Weekly VAT News

Topics – Following period definition in terms of calendar year, deduction of excess VAT

C-680/23 Modexel

On 5 December 2024 the Court of Justice of the European Union (CJEU) released its decision in this Portuguese referral asking whether the expression ‘the following period’ in Article 183 of the VAT Directive must be interpreted as referring literally to the period which immediately follows in the calendar year? If the answer to question 1 is in the negative, where an undertaking ceases its activity and subsequently recommences that activity, with a period of 15 months having elapsed between those two points in time, is that undertaking entitled to deduct the amount of the excess which it carried forward when it ceased its activity in the first assessment that it files after recommencing its activity?

Modexel declared that it had ceased to trade with effect from 28 February 2015. At that time, it reported a VAT balance in its favour of EUR12,456.20.

It recommenced trade and reported this on 10 May 2016, at which time it deducted the amount of the earlier VAT balance, seeking to offset that amount in the first return filed.

The tax authority refused the deduction, arguing that Modexel should have applied for a refund within 12 months from the date on which it ceased its activity and that, since it had not done so, that amount had reverted to the Portuguese State.

The referring Court notes that Article 183 is open to interpretation as regards the expression ‘the following period’. The dispute concerns whether, as the tax authority maintains, that expression is limited, literally, to the following tax period or whether, as a result of the practice adopted by Modexel, there may be a time lapse between those two periods on account of the cessation of activity.

The CJEU recalled that the right of a taxable person to deduct from the VAT which they are liable to pay, the VAT due or paid in respect of goods acquired and services received by them as inputs, is a fundamental principle of the common system of VAT. The deduction system is intended to relieve the taxable person entirely of the burden of the VAT due or paid in the course of all his economic activities. It ensures neutrality as regards the tax burden of all economic activities, whatever the purpose or results of those activities, provided that those activities are, in principle, themselves subject to VAT. It is an integral part of the VAT scheme and cannot in principle be limited.

The CJEU noted that pursuant to Article 179, a taxable person is to deduct the tax as a whole by offsetting from the amount of tax due for a tax period the amount of VAT in respect of which the right of deduction arose and is exercised during the same period. The first paragraph of Article 183 states that, where the amount of deductions exceeds the amount of VAT due for a tax period, Member States may either carry over the excess to the subsequent period or refund the amount.

With regard to the concept of ‘subsequent period’, the CJEU considered that the use of ‘period’ in the singular, indicates that it refers to the tax period immediately following the tax period during which the amount of the deductions exceeds the amount of the VAT due. Also, pursuant to Article 252, the duration of a taxable period is to be fixed by each Member State within the limits determined by the second paragraph of that article, without it being apparent from that article, or from Article 183, that that duration, or the succession of taxable periods, depends on whether a ‘taxable person’ carries out an economic activity during all or part of a given taxable period.

However, it is apparent from the Court's case-law that the carry-forward of the refund of excess VAT over several tax periods following that in respect of which that excess arose is not necessarily incompatible with that provision,

The CJEU recalled that it is the existence of an ‘economic activity’ which justifies classification as a ‘taxable person’. Article 9(1) provides that a 'taxable person' is any person who independently carries out, in any place, any economic activity, whatever the purpose or results of that activity. Article 213(1) requires that a taxable person must declare the cessation of his economic activity to the tax authority, which must then invalidate the VAT identification number assigned to that taxable person. A person who ceases his economic activity therefore also ceases to be a taxable person for VAT purposes.

The loss of the status of 'taxable person' implies a lack of continuity of the tax periods required by the first paragraph of Article 183. Therefore, the CJEU considered that although the first paragraph of Article 183 allows excess VAT to be carried forward over several tax periods following that in which that surplus was generated, the cessation of the economic activity of the taxable person concerned has the consequence that there is no subsequent period, within the meaning of Article 183, to which that surplus may be carried forward.

The CJEU noted that the Commission had observed that giving an economic operator the possibility of carrying forward, after a resumption of economic activity, a surplus of VAT declared at the time of the cessation of the previous activity could encourage abuse and the introduction of artificial arrangements by economic operators.

In the immediate case, Modexel ceased its economic activity, and it was no longer subject to VAT. The excess VAT could not be carried forward to a subsequent period, within the meaning of the first paragraph of Article 183, due to a lack of continuity between the tax periods concerned.

