VAT matters - December 2018

Dec 03, 2018
David Duffy highlights the latest VAT cases and discusses recent VAT developments.


Finance Bill 

The Finance Bill (as initiated) contained a small number of provisions in relation to VAT, which are summarised below. 

As announced in the Budget, the Bill confirmed that the VAT rate for certain goods and services, mainly in the tourism and hospitality sectors such as hotel accommodation, restaurants and admissions to many attractions, will increase from 9% to 13.5% with effect from 1 January 2019. The 9% VAT rate will continue to apply to newspapers (and similar publications) and the provision of sporting facilities. The 9% VAT rate will also be extended to e-books and digitally supplied publications with effect from
1 January 2019. This follows an EU-wide agreement reached in October to allow member states apply reduced rates of VAT to digital publications.
The other VAT-related provisions in the Bill include: a technical amendment relating to the VAT treatment of sales of residential property by liquidators, receivers and mortgagees; and the withdrawal of a VAT relief in situations where VAT has been charged on the supply of a telephone card, which is then used outside the EU.


Share transaction costs

The question of a taxpayer’s entitlement to recover VAT on costs in relation to share transactions has been the subject of much debate and case law in recent years. In recent months, there have been two further European Court of Justice (CJEU) decisions, namely Ryanair (C-249/17) and C&D Foods Acquisitions (C-502/17).
Ryanair was a referral to the CJEU from the Irish Supreme Court. In its decision, the CJEU confirmed Ryanair’s entitlement to fully recover VAT on professional costs relating to its bid to acquire Aer Lingus. This was on the basis that, if the acquisition had been successful, Ryanair would have provided management supplies to Aer Lingus. Prior CJEU judgments had confirmed that the provision of management services by a parent company to its subsidiary is a VATable “economic activity” giving a right to VAT recovery. While Ryanair only acquired a minority interest in Aer Lingus and did not provide any management services to it, the CJEU judgment confirmed the entitlement to VAT recovery based on the intended taxable economic activity of managing the subsidiary.

The C&D Foods Acquisition case, a referral from the Danish courts, bore similarities to the Ryanair case in that it related to an intended but uncompleted share transaction. However, in this case, the taxpayer intended to sell rather than acquire shares. The taxpayer was a holding company which was actively involved in managing its subsidiaries, but engaged various consultants to advise it on the sale of the shares in its subsidiary. The proceeds from the sale were intended to pay down a debt owed to a bank. The CJEU ruled that the VAT on consultancy costs relating to the proposed share disposal was not recoverable as the proceeds of the share sale would not be used for taxable business activities. 

The two cases mentioned above highlight the ongoing complexity of the VAT recovery position on costs relating to share transactions and the importance of considering the exact fact pattern in each case.
Hire purchase transactions

In Volkswagen Financial Services Limited (VWFS) (C-153/17), the CJEU concluded that VWFS is entitled to partial VAT recovery on the overhead costs of its hire purchase business.  This was the case even though these costs were incorporated into the finance charge forming part of the hire purchase contract rather than the cost of the underlying goods. HMRC in the UK had sought to argue that there should be no VAT recovery.

By way of background, hire purchase is treated for VAT purposes as both a taxable supply of goods (the initial handing over of the asset/vehicle) and an exempt supply of credit (i.e. the margin earned by the finance provider). Under consumer law, the hirer is required to disclose separately on the hire purchase agreement the price of the vehicle and the finance element.

The CJEU first confirmed that the VAT treatment of hire purchase as separate supplies of goods and finance was valid.

However, the principal dispute arose in relation to the recovery of input VAT on general overheads in running the VWFS hire purchase business. VWFS argued that the proportion of the input VAT recoverable on overheads should be based on the number of exempt and taxable transactions carried out, with each hire-purchase transaction counting as two transactions (i.e. a taxable supply of goods and an exempt supply of credit). On this basis, half of the general overhead VAT would be recoverable. HMRC argued that the residual input VAT was a cost component of the exempt transactions alone and, therefore, no VAT should be recovered.

The CJEU did not accept HMRC’s position that no VAT was recoverable on general overhead costs of the hire purchase business. While it did not specify the exact methodology to use, it nonetheless confirmed that the taxable supply, as well as the exempt supply of credit, should be factored into the calculation. 
As the hire purchase VAT rules operate similarly in Ireland to the UK, providers of hire purchase products may wish to review their VAT recovery position in light of the judgment.
David Duffy is a VAT Director at KPMG.