International taxes

Historical compatibility of UK exit charge rules with EU law 

The Upper Tribunal has dismissed the appeals of the taxpayers in the joined cases of Trustees of the Panico Panayi Accumulation and Maintenance Settlements Numbers 1 to 4 and Redevco Properties UK1 Ltd. The cases concerned how to resolve historical incompatibilities between UK capital gains tax and corporation tax law with EU law, in relation to exit charges arising on the deemed disposal of assets when trustees (in Panayi) or a company (Redevco) migrated their tax residence from the UK to an EEA state. The migrations in both cases occurred prior to the UK’s departure from the EU, and prior to amendments to the Taxes Management Act 1970 that allow taxpayers to pay such UK-EEA exit charges in instalments over five years.

In separate decisions, the First-tier Tribunal (FTT) agreed with HMRC in both cases that, instead of disapplying the exit charge provisions entirely, a “conforming interpretation” of the UK law with EU freedoms could be adopted. This allowed the legislation as it stood at the time to be read as if it already included an option to defer affected exit charge payments over five equal annual instalments. The Upper Tribunal has now largely endorsed both FTT decisions, agreeing with the conforming interpretation to defer the payment of tax. The Upper Tribunal however disagreed with the FTT’s conclusions that the conforming interpretation also applied to the dates from which interest arose.

Trustees of the Panico Panayi Accumulation and Maintenance Settlements Numbers 1 to 4 and Anor v HMRC [2024] UKUT 319 

From the Business Tax Briefing dated 11 October 2024, published by Deloitte

VAT

Charging points for electric vehicles

Digital Charging Solutions GmbH (DCS) had its place of business in Germany. It provided a subscription service allowing customers in Sweden access to a network of charging points to charge their electric vehicles (EVs). The charging points were operated by third parties, with whom DCS had entered into contracts. When customers accessed charging points, by way of a card or app, the third-party operators would invoice DCS for the sessions. DCS charged its customers on a monthly basis for the amount of electricity supplied and a fixed fee for related services, including network access, information on electricity prices and availability of charging points, etc. 

The Court of Justice of the European Union (CJEU) has considered the VAT consequences of this arrangement. The CJEU found that the supply of electricity for the purposes of charging an EV at a charging point is a supply of goods. The CJEU then concluded that the electricity consumed via the EV charging points was deemed to be supplied, first, by the third-party operators to DCS and, second, by DCS to its customers. DCS acted in its own name, but on behalf of customers under the commission contract provisions of the EU Principal VAT Directive. 

The CJEU differentiated this scenario from cases regarding fuel card providers. Whereas the fuel card providers were financing diesel purchases by their customers (not buying and selling fuel themselves), DCS was not providing a credit mechanism. The CJEU also considered that it would be artificial to classify the supplies of electricity and access services as a single supply, given the fixed fee for the latter was independent of the electricity purchased. This conclusion did not affect the court’s finding in relation to the commission structure. 

Digital Charging Solutions GmbH Case C-60/23

From the Weekly VAT News dated 21 October 2024, published by Deloitte

Input tax recovery on goods provided free of charge

Voestalpine Giesserei Linz GmbH (VGL), a company established in Austria, produced moulded parts in Romania, where it was VAT-registered. A contractor and sub-contractor undertook the processing in Romania, and once the processing had been carried out, the parts were sent by VGL to customers in the European Union. VGL made available to the contractors a building and a crane installed in that building, free of charge, to carry out the processing work. 

The Court of Justice of the European Union (CJEU) has considered VGL’s ability to recover input tax on its purchase of the crane. The fact that the contractor and sub-contractor benefited from the crane did not of itself mean that VGL would be denied input tax recovery. Provided making the crane available was necessary to ensure the processing of the parts, there was a direct and immediate link between the purchase of the crane and VGL’s taxable outputs or wider economic activity, and VGL would be able to recover the input tax. 

The CJEU also considered Romanian law that denied input tax recovery where the taxpayer did not keep separate accounts for its Romanian fixed establishment. The CJEU noted that in accordance with the principle of VAT neutrality, input tax recovery must be allowed if the substantive requirements are satisfied, even if some of the formal requirements are not met. Although VGL had not kept separate accounts for its Romanian fixed establishment, the tax authorities could not deny the right to input tax recovery if they were able to carry out the necessary checks to establish the existence of that right. Subject to the findings of the referring court, the CJEU was supportive of VGL’s claim for input tax recovery on the costs of the crane. 

