Weekly VAT News
EY VAT News – 15 April 2024
Welcome to the latest edition of EY VAT News, which provides a roundup of indirect tax developments for the period to 15 April 2024.
If you would like to discuss any of the articles in more detail, please speak with your usual EY indirect tax contact or one of the people below. Alternatively, you can use our ‘contact us’ form. If you give us a brief description of your query (not just on this week’s content), we will send it to a relevant person in EY.
If you have any feedback or comments on EY VAT News, please contact Ian Pountney.
Court of Justice of the European Union
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Opinion: A split payment mechanism is authorised, and the tax authority is permitted to refuse to grant consent for the transfer, by an insolvency administrator, of funds held in the VAT account
Topics – transfer, by an insolvency administrator, of funds held in the VAT account of a taxable person – split payment mechanism
C-709/22 Syndyk Masy Upadłości A
On 11 April 2024 the Court of Justice of the European Union (CJEU) delivered the opinion of Advocate General Kokott (AG) in this Polish referral asking whether the provisions of Council Implementing Decision 2019/310, authorising Poland to introduce a special measure derogating from the VAT Directive, in particular Articles 395 and 273 thereof, as well as the principles of proportionality and neutrality, should be interpreted as precluding national legislation and practice which, in the circumstances of the case at hand, preclude the grant of consent for the transfer, by an insolvency administrator, of funds held in the VAT account of a taxable person (under a split payment mechanism) to a bank account which has been designated by that taxable person?
In Poland, a ‘split payment mechanism’ operates whereby payment against a supply is usually transferred in full by the customer to the supplier (consideration in exchange for the supply plus VAT) but this is then ‘split’ into: (i) the consideration, which is paid to the supplier of the goods or services; and, (ii) the VAT due, which is paid to a blocked bank (VAT) account of the tax authorities.
Whilst the taxpayer is able to use this money to pay taxes, social security contributions and other listed liabilities, they cannot freely transfer this money to another designated account.
Following the introduction of the split payment mechanism, conflict with the law regarding insolvency became evident as this provides for its own priorities for the repayment of liabilities from the company in insolvency. Repayment of tax arrears falls into the second listed category, consequently the tax authorities have to wait until priority debts are satisfied. However, tax and insolvency laws are not synchronised; there are regulations aimed at protecting the interests of creditors of a company in insolvency and there are regulations protecting the interests of the State Treasury.
As in the immediate case, the Tax Office refuse to transfer money accumulated on the VAT account to receivers representing companies in insolvency. Domestic rulings have been favourable to the tax authorities, the courts finding that insolvency law does not exclude the application of the provisions of the VAT Act. It does not matter that the application for permission to transfer the funds was made by the receivers where the company in insolvency is still a VAT taxpayer; the declaration of insolvency does not affect its status as a taxpayer.
However, the Provincial Administrative Court has previously held that tax regulations may not lead to the State Treasury being favoured over other creditors of the company in insolvency.
In the immediate case, the receivers applied to the head of the Tax Office to transfer funds from the VAT account to the estate of the company in insolvency. The money was to be transferred to the municipality's account to pay property tax for July 2021. This request was refused by the tax office as the company had arrears in VAT and income tax for an amount higher than the one resulting from the application.
The referring court questions whether, to combat VAT fraud (which is the main purpose of introducing a split payment), it is possible to refuse to pay money from a VAT account to a receiver who acts under the supervision of a judge commissioner. It asks whether this violates the EU's principle of proportionality and whether the State Treasury has been privileged over other creditors. It also questions the lawfulness of the introduction, and limits of the application, of the split payment mechanism, which was adopted with the aim of combating VAT fraud.
The AG recalled that Article 1 of Implementing Decision 2019/310 authorises Poland to operate a split payment mechanism, this is a derogation from Article 226 of the VAT Directive. Article 395(1) provides that the Council of the EU, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures in derogation from the VAT Directive to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. In the immediate case, the split payment mechanism is intended to prevent VAT fraud.
