VAT Snapshot - March 2023

Our March VAT Snapshot provides an update on important VAT-related developments. One of the key topics is the Windsor Framework, a legal agreement between the EU and the UK designed to address the movement of goods between the European Single Market and the UK under the current Northern Ireland Protocol.

The snapshot also covers recent European case law that provide clarity on VAT-related matters in the areas of insurance and electronically supplied services via online platforms. These judgments could impact businesses operating in these sectors.

We have also provided a short overview of key aspects to consider in respect to e-invoicing.

1. The Northern Ireland Protocol and the Windsor Framework

Issue:

The EU and UK negotiated the Windsor Framework, addressing issues with the Northern Ireland Protocol established in 2021, which caused administrative burdens and trade disruptions.

The changes under the Windsor Framework include easements to goods traded from Great Britain to Northern Ireland, changes to VAT rules and postal services, and includes new governance mechanisms.

Relevance:

The EU and the UK have concluded negotiations resulting in the Windsor Framework (‘the Framework’), which is an agreement addressing issues with the Northern Ireland Protocol (‘the NI Protocol’). The NI Protocol regulated Northern Ireland's (NI) relationship with the EU and Great Britain (GB), but led to increased administrative burdens, uncertainty, and trade disruptions. The Framework aims to facilitate trade within the UK internal market by introducing a new system of checks on goods moving from Great Britain (“GB”) to Northern Ireland (“NI”), simplifying controls on agri-food, and introducing a "Stormont Brake" mechanism allowing the Northern Ireland Assembly to object to rules under the NI Protocol.

From a customs perspective, the Framework introduces a green lane, for goods moving from GB to NI based on an expanded trusted trader scheme. Goods that remain in NI and will not cross into Ireland will use the green lane and must be labelled “not for EU”. Such goods will face fewer customs checks.

The aim is for the ‘green lane’ to enter into force in Autumn 2023. Labels for meat and dairy products will come into the force from 1 October 2024. All relevant products must be marked by 1 July 2025.

These new customs arrangements require effective safeguards including data-sharing on the movement of goods, reinforced monitoring procedures robust authorisation processes for trusted trader scheme.

Under the Northern Ireland Protocol, EU rules for VAT and excise apply to goods in Northern Ireland. Under the revised rules set out in the Framework, EU rules on VAT rates will not apply to a list of goods for consumption in NI in certain circumstances. The UK Government has stated that the Framework means it can bring forward legislation to apply the zero-rate of VAT to energy saving materials in NI, e.g. solar panels and heat pumps. In addition, a number of other flexibilities should enable UK-wide VAT changes to apply in NI. In respect of excise, upcoming changes to alcohol duty would also apply in NI.

A forward-looking mechanism in respect of VAT and excise will be established between the UK and the EU to address future issues as and when they arise in order to manage any divergences in policy.

How EY can help

EY’s specialists can assist businesses in reviewing supply chains and ensuring that requirements for moving goods from GB to NI under the Windsor Framework, such as relabelling products and establishing controlled processes are met.

2. Insights on the Seguros case: C-42/22 - Global Companhia de Seguros

Issue

On 9 March 2023, the Court of Justice of the European Union (CJEU) ruled on a case involving the sale of parts from written-off motor vehicles by an insurance company. The case considered whether the sale of these parts to third parties was subject to VAT under EU law.

The insurance company involved in the case purchased parts from written-off motor vehicles involved in accidents covered by the company's insurance policies. After purchasing the parts, the company would then sell these parts to third parties without accounting for VAT on those sales. The dispute arose when the Portuguese tax authorities assessed additional VAT on these sales, arguing that the parts sold were subject to VAT.

There were a number of technical points considered by the CJEU, with the CJEU’s decision ultimately hinging on whether these sales constituted "insurance and reinsurance transactions" within the meaning of Article 135(1)(a) of the VAT Directive.

The CJEU first noted that, in the context of the Portuguese compulsory motor vehicle civil liability insurance scheme, in the event of an accident in which the vehicle covered is completely written off, the person insured and the insurance undertaking are able to decide on the transfer of ownership of the parts from that written-off vehicle to that undertaking. To that end, the latter is required to communicate to the person insured the value at which it is prepared to purchase those written-off parts, in order to enable him or her to take a decision.

If that transfer is carried out, that undertaking then resells those written-off parts to a third party. The amount paid by the insurance undertaking to the person insured includes the value of the written-off parts thus determined. The CJEU determined that fact that the amount of the compensation due to the person insured as a result of an accident included the purchase price of those written-off parts was irrelevant. The value of the parts constituted the residual value, after the accident, of the insured vehicle and was therefore not, by definition, part of the damage suffered by the insured person. Consequently, that price does not form part of the insurance compensation itself.

The court ultimately determined that these sales did not meet the conditions of insurance transactions on the basis that in this case, parts from written-off motor vehicles, bears no relation to the covering of risk, which is essential to the definition of insurance transactions under the Directive. Additionally, the transactions for the sale of parts from written-off motor vehicles took place under agreements separate from the insurance contracts, between insurer and persons other than the insured, further demonstrating that they were not insurance transactions.

The court also ruled that the sale of parts from written-off motor vehicles could not be regarded as inseparably linked to the insurance contract relating to the vehicle and, therefore, did not have to be subject to the same tax treatment as that contract. While the court acknowledged that in some cases, several formally distinct services could be considered a single transaction for VAT purposes, it did not find this to be the case here.