Voestalpine Giesserei Linz GmbH Case C-475/23

From the Weekly VAT News dated 14 October 2024, published by Deloitte

Input tax on legal fees

Visual Investments International Ltd (Visual) claimed input tax of more than £54,000 for VAT periods from 2018 to 2021 for legal fees incurred on a commercial dispute. HMRC considered that Visual was not entitled to claim the input tax, on the basis that the legal services were not directly and immediately linked to Visual’s taxable supplies, and were not solely received by Visual. The commercial dispute related to the enforcement of an agreement to transfer shares in two companies to a joint venture vehicle, which was to be 39% owned by a company majority-owned by Visual. The commercial dispute was ultimately settled, following litigation. 

The First-tier Tribunal (FTT) held that Visual was not entitled to recover input tax on the legal fees. Visual argued that the litigation was undertaken to protect Visual’s business interests, which included providing management consultancy services, and that, accordingly, there was a direct and immediate link between the fees incurred and the making of taxable supplies of consulting services. However, the FTT found that the costs were incurred to force the transfer of shares to the joint venture, which were ultimately to be sold at a profit. There was no direct and immediate link with potential taxable supplies of management consultancy. 

Although not necessary given this conclusion, the FTT considered briefly whether Visual was the sole recipient of the legal services. The FTT concluded that the services were being supplied to all three claimants in the commercial litigation. Accordingly, if it had been necessary for the FTT to make a decision on the issue, it would have found that Visual would have been entitled to an input tax deduction of one-third of the VAT. However, given the FTT’s decision on the first point, Visual’s appeal was dismissed. 

Visual Investments International Ltd v HMRC [2024] UKFTT 843

From the Weekly VAT News dated 7 October 2024, published by Deloitte

Belgian cases on VAT and online gambling 

With effect from 1 July 2016, Belgium abolished the VAT exemption for online gambling other than lotteries. The Constitutional Court annulled this by a judgment in March 2018. However, in a November 2018 judgment, the Court maintained the effect of the change from 1 July 2016 to 21 May 2018, for budgetary and administrative reasons. 

Following objections from a number of Belgium providers of online gambling, the Court of Justice of the European Union (CJEU) has now considered whether it is consistent with the principle of fiscal neutrality to differentiate between: 

• online lotteries and other online gambling; and 
• non-lottery online gambling and offline gambling. 

The CJEU noted that fiscal neutrality precludes treating similar goods and services differently for VAT purposes. Supplies of services are similar where they have similar characteristics and meet the same needs from the customer’s point of view, the test being whether they are comparable. While it is for the referring court to assess whether the services are similar, the CJEU set out indicators to be taken into account, which include cultural factors, differences relating to minimum and maximum stakes, and the chances of winning. With the exception of “cultural factors”, these reflect previous gambling fiscal neutrality case law. 

The CJEU considered that lotteries differed from other forms of gambling in that they are solely determined by chance and there is a delay between purchasing the lottery ticket and the result. With respect to (non-lottery) online versus offline gambling, the CJEU referred to the context of the gambling, and concluded that the differences in treatment may be compatible with fiscal neutrality. The CJEU also concluded that, given the primacy of EU law, national courts must disapply provisions that are incompatible with EU law, including the EU Principal VAT Directive, notwithstanding the judgment of a constitutional court, and taxpayers must be refunded VAT paid in breach of EU law, subject to unjust enrichment. 

Chaudfontaine Loisirs Case C-73/23

Casino de Spa and Others Case C-741/22

From the Weekly VAT News dated 30 September 2024, published by Deloitte

VAT split payment mechanism

By way of derogation from the EU Principal VAT Directive (PVD), in 2019, Poland enacted a split payment mechanism to address the problem of VAT fraud. Under the split payment mechanism, customers who purchased supplies worth 15,000 Polish złotys (approximately €3,500) had to pay the VAT into a separate VAT bank account of the supplier. This account could only be used to pay VAT, and other tax liabilities, to the tax authorities or to pay the VAT on goods and services purchased by the supplier.

In this case, the administrators of an insolvent business requested the transfer of funds from the VAT account to pay property tax due by the business. Following questions from the domestic court regarding Poland’s application of the split payment mechanism, the CJEU has held that the mechanism is compatible with the PVD, and did not exceed the terms of the derogation granted. In particular, the mechanism did not require VAT to be accounted for prior to the submission of a VAT return, which would have been contrary to the PVD. Also, it was not apparent to the court that there was any breach of fiscal neutrality or proportionality. The court confirmed Poland’s application of the split payment mechanism.

In the UK, HMRC has awarded a contract for the development of a proof of concept for the application of the split payment mechanism, the final phase of which is due by 31 January 2025. 

Syndyk Masy Upadłości A Case C-709/22

From the Weekly VAT News dated 30 September 2024, published by Deloitte