The AG considered that the conditions of Article 395(1) have been met and the immediate case does not therefore depend on the compatibility of the split payment mechanism with Article 273. Article 273 makes it possible only to impose additional obligations aimed at ensuring the correct collection of VAT and at preventing evasion. In the immediate case, the split payment mechanism however is intended not to ensure the correct collection of VAT but only to prevent tax evasion (and tax losses). Also, it is not an additional obligation but rather a derogation from the VAT Directive. Derogations, however, are permissible only on the basis of Article 395.
The AG noted that the split payment would need to be compatible with the other provisions of the VAT Directive, namely Article 206 in conjunction with Article 168(a).
The AG considered that whilst Article 206 provides that taxable persons are liable for payment only of the VAT arising from their transactions that becomes chargeable on submission of a VAT return at the end of a particular taxation period and after deduction of the input VAT which they have themselves paid to other taxable persons, the split payment mechanism is compatible with these provisions. Although taxable persons cannot freely dispose of the VAT account, they can at least use it to pay VAT to those supplying goods or services to them. What is more, it appears that that account may be used to discharge all liabilities to the State.
The position as regards Article 168(a) may be otherwise, however, if the sum of the funds held in the VAT account exceeds the amount of the tax debt. If, in those circumstances, taxable persons are unable to dispose of the funds in the VAT account in a timely manner, they are deprived of liquidity for no reason under tax law. While the surplus amount must therefore be promptly released to the taxable person, the tax authority must still be able to verify the accuracy of the declared tax liability, at least if it has any specific doubts in that regard. The AG considered that it is for the referring Court to review whether those requirements are met.
Considering the compatibility with EU law of not releasing the funds from a VAT account in the event of insolvency, the AG noted that EU law does not lay down any material rules of its own as regards the order in which creditors are to be satisfied in insolvency proceedings, consequently EU law does not preclude national legislation and practice which ultimately have the effect, in insolvency proceedings, of prioritising the satisfaction of the creditor of tax liabilities over the creditors of other claims.
The AG also considered whether the refusal by the tax authorities to release the funds held in the VAT account could constitute a breach of the taxable person’s (account holder’s) right to property guaranteed in Article 17(1) of the Charter of Fundamental Rights of the European Union. Having opined that the split payment mechanism constitutes an implementation of EU law in accordance with Article 51(1), the AG considered that whilst the mechanism ‘interferes’ with Article 17(1), it is justified.
Finally, the AG considered whether there is a breach of other EU law principles and opined that there is nothing to indicate the presence of a breach of the principles of the rule of law and legal certainty provided for in Article 2 of the Treaty on European Union (TEU). The right to good administration reflects a general principle of EU law. The requirements to which that right gives rise also apply to national tax authorities in the implementation of EU law. There is, however, no evidence of a breach of that principle in the immediate case. Also, there is nothing to indicate the presence of a breach of the principle of sincere cooperation under Article 4(3) TEU either.
In summary, Article 17(1) of the Charter of Fundamental Rights of the European Union, the principles of proportionality, neutrality, the rule of law, legal certainty, sincere cooperation and good administration, as well as the provisions of the VAT Directive and Council Implementing Decision 2019/310 do not preclude national legislation and practice whereby the insolvency administrator is denied permission to transfer the funds held in the VAT account belonging to a taxable person to a bank account designated by an insolvency administrator, in so far as the taxable person still has tax arrears.
Comments: Whist we await to see whether the Court follows the AG’s opinion, this is an interesting case which explores the mechanics of the split payment mechanism and supports the tax authority’s argument that it is entitled to retain VAT payments where a taxable person subject to receivership still has tax arrears. It is, perhaps, not surprising that the AG concludes that EU law does not preclude domestic legislation and practice which ultimately have the effect, in insolvency proceedings, of prioritising the satisfaction of the creditor of tax liabilities over the creditors of other claims. It is also likely that EU law would be consistent with other arrangements in which the sums in the VAT account were available to other creditors in case of insolvency. Given that Poland had a derogation to permit it to operate split payments, the precise details of the way that it did so were a matter for national law.
