charities from 1 January 2018 onwards, with refunds being paid in the subsequent year. Therefore, the first compensation payments will be made in 2019. Charities will be required to satisfy a number of conditions to make a claim. Where these conditions are satisfied, a charity can apply for a refund of a proportion of VAT suffered on their costs based on the level of non-public funding they receive. For example, where a charity’s gross income for 2018 comprises 70% privately sourced income including fundraising, subscriptions and donations, the charity may apply to claim up to 70% of the VAT suffered on its costs for the year. However, the total Exchequer funds available for VAT refunds are limited to €5 million in 2019 for the entire charity sector. Where total valid claims from all charities in 2019 exceed the €5 million cap, the claims will be apportioned to qualifying applicants on a pro-rata basis.

VAT treatment of payment services

eBrief 100/17 provides a link to a new section of Revenue’s tax and duty manual entitled “VAT Treatment of Payment Services”. The section contains Revenue’s interpretation of the scope of the VAT exemption for services of negotiating or dealing in payments and transfers – commonly referred to as “payment processing services”. This guidance follows recent Court of Justice of the European Union (CJEU) judgments regarding the scope and application of this exemption.

The guidance sets out the conditions for VAT exemption to apply to payment processing services, which are largely drawn from the decided case law. In addition, the guidance clarifies that the status of the supplier and the means by which the service is supplied (i.e. electronically or manually) are not determinative of the VAT treatment of the service.

The guidance includes several examples to illustrate these principles. It confirms that VAT exemption applies to a bank’s service of transferring funds from one party’s account to another, as well the services of a merchant acquirer bank or financial institution that processes debit or credit card transactions on behalf of merchants. The key point is that these services effect the payment and bring about a change in the legal and financial position of the payer and payee. However, services involving the transfer of information regarding payments using a secure messaging system would generally not be exempt from VAT as that service does not actually effect the payment. In addition, services involving the provision of infrastructure and technology to enable a merchant to transmit credit card information to a merchant acquirer, but do of themselves effect the payment, would equally not qualify for VAT exempt.

The guidance is welcome in terms of clarifying the boundaries between services which effect a payment and those which provide the technology or infrastructure to provide information. However, with the continuing growth of fintech or financial technology and new payment methods, the distinction between VAT-exempt and VAT-taxable services will need to be closely monitored.

EU VAT UPDATES

Leasing and hire contracts

The CJEU’s ruling in Mercedes-Benz Financial Services (MBFS) (C-624/15) is relevant to providers of asset finance products such as leases, hire purchase (HP) and in particular, personal contract plans (PCP).

This case concerned a PCP car finance product offered by MBFS where the customer was required to pay an initial deposit and monthly instalments over the term of the agreement. The contract contained a provision which provided that, at the end of the term, the customer had the option to make a balloon payment (equal to approximately 40% of the initial value of the vehicle) in order to purchase the vehicle outright or alternatively, hand back the vehicle.

Under EU VAT law, where an agreement for the hire of an asset provides that “in the normal course of events”, ownership of the asset is to pass to the customer at the latest upon payment of the final instalment, it is deemed to be an upfront supply of goods. Therefore, VAT on such supplies is due upfront when the asset is first handed over to the customer. This is the treatment that normally applies to HP agreements. By contrast, an agreement for hire that does not provide that ownership is to pass “in the normal course of events” (e.g. an operating or finance lease) is regarded as a supply of a service and VAT applies as the rental amounts fall due.

The CJEU was asked to consider the meaning of “in the normal course of events” in order to determine whether the MBFS agreement should be considered a supply of goods (similar to a HP agreement) or a supply of services (similar to a lease). It was held that, in order for the agreement to be categorised as a supply of goods, two conditions must be satisfied. First, there must be a clause expressly relating to the transfer of ownership of the goods from the lessor to the lessee. This can include an option to purchase the agreement. Second, it must be clear from the terms of the contract that the ownership of the goods is intended to be acquired automatically by the lessee if performance of the contract proceeds normally, over the full term of the contract. For example, this would be the case where the exercise of the option to purchase under the contract is the only economically rational choice for the lessee. It was left up to the national court to apply these conditions to MBFS but on the basis that the optional payment under the MBFS was a significant proportion of the value of the vehicle, the CJEU’s guidance would suggest that it should be regarded as the supply of a service.

Asset finance providers should carefully consider the VAT treatment of their supplies in light of the judgment as the designation of the contract as a supply of goods or services will have significant implications for the timing and amount of VAT due on such contracts.

David Duffy ACA, AITI Chartered Tax Advisor, is a VAT Director at KPMG.