VAT matters - June 2018

Jun 01, 2018
David Duffy highlights the latest VAT cases and discusses recent VAT developments.


Revenue eBriefs 66/18 and 68/18 contain links to Revenue guidance on specific matters. Revenue eBrief 68/18 contains VAT guidance on a number of issues which are principally relevant to the financial services sector. Revenue eBrief 66/18 addresses the VAT treatment of staff secondments.

VAT deductibility for life insurance companies
The provision of insurance is a VAT-exempt activity and therefore, VAT incurred on costs in respect of the provision of insurance is generally not recoverable (with the exception of insurance services to customers located outside the EU).

However, the Revenue guidance acknowledges that a life insurance company typically also generates income from savings and investment products which are written as a life insurance policy, but are similar to, and in competition with, other financial products offered by banks, fund managers etc. The guidance confirms that VAT recovery on costs incurred by a life insurance company relating to these types of products should typically be based on the non-EU financial investments made by the life insurance company in respect of the products. Consequently, VAT should be recoverable on costs that are directly attributable to dealing in non-EU securities, while VAT recovery should be disallowed on costs directly attributable to dealing in EU securities.
Where the life insurance company has costs that relate to both its insurance and investment activities, a VAT recovery rate methodology must be formulated using a methodology that correctly reflects how costs are consumed and has due regard for the total supplies of the business.

VAT deductibility for the funds industry

This guidance note sets out the VAT deductibility rules for regulated Irish funds where the fund is engaged in the execution of trades in financial securities. The guidance does not apply to funds investing in real estate or other non-financial assets. 

As with other entities, a fund is entitled to VAT recovery on its costs to the extent it is engaged in the supply of financial services to non-EU counter-parties. However, given that the fund’s level of trading can be very substantial, Revenue set out in this guidance note two methods for calculating the proportion of non-EU activity of a fund. The first is based on the proportion of non-EU investments included in the fund’s net asset value (NAV). Revenue consider this to be generally the most reliable method to correctly reflect the use that the costs incurred are put to. The second method, based on the quantum of non-EU investors in the fund, may only be used if it is a more accurate reflection than the method based on the NAV.

Revenue states that whichever method is adopted, it must be applied consistently and any change in methodology should be submitted to Revenue for approval.

VAT treatment of personal contract plans
In light of the Court of Justice of the European Union (CJEU) judgment in Mercedes Benz Financial Services (C-164/16), Revenue has outlined its position regarding the VAT treatment of personal contract plans (PCP). PCP is a common means of financing assets such as cars, as it generally allows for reduced repayments during the term of the agreement with a larger optional balloon payment due at the end. At the end of the term, the customer has the option to: return the car without paying the balloon payment; pay the balloon amount and take full legal ownership of the car; or trade in the car and enter into a PCP on a new car.

The Mercedes Benz judgment had confirmed that a contract of this type should be treated as an upfront supply of goods for VAT purposes by the finance company at the outset of the agreement where the only rational choice for the customer will be to exercise the option to purchase the asset at the end of the agreement. 

In this guidance note, Revenue indicates that it is prepared to accept that the requirement to purchase the asset at the end of a PCP contract can be fulfilled by the exercise of either the option to make the balloon payment at the end of the agreement and take ownership of the asset or the option to trade in the asset and enter into a PCP on a new asset. Therefore, where it is clear at the outset of the agreement that the economically rational choice will be to buy the asset or trade it in against a new asset, it can be treated as a supply of goods for VAT purposes. This will need to be considered on a case-by-case basis. 

VAT treatment of staff secondments
eBrief 66/18 contained guidance on the VAT treatment of staff secondments to companies established in Ireland from related foreign companies. The guidance confirms that in the normal course, staff secondments are subject to VAT at the standard rate. However, Revenue allows an administrative practice where VAT is not chargeable on payments in respect of the seconded staff provided Irish PAYE and PRSI have been correctly operated on those payments. This treatment only applies where staff are seconded from a company not established in Ireland, which is in the same corporate group as the recipient company. In addition, the Irish company to which the employee is seconded must exercise control over the performance of the employee’s duties or the employee must effectively have managerial responsibility for the operation of the Irish company. In addition, the PAYE/PRSI liabilities relating to the payments to the seconded employee must be paid to Revenue in a timely manner.
Where the company sending the employee charges the Irish company an amount in excess of the amounts payable to the employee, this excess will be liable to VAT on the reverse charge basis in the hands of the Irish company engaging the employee.


Input VAT recovery and time limits
The CJEU judgment in Volkswagen AG (C-533/16) confirmed that where VAT is charged by a supplier to a customer several years after the relevant supply took place, member states cannot deny a VAT refund to that customer solely based on the expiry of a time limit running from the date of the supply.

This case concerned Slovakian companies that supplied Volkswagen with moulds for car lights. The suppliers did not charge VAT to Volkswagen as they had incorrectly considered their supplies to be VAT exempt. Subsequently, the suppliers invoiced VAT on the historic supplies for a number of years, collected this VAT from Volkswagen and paid it over to the Slovakian tax authorities. Volkswagen was not established in Slovakia, and therefore submitted an 8th Directive claim for this VAT (a claim for traders not VAT registered or established in a member state they are seeking to recover VAT in).

The Slovakian tax authorities had a five-year time limit for VAT recovery from the date of the initial supply and therefore, disallowed Volkswagen’s claim for VAT recovery on invoices relating to supplies that took place more than five years earlier. However, the CJEU found that where a taxpayer has not been invoiced for, and has not paid, the VAT arising on a supply, VAT recovery cannot be denied simply due to a time limit from the date of supply which had expired before the refund claim was submitted.

It is worth noting that the judgment in this case was based on a specific fact pattern and businesses that incur foreign VAT should pay close attention to the relevant time limits for submitting refund claims.

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