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Judgment: Member States may require small businesses to submit an application for VAT registration within a prescribed period
Topics – Special Scheme for Small Enterprises – conditions
On 11 April 2024 the Court of Justice of the European Union (CJEU) released its decision in this Bulgarian referral asking whether a national provision, which treats taxable persons differently in respect of the tax exemption provided for under Title XII, Chapter 1 of the VAT Directive (Special Scheme for Small Enterprises), depending on the speed with which they reach the turnover threshold for compulsory VAT registration, is in breach of the principles of the common system of VAT in the European Union? Does the VAT Directive preclude a national provision under which the tax exemption under Title XII, Chapter 1 depends on the supplier fulfilling the obligation to apply for compulsory VAT registration in time? What criteria arising from the interpretation of the VAT Directive must be used to assess whether national provisions, which provides for the incurrence of a tax debt in the event of late submission of the application for compulsory VAT registration, is a penalty provision?
Legafact provides business consultancy services and was not initially VAT registered. On 21 August 2018, it issued four invoices and on 23 and 24 August 2018, it issued two further invoices for supplies of services. On 3 September 2018, it applied for compulsory VAT registration and was registered with effect from 19 September 2018.
The tax authorities considered that the turnover threshold applicable to the scheme at issue was exceeded when the second invoice of 21 August 2018 was issued. Pursuant to domestic VAT legislation that supply was taxable and the tax authorities concluded that Legafact should have submitted the application for registration within seven days from the date on which it reached the registration threshold, that is, by 28 August 2018, which it did not do. Consequently, Legafact was liable to pay tax on the taxable supplies from the date when that turnover was exceeded until the date when it was registered with the tax authorities. In addition to the tax debts, the tax adjustment notice issued included interest.
The tax adjustment notice was upheld in administrative proceedings, but the Administrative Court held that the tax adjustment notice was issued contrary to the applicable substantive law, in particular the VAT Directive. It also found that the domestic law constituted a penalty provision in cases of late submission of an application for compulsory registration and that the State may impose such a penalty only if it is proportionate. A three-day delay in applying for compulsory registration was no basis for regarding the offence committed as serious. Since there was no information indicating that the respondent intended to evade paying tax, the penalty imposed was disproportionate and the imposition of VAT debts and interest by the tax adjustment notice was therefore unlawful.
In summary, the referring Court asks whether the VAT Directive must be interpreted as precluding national legislation, adopted by a Member State pursuant to Article 287 of that directive, which makes the benefit of the VAT exemption provided for by that directive for small businesses subject to the condition that the taxable person, whose annual turnover or turnover measured during a period of two consecutive months exceeds the amount indicated for that Member State in that provision, submits an application for VAT registration within a prescribed period.
The CJEU noted that the VAT Directive allows Member States to apply special schemes in respect of small businesses. The domestic legislation at issue in the immediate proceedings was adopted pursuant to Article 287(17), authorising the Republic of Bulgaria to grant an exemption to taxable persons whose annual turnover is not more than equal to the Bulgarian equivalent of EUR 25,600. Pursuant to this legislation, taxable persons are required to lodge a VAT registration within a period of seven days which begins to run from a period dependent upon the period in which that turnover was achieved.
The CJEU recalled that the special scheme for small enterprises provides for administrative simplification. In this regard, Member States have a discretion as to the manner in which the scheme is administered. An obligation according to which taxable persons must lodge a VAT registration where their annual turnover exceeds the threshold laid down in Article 287 is, in principle, part of that discretion.
As regards the time at which the obligation to lodge a VAT registration arises, the domestic legislation provides for a difference in process dependent upon the period in which the threshold is breached. That difference in treatment takes account, inter alia, of the characteristics of seasonal activities, and the CJEU considered that the timing and this difference in treatment also falls within the discretion conferred on the Member States by the VAT Directive.
