VAT Matters - August 2019

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

Two-tier VAT registration

In eBrief 114/19, Revenue announced the introduction of a “two-tier” VAT registration process which took effect from 15 June 2019. The purpose of this change is to help speed up VAT registration applications for most businesses while also protecting against fraudulent traders obtaining VAT numbers that would allow them to buy-in goods or services from abroad VAT-free.

Under the new system, applicants must specify whether they are applying for a ‘domestic-only’ or ‘intra-EU’ VAT registration number. Businesses that trade in goods or services with counterparties in other EU member states should apply for intra-EU registration. Other businesses should apply for domestic-only status.

It is our understanding that domestic-only and intra-EU numbers will follow the same format. However, only intra-EU numbers will be valid on the EU’s VAT Information Exchange System (VIES) website. The VIES website is intended to allow suppliers to validate their customers’ VAT numbers for the purpose of intra-EU trade. Domestic-only VAT registration numbers will not be valid on the VIES website.

For new applicants to obtain an ‘intra-EU’ VAT registration, additional information will be required, including details of due diligence undertaken to establish whether their suppliers are genuine traders and the arrangements for the cross-border transport of goods (if applicable). Less information will be required for domestic-only applicants, but these applicants may at a later time apply for intra-EU status, at which time they will be required to provide additional information on their intra-EU activities.

All VAT registrations in effect prior to the introduction of the two-tier system will be automatically treated as having intra-EU status and there is no requirement to contact Revenue in this regard. Further changes are expected to be introduced in September 2019 to accelerate the processing times of VAT registration applications.

EU VAT updates

Recovery of VAT incorrectly charged

In the case of PORR Építési Kft (C-691/17), the Court of Justice of the European Union (CJEU) confirmed that the Hungarian tax authorities were entitled to disallow a claim by the taxpayer, PORR, in respect of VAT incorrectly charged to PORR by the supplier of motorway construction services. This was on the basis that PORR should instead have self-accounted for VAT under the reverse charge procedure.

The CJEU confirmed that in such circumstances, the customer must pursue the supplier for a reimbursement of the VAT incorrectly charged in the first instance. It is only if reimbursement from the supplier is impossible or excessively difficult (e.g. if the supplier is insolvent) that the customer can address their application to the relevant tax authority. However, the CJEU confirmed that the tax authority is not required to ascertain whether the relevant supplier can adjust the VAT before rejecting a claim by the customer for a deduction of VAT incorrectly charged.

This case highlights the importance of adopting the correct VAT accounting mechanism in order to claim recovery of the VAT arising on the supply.

VAT bad debt relief

In A-PACK CZ case (C-127/18), the CJEU held that a tax authority cannot deny a supplier’s claim for a VAT adjustment on bad debts, simply as a result of the debtor ceasing to be VAT registered. The VAT legislation in the Czech Republic appears to have included a condition that a VAT bad debt adjustment could not be made in these circumstances. In addition to confirming that this condition was incompatible with EU VAT law, the CJEU went on to say that the fact that the customer is no longer VAT registered because of insolvency proceedings is, in fact, supportive of the position that it is a bad debt and that the supplier should, therefore, be entitled to an adjustment for the VAT previously remitted on those supplies. There is no equivalent condition in Irish VAT law, but confirming the principle of an entitlement to claim VAT bad debt relief when it is clear that the debt will almost certainly not be collected is helpful.

VAT exemption for granting of credit

Vega International Car Transport and Logistic (C-235/18) was an Austrian company which had a number of subsidiaries throughout the EU. Vega provided fuel cards to drivers employed by its subsidiaries to allow them to purchase fuel for the purpose of providing transport services. Vega paid for the fuel purchased with the fuel card and at a later date, on a monthly basis, passed on the cost of the fuel to its subsidiaries plus a surcharge. Accordingly, Vega allowed its subsidiaries to obtain the use of the fuel but only pay for that fuel at a later date, in return for an additional charge. 

Vega sought to argue that this should be considered a VAT-exempt service to its Polish subsidiary of the provision of credit. The CJEU agreed with this analysis as it concluded that Vega had not bought and resold the fuel, but had instead provided it subsidiaries’ employees with an instrument to allow them to purchase fuel. The judgment reconfirmed a principle established in other cases that the VAT exemption for the granting of credit is not limited to loans or similar products granted by banks and financial institutions, but can in principle apply to other circumstances where an additional charge is levied for deferred payment.

VAT recovery on investment activities

The University of Cambridge case (Case C 316/18) asked whether there is any entitlement to recover VAT connected with activities that are outside the scope of VAT, if those activities could help generate funds for other VATable activities. 

The University in this case provides VAT-exempt educational services as well as VATable services, such as commercial research, and therefore has a partial VAT recovery position on its general overhead costs. However, the University also received donations and endowments, which it invested through a fund. It was accepted that this investment activity was non-economic activity, i.e. outside the scope of VAT. The CJEU was asked whether the University could recover VAT on the management costs of the fund at its general overhead recovery rate. 

The CJEU concluded that, based on the facts of the case, there was not the necessary direct and immediate link between the fund management costs and VATable output activities, and therefore the costs did not form part of the University’s overheads. Consequently, as the fund management costs instead related to an activity that was outside the scope of VAT, there was no entitlement to recover VAT on the fund management costs.

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