VAT snapshot - Q3 2023

The Q3 2023 VAT Snapshot includes the UK Upper Tribunal case of Hotel La Tour which could provide an opportunity to recover UK VAT on share sale transaction costs such as legal fees.

The Snapshot addresses the Court of Justice of the European Union’s (CJEU) ruling in the Cabot Plastics Belgium case. This case concerns the VAT implications of tolling services.

Our Snapshot outlines the importance of monitoring evolving sustainability tax policies and the ever-changing landscape of indirect tax regulations, including e-invoicing and legislative updates.

The Snapshot lastly details the European Commission's extensive plan to reform customs operations across Europe aimed at forming a new partnership with businesses, taking a smarter approach to customs checks and having a more modern approach to e-commerce.

1. UK VAT recovery on share sale costs – UK Upper Tribunal judgement in Hotel La Tour

Issue

Hotel La Tour Ltd (HLT) incurred UK VAT on professional services during the sale of shares in its wholly owned subsidiary, Hotel La Tour Birmingham Ltd (HLTB). The purpose of the share sale was to fund HLT’s development of a new hotel which would be engaged in a fully taxable activity. As the sale of the shares was VAT exempt the question was whether VAT recovery on the associated professional services should be denied as a result of the VAT exempt sale (HMRC’s assertion) or permitted due to the ultimate purpose of the transaction being to facilitate taxable hotel activity (HLT’s assertion).

HLT were successful in arguing for full VAT recovery on professional services costs in the UK First-Tier Tribunal (FTT) which was subsequently upheld by the UK Upper Tribunal (UT).

The case provides that where the proceeds of a sale of shares are used to fund specific taxable activities and assuming the costs incurred to sell the shares are not specifically incorporated in the selling price, UK VAT incurred on associated costs such as legal, accounting and tax fees could still be recovered.

It was accepted that there was the necessary direct and immediate link between the professional services and HLT’s downstream taxable general economic activities and that “the chain” was not broken by the VAT exempt sale of the shares in HLTB.

Relevance

This case is important for UK VAT purposes. While HMRC are understood to have been granted permission to appeal this decision, protective claims are now being submitted by taxpayers in the UK given the four year UK statute of limitations.

Any businesses with a comparable fact pattern and who have restricted UK VAT recovery on share sale transaction costs should review this opportunity and potentially submit protective claims.

We believe that Irish Revenue would take the same approach as HMRC and seek to deny VAT recovery on share sale transaction costs unless the purchaser of the shares is a non-EU entity. Any challenge to the Irish Revenue position would likely require litigation.

How EY can help

Our UK VAT experts can support businesses in preparing protective claims based on the above case.

We can review share sales and purchases to determine transaction cost Irish and EU VAT recovery entitlement. This is a complex area with various technical case law. We can support businesses in avoiding common pitfalls in this area such as timing and documentation issues for future share transactions.

2. Tolling services and fixed establishments – CJEU judgement in Cabot Plastics Belgium SA

Issue

Cabot Switzerland GmbH (Cabot Switzerland) is a Swiss company involved in selling carbon-based products. It entered into a tolling contract with a related party, Cabot Plastics Belgium SA (Cabot Belgium).

Cabot Belgium used exclusively its own equipment to process raw materials into products used in the manufacture of plastics. The services provided by Cabot Belgium to Cabot Switzerland constitute almost all of its turnover. The services were performed under the direction of Cabot Switzerland. Raw materials were purchased by Cabot Switzerland. Cabot Belgium also provided additional services such as storage and support with technical checks/assessments and customs formalities.

The case considered whether Cabot Belgium could constitute a fixed establishment of Cabot Switzerland for VAT purposes. This was the position of the Belgium tax authorities who sought to collect Belgium VAT on the tolling services.

The CJEU referenced that Cabot Belgium remained responsible for its own resources and provided the tolling services at its own risk. The CJEU highlighted that Cabot Switzerland did not have human and technical resources in Belgium in the same way as if they were its own. The conclusion of the CJEU was thus that Cabot Switzerland did not have a fixed establishment in Belgium. No Belgium VAT should apply on the tolling services.

Relevance

This is a welcome decision for taxpayers. The decision is in line with the recent trend in CJEU case law which has found against non-established entities having local fixed establishments through local subsidiaries or third parties.

