European Court of Justice decisions on VAT

A couple of ECJ decisions on VAT have caught the eye of Tax partner Nigel Popplewell; one on abusive practices and the other whether extraneous activities were VATable.

08 August 2013

A couple of ECJ decisions on VAT have caught the eye of Tax partner Nigel Popplewell.  The first, Paul Newey relates to abusive practices and is a UK referral.  The second was a referral by the Bulgarian domestic courts relating to the activities of a bailiff who undertook an economic activity outside his core business; the issue was whether the extraneous activities were VATable.

1. HMRC v Paul Newey – case C-653/11

Mr Newey was a loan broker established in the UK.  He therefore made exempt supplies of broking services.  He needed to advertise his services and incurred considerable costs in doing so.  The advertising services supplied to him were standard rated.  So he had a significant stuck input tax problem.

In order to avoid this, Mr Newey incorporated a company (Alabaster) in Jersey and granted the company the right to use the business name that he had been using (Ocean Finance).  Alabaster employed at least one person on a full time basis and had its own management.  They had little experience, however, in broking and were suggested and recruited by Mr Newey’s accountants.

The VAT magic behind this was that the supplies of broking services by Alabaster to Mr Newey’s existing client base did not attract VAT, so those clients were in no worse a position.  However, the advertising services supplied to Alabaster did not attract UK VAT, so the stuck VAT issue went away.

However, Alabaster did not itself process the loan applications, but these were subcontracted to Mr Newey’s business in the UK.  His business was paid a fee for this.  The advertising services were provided by an independent Jersey company who organised the advertising to be supplied to Alabaster from the UK suppliers.  But most of the negotiation with the advertising company in Jersey was undertaken by Mr Newey.

HMRC submitted that the advertising services were in fact supplied to Mr Newey in the UK and therefore taxable in the UK; and the loan broking services were also supplied in the UK by Mr Newey.

Alternatively, if Alabaster was to be regarded as being in Jersey, the arrangements were abusive.

The referral to the ECJ concerned the contractual position and the weight that a national court should give to contracts in determining who makes a supply for VAT purposes.

The court made the following observations:

given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a “supply of services” transaction….have to be identified.

It may, however, become apparent that sometimes certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.

That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions.

So if it becomes apparent that contractual terms do not reflect economic and commercial reality, but constitute a “wholly artificial arrangement which does not reflect the economic reality and which was set up with the sole aim of obtaining a tax advantage”, they can be redefined so as to re-establish the situation that would of prevailed in the absence of the transaction (on the basis that it is an abusive practice).  Note that in one part of its judgement the court says 'purely artificial'; in another it says 'wholly artificial'. 

It is for the national court “by means of an analysis of all circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect the economic reality”.

So it’s back to the Upper Tier Tribunal.  The UTT will then have to decide as a matter of fact whether the arrangements are wholly artificial and do not reflect economic reality – a difficult task.

2. Kostov - ECJ judgement 6-62/12

This is the Bulgarian bailiff.  He was VAT registered for his bailiff activities.  He then acted as an agent for a wholly separate client to bid for three pieces of land.  The bids were successful and Mr Kostov was paid about €25,000 for his agency services.  The question was whether he was liable to Bulgarian VAT on that €25,000. 

He had provided this service on an “occasional basis and not in connection with his activity as a private bailiff”.

The court held that a “natural person who is already a taxable person for VAT purposes in respect of his activities as a self-employed bailiff must be regarded as a “taxable person” in respect of any other economic activity carried out occasionally provided that that activity constitutes an activity within the meaning of the second sub-paragraph of Article 9(1) of the VAT Directive”.

So if you’re VAT registered and carry out an economic activity outside your core business, you will still need to charge VAT on that peripheral activity if it is an economic activity within Article 9(1).  Since this is extremely broad, it is likely that most activities (whether supplies of goods or services) will come within it.

For more information, please call or email the key contact identified at the top of this page. 

Key contact

Brian Wong

Brian Wong Director

  • Rail
  • Highways and Road Transport
  • Judicial Review and Public Law

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more