Also, Article 183 provides that Member States may either carry over excess VAT to the following period or make the refund in accordance with the detailed rules which they lay down. The CJEU noted that Portuguese legislation in principle combines those two methods of refunding excess VAT, but that, in the event of the cessation of any economic activity of an operator, that operator may apply for reimbursement before the end of a period of twelve months beginning from the period in which that surplus arose.

The CJEU considered that the refund and the deferral provided by Article 183 are not mutually exclusive. Also, although Member States have a certain freedom in establishing the detailed rules referred to in Article 183, those detailed rules may not undermine the principle of fiscal neutrality by making the taxable person bear, in whole or in part, the tax burden. Those detailed rules must enable the taxable person to recover, under appropriate conditions, the entire claim resulting from that excess VAT, which means that the refund must be made, within a reasonable time, by a payment in cash or in an equivalent manner, and that, in any event, the method of refund adopted must not expose the taxable person to any financial risk. Any freedom in this regard is subject to the principles of equivalence and effectiveness.

The CJEU considered that a limitation period, the expiry of which has the effect of penalising a taxpayer who is not sufficiently diligent, who has failed to claim a refund of VAT, by causing him to lose the right to that refund, cannot be regarded as incompatible with the system established by the VAT Directive provided, first, that that period applies in the same way to similar rights in tax matters based on national law and to those based on EU law (principle of equivalence) and, secondly, that it does not in practice make it impossible or excessively difficult to exercise the right to a refund of VAT (principle of effectiveness).

As regards the principle of equivalence, the CJEU noted it has no evidence before it capable of raising doubts as to whether the legislation at issue in the main proceedings complies with that principle.

As regards the principle of effectiveness, the CJEU considered that a limitation period of twelve months from the period in which the excess VAT arose does not appear to be capable of making it impossible or excessively difficult in practice for a taxable person or former taxable person to assert his right to a refund of excess VAT. In the immediate case, it is in no way apparent that Modexel sought to assert its right to a refund of the excess VAT, declared at the time of the cessation of its economic activity, before the end of that twelve-month period, and encountered difficulties in that regard. In those circumstances, it must be held that Modexel's exercise of its right to a refund of VAT has not been rendered impossible or excessively difficult in practice.

In summary, the first paragraph of Article 183 must be interpreted as meaning that it does not preclude national legislation which provides that, when a taxable person ceases his economic activity, that person may not carry excess VAT forward, declared at the time of that cessation of activity, to a following period and may recover that amount only by requesting a refund within 12 months from the date on which that activity ceased, provided that the principles of equivalence and effectiveness are observed.

Comments: Whilst specific to the arrangements provided by Portuguese law, this is a useful reminder to ensure that compliance procedures are in place to ensure the timely recovery of any VAT incurred.

Thursday 12 December

Judgment – C-331/23 Dranken Van Eetvelde

Topics – Joint liability in cases of VAT fraud

A Belgian referral concerning joint liability in a case of VAT fraud and asking whether domestic legislation infringes Article 205 of the VAT Directive, and the principle of proportionality, in so far as it provides for unconditional overall liability and does not allow the court to assess liability on the basis of each person’s contribution to a tax fraud? The referral also asks whether the cumulation of administrative and criminal penalties in the present case is compatible with the principle ne bis in idem (a person cannot be punished and be subject to several procedures for the same facts) enshrined in Article 50 of the Charter of Fundamental Rights of the European Union?

Judgment – C-527/23 Weatherford Atlas Gip

Topics – Refusal of the right to deduct if services are not used for taxable transactions

A Romanian referral asking whether Article 168 of the VAT Directive, read in the light of the principle of fiscal neutrality, must be interpreted as precluding the tax authority from refusing a taxable person the right to deduct the VAT paid in respect of administrative services acquired, where it is established that all the costs recorded for the services purchased have been included in the taxable person’s general costs and that the taxable person carries out only taxable transactions, that the supply of services is expressly confirmed by the tax authority and that the tax treatment applied is that of the reverse charge procedure (which precludes a loss to the Treasury)? For the purposes of interpreting the provisions of Articles 2 and 168 may the services of management and administration (namely assistance and consultancy in various fields, financial and legal advice) provided between intra-group companies for the benefit of different members of the group be regarded by each member in part as being used for the purposes of taxable transactions, that is to say, acquired for its own purposes? For the purposes of interpreting Article 2 where it is established that intra-group services are not supplied to a member of the group, may a company which is part of the group but is deemed not to have benefited from such services be regarded as a taxable person acting as such?