However, determining fixed establishment risk can be complex and fact specific. As evidenced by earlier CJEU case law such as DFDS and Welmory, the area should continue to be managed with caution particularly given the different approaches which local tax authorities can take.

How EY can help

We can support businesses being challenged by tax authorities in terms of having local fixed establishments by virtue or related or third-party resources. We can support companies in evaluating and minimising their risk of such challenges.

More broadly, via our connected global network of experts, we can assist businesses with reviewing cross-border supply chains to ensure that the appropriate VAT/GST treatment is applied and that any leakage and cash flow issues are minimised.

3. Keeping on top of global green tax and indirect tax changes

Issue

Governments worldwide are increasingly utilizing environmental levies, such as taxes on plastic packaging and carbon emissions, as tools to incentivize sustainable practices, achieve net-zero goals, and minimize waste. For businesses, it is essential to stay well-informed about the ever-evolving landscape of sustainability tax policies globally. This awareness is crucial not only for compliance but also to understand wider trends in the green taxes landscape.

A similar need exists concerning developments in indirect taxation, including e-invoicing and legislative revisions, where businesses must continually adapt.

With a continuously changing regulatory environment, monitoring the dynamic shifts in both green taxes and indirect taxes on a global scale can present a formidable and time-intensive challenge.

Relevance

We understand that, when operating on an international scale, keeping track of developments worldwide in an ever-changing regulatory environment can pose a significant challenge for our clients.

With this consideration, EY has developed web-based dashboards, including the Indirect Tax Developments Dashboard and Green Tax Developments Dashboard.

These platforms monitor international regulatory changes and present them through user-friendly interactive maps and dashboards. Users can identify key information relevant to their organizations using a range of filters and search features. These dashboards are updated weekly, with developments identified from a wide variety of sources and carefully screened by EY professionals. Additionally, direct links to EY Tax Alerts and official sources provide more comprehensive insights.

How EY can help

We can offer a demonstration session for either or both dashboards (typically lasting 15 to 20 minutes).

If you wish to assess the value these dashboards can bring to your organization's daily operations, we can offer a two-week trial period with access for two users.

4. EU Customs Union Reform

Issue

In May 2023, the European Commission put forward proposals for the most comprehensive reform of the EU Customs Union since its establishment.

The cornerstone of this reform is the establishment of a new EU Customs Authority which will oversee an EU Customs Data Hub, which will act as the "engine" of the new system. Over time, the Data Hub will replace the existing customs information technology infrastructure in EU Member States.

Under the new regime, it is envisaged that businesses that want to bring goods into the EU will be able to log all the information on their products and supply chains into a single online environment: the new EU Customs Data Hub. This technology will compile the data provided by business and — via machine learning, artificial intelligence and human intervention — provide authorities with a "360-degree overview" of supply chains and the movement of goods.

In some cases where business processes and supply chains are completely transparent, the most trusted traders ("Trust & Check" traders) will be able to release their goods into circulation in the EU without any active customs intervention. The Trust & Check category aims to strengthen the current Authorised Economic Operators (AEO) program for trusted traders.

In relation to e-commerce, the proposals include plans to make online marketplaces responsible for ensuring compliance with EU customs obligations, deem online marketplaces as importers to ensure customs duty is paid at the time of purchase and abolish duty exemption on goods valued under €150. The reform will also simplify customs duty calculations for the most common low-value goods brought into the EU, reducing the thousands of possible customs duty categories down to only four.

Lastly, the proposals seek to introduce a legal definition of "importer" while abolishing the notion of "declarant".

Relevance:

The legislative proposals are sent to the European Parliament and the Council of the European Union for agreement, and to the European Economic and Social Committee for consultation.

The reform plan outlines a structured timeline for implementation. Under the proposals, the Data Hub will open for e-commerce consignments in 2028, followed (on a voluntary basis) by other importers in 2032.

How EY can help

We can support businesses in:

• Assessing whether their current record keeping systems are suited for the new way of exchanging data with customs authorities.
• Evaluating whether the abolished customs-duty exemption and the new customs duties categories could affect their importations.
• Determining whether the new Trust & Check category could benefit their business.
  

EY Indirect Tax Contacts

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