Moving onto the final question referred, the CJEU considered whether the VAT Directive must be interpreted as precluding national legislation which provides that an infringement by a taxable person of the obligation to submit an application for registration for VAT within the prescribed period results in the incurrence of a ‘tax debt’.
The CJEU recalled that to ensure the correct collection of tax and to prevent evasion, Member States may, inter alia, lawfully provide for appropriate penalties intended to penalise failure to comply with VAT obligations. However, such measures must not go beyond what is necessary to achieve these objectives. In that regard, it is for the national courts to ascertain whether the amount of the penalty goes beyond what is necessary.
In assessing whether a penalty complies with the principle of proportionality, it is necessary to take into account, inter alia, the nature and gravity of the infringement which the penalty is intended to penalise, and the detailed rules for determining the amount of that penalty. When choosing penalties, Member States are required to comply with the principle of effectiveness, which requires the introduction of effective and dissuasive penalties to combat infringements of the harmonised VAT rules and to protect the financial interests of the European Union.
The CJEU noted that in the immediate case, in the event of the late submission of an application for registration, taxable persons whose annual turnover exceeds the threshold above which the submission of that application is compulsory, are liable to the payment of VAT on taxable supplies made from the expiry of the seven-day period within which the registration notice should have been issued up to the date of registration.
The CJEU considered that these provisions cannot be regarded as constituting a penalty in so far as its sole purpose is to recover VAT on taxable transactions. It will however be for the referring Court to consider the individual circumstances of the taxpayer and application of the scheme as appropriate to him to ascertain whether the national legislation provides for a penalty. The referring court must ascertain whether that legislation, first, complies with the principle of effectiveness in combating infringements of the harmonised VAT rules and, second, meets the requirements of proportionality.
In summary:
- The VAT Directive does not preclude domestic legislation, adopted by a Member State pursuant to Article 287 of that directive, as amended, which makes the benefit of the exemption from VAT provided for by that directive, for small undertakings, subject to the condition that the taxable person, whose annual or measured turnover during a period of two consecutive months exceeds the amount indicated for that Member State in that provision, submits an application for VAT registration within a prescribed period.
- The VAT Directive must be interpreted as not precluding domestic legislation which provides that an infringement by a taxable person of the obligation to submit an application for registration for VAT within a prescribed period, results in the incurrence of a tax debt, provided that that legislation complies with the principle of effectiveness and satisfies the requirements of proportionality, in accordance with the case-law of the Court.
Comments: A specific set of circumstances applicable to the mechanics of the ‘Special Scheme for Small Enterprises’ and VAT registration.
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Calendar Update
Thursday 18 April
Judgment – C-68/23 M-GbR
Topics – single-purpose and multi-purpose vouchers – prepaid cards or vouchers for the purchase of digital contents
A German referral concerning the definition of single-purpose and multi-purpose vouchers – tax treatment of prepaid cards or vouchers for the purchase of digital content. The referral asks whether a single-purpose voucher exists within the meaning of Article 30a(2) of the VAT Directive where the place of supply of the service to which the voucher relates is known, in so far as those services are intended to be supplied to final consumers within the territory of a Member State, but the fiction of the first subparagraph of Article 30b(1) also gives rise to a service in the territory of another Member State?
If the first question is answered in the negative (and hence a multi-purpose voucher exists in the present case), does subparagraph 1 of Article 30b(2), according to which the actual provision of the services in return for a multi-purpose voucher accepted as consideration or part consideration by the supplier is subject to VAT pursuant to Article 2, whereas each preceding transfer of that multi-purpose voucher is not subject to VAT, preclude a differently substantiated tax obligation by reference to C-520/10 Lebara?
Judgment – C-89/23 Companhia União de Crédito Popular
Topics – commission on pledged goods – ancillary service to the principal service?
A Portuguese referral asking whether, for the 11% commission which the law allots to a lender for the sale of pledged goods, VAT exemption applies pursuant to Article 135(1)(b) of the VAT Directive? Can the sale of the pledged goods, where the borrower fails to pay in accordance with the legal conditions, be regarded as an ancillary service to the services provided by the lender (activity of lending secured by a pledge)? The appellant's business activity consists essentially in granting loans secured by a pledge (in the present case, gold and silver items, and watches).