Thursday 19 December

Judgment – C-573/22 Foreningen C and Others

Topics – Whether a statutory media licence fee may be subject to VAT

A Danish referral asking whether Article 370, read in conjunction with point 2 of Annex X, Part A, of the VAT Directive, is to be interpreted as permitting the Member State concerned to impose VAT on a statutory media licence fee to finance the non-commercial activities of public radio and television bodies, notwithstanding the absence of a ‘supply of services for consideration’ within the meaning of Article 2(1). This referral concerns whether a statutory media licence fee, such as the Danish media licence fee, may be subject to VAT and, secondly, the interpretation of what constitutes an unacceptable amendment to a national derogation scheme covered by a standstill provision (Article 370).

For further information please contact Alex Hale.

Opinion – C-427/23 Hater Diszkont

Topics – VAT refunds to foreign travellers – a separate supply of services?

A Hungarian referral asking whether the administration of VAT refunds to foreign travellers is a separate supply of services distinct from the tax-exempt supply of goods, on which VAT must be charged and paid in accordance with the general rules pursuant to Articles 1(2), 1)(c), 78 and 146(1)(e) of the VAT Directive where the administration fee, which is a percentage of the VAT to be refunded, is received and invoiced simultaneously with the VAT refund, at a time different from the supply and invoicing of the goods and after the customer has paid the consideration for the goods and those goods have exited for a third country?

Opinion – C-794/23 Finanzamt Österreich (TVA facturée par erreur a es consommateurs finals II)

Topics – Requirement to pay VAT that was overcharged mostly to “end consumers”

An Austrian referral asking whether Article 203 of the VAT Directive is to be interpreted as meaning that a taxable person who has supplied a service and recorded in his invoice a VAT amount calculated on the basis of an incorrect tax rate is not liable, under that provision, for the part of the VAT invoiced incorrectly if the service was supplied to a non-taxable person, even if the taxable person has supplied similar services to other taxable persons? Is ‘final consumer who does not have a right to deduct input VAT’, within the meaning of the judgment C-378/21, to be understood as referring only to a non-taxable person or also to a taxable person using the specific service only for private purposes (or for other purposes not conferring the right to deduct input VAT) and therefore lacking the right to deduct input VAT? In the event of simplified invoicing in accordance with Article 238 of the VAT Directive, what criteria is to be used to assess (possibly by way of an estimate) for which invoices the taxable person is not liable for the incorrectly invoiced amount because there is no risk of loss of tax revenue?

HMRC v Colchester Institute Corporation

Topics – Further Education Colleges – grant funding – consideration

The Upper Tribunal (UT) has released its decision in this case concerning an appeal by HMRC against a decision of the First-tier Tribunal (FTT) (Colchester Institute Corporation (No.2)) which concerned whether certain grants Colchester Institute Corporation (CIC) received from government-funded agencies constituted ‘a supply of services for consideration’ – being the education and/or vocational training provided free of charge by the college to students (the consideration issue). The Upper Tribunal (UT) in Colchester Institute Corporation v HMRC had previously decided the consideration issue in CIC’s favour, in relation to materially similar grant-funded provision of education and training (but in relation to earlier VAT periods). As that UT decision was binding on the FTT, and the consideration issue was determinative of the appeal, the FTT allowed CIC’s appeal.

With the permission of the FTT, HMRC appeal on the basis that the earlier UT decision had been wrongly decided. HMRC argued that the provision of education or training was not for consideration; the grants paid to CIC by the Education Funding Agency (EFA) and the Skills Funding Agency (SFA) were not directly linked to the provision of education or training, and that UT had wrongly decided the consideration point. HMRC also argued that the earlier UT erred, in a number of respects, in its analysis that ‘funding agreements’ supported a conclusion that the supplies were for consideration, and that it wrongly identified the degree of specificity required by the requirement that there be a ‘direct link’.

In this latest decision the UT dismissed HMRC’s appeal, holding that the earlier UT dealt with the same consideration issue in respect of the same material facts. The reasoning in that decision, which held in CIC’s favour on the consideration issue, applies equally to materially similar facts of this appeal. The FTT was accordingly correct to find CIC succeeded on the consideration issue and to allow CIC’s appeal.