Finally, the court ruled that the principle of fiscal neutrality inherent in the common VAT system did not preclude the refusal to exempt these sales from VAT where the purchases did not give rise to deductibility.

Relevance

This is a decision which demonstrates that VAT exemptions must be construed narrowly. Businesses making supplies of goods in similar circumstances may wish to consider the implications of this decision.

How EY can help

EY’s VAT specialists can assist businesses to review similar supplies made under insurance contracts to determine the appropriate VAT treatment.

3. Fenix International: Digital platforms supplying e-services are undisclosed agents. (Case: ECJ C-695/20 (Fenix International))

Issue

On 28 February 2023, the CJEU issued a landmark ruling in the Fenix International case, which will have significant implications for digital platforms. The decision clarifies the responsibilities of digital platforms for the collection and payment of VAT for electronically supplied services.

Background

The Appellant (Fenix) operates a social media website known as ‘OnlyFans’ (the Platform) and has sole and exclusive control of the Platform. The Platform is offered to ‘Users’ from around the world. These Users are divided into ‘Creators’ and ‘Fans’. Creators have profiles and upload and post content such as photographs and videos to their respective profiles. They can also stream live video webcam and send private messages to Fans who subscribe to them. The Creator determines the monthly subscription fee, although Fenix sets the minimum amount both for subscriptions and for tips.

Fans can access uploaded content by making ad hoc payments or paying a monthly subscription in respect of each Creator whose content they wish to view and/or with whom they wish to interact. Fans can also pay tips or donations known as ‘Fundraising’ for which no content is supplied in return. Therefore, Creators charge and earn money from content and Fans pay money for content.

Fenix provides not only the Platform but also the facility whereby Fans make payments and Creators receive payment. Fenix is responsible for collecting and distributing the payments, utilising a third-party payment service provider. Fenix charges the Creator 20% for services by way of a deduction (the Charge) from the consideration paid by the Fan; if a Creator charges a notional £100 for a subscription, Fenix receives £100 from the Fan, retains £20 and pays the Creator £80.

Both payments from a Fan and payments to a Creator will appear on the relevant User’s bank statement as a payment made to or from Fenix. At all material times, Fenix charged and accounted for VAT at a rate of 20% on the Charge.

The question before the court was whether Article 9a(1) of the VAT Implementing Regulations was overstepping its implementing powers and thus considered invalid. Article 28 of the EU VAT Directive establishes a deemed provision that states that an intermediary, such as a platform, acting in its own name, receives the service from the supplier and supplies the same service to the final consumer.

The court was clear that it was seeking a uniform application of Article 28 of the VAT Directive throughout the EU. As a result, Article 9a(1) of the VAT Implementing Regulations could not be deemed invalid.

The court concluded that where a taxable person, who takes part in the supply of a service by electronic means, has the power to authorise the supply of that service, or to charge for it, or to lay down the general terms and conditions of such a supply, that taxable person may unilaterally define essential elements relating to the supply, namely the provision of that service and the time at which it will take place, or the conditions under which the consideration will be payable, or the rules forming the general framework of that service.

In such circumstances and having regard to the economic and commercial reality reflected by them, it is correct that the taxable person must be regarded as being the supplier of the services, pursuant to the VAT Directive. After its examination, the CJEU held that, by adopting the contested provision of the implementing regulation, the Council merely clarified the VAT Directive, without supplementing or amending it. Examination of the question referred therefore disclosed no factor of such a kind as to affect the validity of the contested provision of the implementing regulation.

Relevance

• The decision provides clarity in respect of the VAT position of digital platforms.

How EY can help

• EY's VAT specialists can provide a comprehensive analysis of online platform businesses' transactions, ensuring compliance with legislation/the latest Fenix International case law.

4. E-Invoicing: Understanding its importance and impact on your business

Issue

E-invoicing refers to the submission of digital data files to tax authorities to provide detailed transactional, accounting or operational data to support tax filings.

In the rapidly changing area of digital tax administration, particularly following the EU Commission’s VAT in a Digital Age package, businesses should be immediately reviewing those areas impacted by these changes to develop a plan on how to address potential impacts.

Relevance

As tax authorities embrace digital tools and increase data analytics, companies need to have visibility and structure around data sources, formats and content delivered digitally to governments worldwide. Failure to comply can lead to risk of intensified audits and automatic assessments, increase tax penalties, refund delays or denials and operational risks.

E-Invoicing requires more real time VAT calculation accuracy with the compliance burden shifting earlier in the accounting process. All VAT and invoice reporting data needs to be accurate and systems need to be updated to ensure automated reporting compliance. Key areas to consider include:

• VAT accounting processes and systems
• VAT data accuracy and completeness
• Exception reporting and risk analysis
• Tax point and value accuracy
• Elimination of manual adjustments and high-risk areas

To manage the new e-invoicing requirements, companies need a simple, structured approach in place to effectively manage the new requirements.

How EY can help

We are seeing an exponential increase in the pace at which companies need to respond to the changing digital submission requirements and evolving audit techniques.

Having guided businesses in many jurisdictions through E-Invoicing implementations, EY understands that key business impacts must be considered ahead of time, and decisions made to deal with those impacts, to help ensure that any transition is managed as smoothly as possible.

EY Indirect Tax Contacts

If you require further information, please call your regular contact in EY or contact any of the following:

• Deirdre Hogan
• Eamonn McCallion
• Maria Reade