Comments: HMRC recognised that it had little prospect of succeeding in this appeal as it was unlikely that the UT would find that the 2020 UT decision was wrong (as a matter of judicial comity, the later UT would normally follow an earlier UT decision of co-ordinate jurisdiction unless satisfied the earlier decision was wrong). HMRC did however use the appeal to reserve the right to challenge the 2020 decision in a potential Court of Appeal hearing if it is given further leave to appeal. The decision reaffirms that the provision of free education by CIC under government-funded grants is considered a supply of services for consideration.

Please also refer to Revenue and Customs Brief 8 (2021): VAT treatment of public funds received by further education institutions.

For further information please contact Carolyn Norfolk.

These Regulations make various amendments relating to excise duty.

• Regulation 2 amends the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWGR) to remove the requirement that revenue traders may only store goods in an excise warehouse for longer than 72 hours if they are an authorised warehousekeeper, a registered owner or they have a duty representative, and makes consequential amendments on that change.
• Regulation 3 amends the Excise Goods (Export Shops) Regulations 2000 to allow a person who purchases goods from an export shop with the intention of exporting the goods to return the goods to the export shop.
• Regulation 4 makes miscellaneous and consequential amendments to the Excise Goods (Holding, Movement and Duty Point) Regulations 2010 (HMDP), by simplifying specific regulations that apply to the holding and movement of excise goods like alcohol, tobacco and fuels.
• Regulations 5 and 7 to 10 make consequential changes on the amendments to WOWGR.
• Regulation 6 makes changes consequential on the amendments to regulation 57 HMDP.

Regulations 2, 4(7) to (11), 5 and 7 to 10 come into force on 3rd March 2025. All other provisions come into force on 23rd December 2024.

For further information regarding excise duty please contact Craig Clark.

These Regulations introduce changes to customs rules which enable HMRC to repay customs duty amounts to businesses, where this is appropriate following a review of a rate of duty that has previously been charged. They extend HMRC’s ability to repay duty amounts that have been paid where this review process results in a backdated reduction of the duty amount due in respect of imported goods.

These Regulations come into force on 24th December 2024.

Please also refer to Policy Paper – The Customs (Miscellaneous Amendments) (No. 3) Regulations 2024.

For further information regarding global trade please contact Gerard Koevoets.

This Guidance explains how to check if and when you need to register for VAT to prepare for VAT being chargeable on school and boarding fees. More guidance has been added on how to calculate your taxable turnover from the past 12 months.

For further information please contact Mark Dyer or Carolyn Norfolk.

This Collection brings together a list of Freeport maps, Freeport customs site and Freeport tax site locations legislated for within them, and a statement on the designation process. Maps of Anglesey Freeport tax sites have been added.

Please also refer to:

• Maps of UK Freeports
• Maps of Anglesey Freeport tax sites

For further information regarding global trade please contact Gerard Koevoets.

This Notice explains how to account for VAT and who to contact if you are an insolvency practitioner and you are appointed over insolvent VAT-registered businesses. Section 5.6 has been updated to remove reference to repayments being sent to the address of the registered business. The contact email address under 'Bankruptcies' in section 1.4 has also been updated.

This Notice explains how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme. Information on special circumstances for businesses based in Northern Ireland that sell goods to member states of the EU has been updated in section 6.4. It now includes information on the distance selling threshold and what to do after you've met it.

For further information regarding Northern Ireland please contact Michael McNeil.

Court of Justice of the European Union

The CJEU has held that the European Commission may refuse to recognise a company's relocation of production solely on the ground that the relocation was intended to escape customs duties imposed in connection with a trade dispute between two states – in this case, the United States and the European Union. The Fourth Chamber of the Court delivered its ruling in Harley-Davidson Europe Ltd., et al. v European Commission. The decision is now final as the General Court of the CJEU has declined to hear an appeal.

As businesses look to prepare for possible US tariffs and retaliation by trading partners, actions to consider for companies that import into the EU include:

• Analyse both financial and physical flows, as well as the import duties spent, to assess the potential duty impact of anticipated new tariffs
• If considering alternative sourcing decisions from US-origin products into the EU, ensure that the rationale for relocation is not primarily based on avoiding additional retaliatory customs duties
• Conduct scenario-planning exercises to anticipate various outcomes of trade policy changes and develop contingency plans to ensure business continuity

For further information please contact George Riddell or Marc Bunch.

US

President-elect Donald Trump has published on TRUTH social (a social media platform owned by Trump Media & Technology Group) that one of his first Executive Orders will be to charge Mexico and Canada a 25% tariff on all products imported into the US. Trump added that these tariffs would remain in place until the countries intensify efforts to combat drugs and illegal immigration.

Trump also discussed charging China an additional 10% tariff on top of the tariffs already in place until it is concluded that China has taken a stronger stance on the issues of drugs crossing into the US from the Mexico border.

With the anticipated increase in tariffs, US importers will face significantly higher customs duties after 20 January 2025, and strategic planning is imperative to help mitigate these additional costs.

Canada

On 25 November 2024, US President-elect Donald Trump announced via social media his intention to impose a 25% tariff on all products imported from Canada and Mexico. The President-elect also announced a plan to impose an additional 10% tariff on all imports of Chinese goods, which would apply in addition to tariffs currently in place.

The proposed 25% tariff on Canadian imports is a significant increase from the universal 10% tariff proposed by the President-elect during the US election campaign. The President-elect has linked the threatened tariffs to Canadian and Mexican border security and immigration issues. It is unclear at this stage what policy conditions would need to be satisfied by Canada and Mexico with respect to these issues to prevent the imposition of the threatened tariffs.

Our Alert briefly reviews the current Canada-US trade landscape and outlines strategies to help businesses navigate the potential operational impact of these proposed changes.

Canada

The Government of Canada has announced that it will introduce legislation to provide temporary Goods and Services Tax/Harmonized Sales Tax (GST/HST) relief on holiday essentials such as groceries, restaurant meals, children's clothing and footwear and children's toys. If enacted, relief would apply for the period beginning on 14 December 2024 and ending on 15 February 2025.

Given that the onset of the relief period is fast approaching, retailers should prepare by reviewing their inventories and adjusting their point-of-sale software as soon as possible. Also, providing tax relief by exempting qualifying goods from GST/HST could have a detrimental effect on retailers, as they would not be able to claim input tax credits in relation to sales of these goods.

Saudi Arabia

The Zakat, Tax and Customs Authority (ZATCA) has announced the criteria for taxpayers to be included in the 18th wave of Phase 2 e-invoicing integration. Taxpayers resident in Saudi Arabia, with a taxable turnover exceeding SAR2m during the calendar year 2022 or 2023, should comply with the Phase 2 e-invoicing requirements that are effective from 1 June 2025.

Businesses should undertake the relevant steps in making the required changes in their information technology systems. Taxpayers should comply with the Phase 2 requirements in line with the e-invoicing regulation to preclude possible penalties. Taxpayers who do not fall within the first 18 waves of Phase 2 e-invoicing integration should monitor future announcements from the ZATCA on the integration timeline period applicable to them in subsequent waves.

Argentina

The Revenue and Customs Control Agency has issued General Resolution 5604/2024 eliminating the 95% prepayment that had been required for the Impuesto PAIS (i.e., tax rates on purchases of foreign currency for the payment abroad of certain goods and services).

Egypt

The Tax Authority (ETA) has issued Instruction No. (78), revoking Circulars Nos. (5) and (6) of September 2019 (Circulars). These Circulars had required VAT to be applied to specific exported services, including marketing, promotion, warranty services and agency services. The Instruction is effective from its date of issuance.

Although the new instruction cancels the previous VAT requirement, companies that have already collected VAT under the Circulars must remit these amounts to the ETA.

Taxpayers should review the provisions of the Instruction and update their compliance procedures for the relevant export activities to align with the requirements.

The European Council has published the agenda for the next meeting of the Economic and Financial Affairs Council, due to be held on 10 December 2024, which includes, inter alia:

• Customs reform – Ministers will be informed of the progress of work within the Council on proposals to reform the EU’s customs legislation. The presidency will provide the information based on a presidency progress report. Please refer to EU Customs Reform.
  
  For further information regarding global trade please contact Gerard Koevoets.
  
  
• Energy taxation – Ministers will hold a policy debate on the revision of the energy taxation directive – Fit for 55 – The EU's plan for a green transition.
  
  
• Taxation – The Council will approve the bi-annual ECOFIN report to the European Council on tax issues. The Council will also adopt conclusions on the progress achieved by the Code of Conduct Group – Code of Conduct Group (Business Taxation).