Thursday 25 April
Judgment – C-657/22 SC Bitulpetrolium Serv SRL
Topics – excise duty, customs inspection, infringement of warehousing procedure
A Romanian referral asking whether national provisions and practices, according to which the reintroduction into a tax warehouse of a heating fuel (heating oil) in the absence of a customs inspection constitutes an alleged infringement of the warehousing procedure justifying the application of excise duty at the rate fixed for gas oil – a fuel whose excise duty is more than 21 times higher than the excise duty on heating oil, are contrary to the principle of proportionality and to Article 2(3), Article 5 and Article 21(1) of Directive 2003/96? Are national provisions and practices, according to which VAT is charged on additional amounts determined by the tax authority by way of excise duty on gas oil as a penalty for non-compliance with the customs supervision arrangements of the taxable person, as a result of the taxable person reintroducing into the warehouse energy products of the heating oil type, on which excise duty had already been paid, and which have been refused by customers and remain intact and in storage until a new buyer is identified, contrary to the principle of proportionality, the principle of neutrality of VAT and Articles 2, 250 and 273 of the VAT Directive?
Opinion – C-741/22 Casino de Spa and Others
Topics – online lotteries – VAT exemption – public establishment compared to private operators
A Belgian referral asking, inter alia, whether Article 135(1)(i) of the VAT Directive and the principle of neutrality are to be interpreted as precluding a Member State from using different treatment for online lotteries offered by Loterie Nationale (the Belgian national lottery), a public establishment, which are exempt from VAT, and other online games of chance offered by private operators, which are subject to VAT, assuming that they are similar supplies?
Opinion – C-60/23 Digital Charging Solutions GmbH
Topics – electric vehicles, goods or services, chain of transactions
A Swedish referral asking whether the supply to the user of an electric vehicle, consisting of the charging of the vehicle at a charging point, constitutes a supply of goods under Articles 14(1) and 15(1) of the VAT Directive? If the answer to Question 1 is in the affirmative, is such a supply then to be deemed to be present at all stages of a chain of transactions which include an intermediary company, where the chain of transactions is accompanied by a contract at every stage, but only the user of the vehicle has the right to decide on matters such as quantity, time of purchase and charging location, as well as how the electricity is to be used?
Comments: Please also refer to the CJEU Judgment in C-282/22 Dyrektor Krajowej Informacji Skarbowej where it was held that electric vehicle charging points with technical support and intended access to a website and an e-wallet is a single supply of goods.
For further information, please contact Richard Norman.
Opinion – C-73/23 Chaudfontaine Loisirs
Topics – gambling – exemption for provision by electronic means – comparison to lotteries
A Belgian referral asking, inter alia, whether Article 135(1)(i) of the VAT Directive and the principle of fiscal neutrality permit a Member State to exclude from the benefit of VAT exemption, gambling which is provided electronically while gambling which is not provided electronically remains exempt from VAT? Does Article 135(1)(i) and the principle of fiscal neutrality permit a Member State to exclude from VAT exemption only gambling which is provided electronically to the exclusion of lotteries, which remain exempt from VAT whether or not they are provided electronically?
Judgment – C-207/23 Finanzamt X (and transmission d’un bien à titre gratuit)
Topics – provision of residual heat – disposal free of charge – supply subject to VAT
A German referral asking whether, where a taxable person makes heat from his company available to another taxable person for the latter’s economic operations free of charge (in this case: allocation of heat from the cogeneration plant of an electricity provider for the benefit of an agricultural company for the purpose of heating asparagus fields), is this to be regarded as an ‘application by a taxable person of goods forming part of his business assets’ in the form of a ‘disposal free of charge’ within the meaning of Article 16 of the VAT Directive? Is the answer to this question dependent on whether the taxable person receiving the heat uses it for purposes that would entitle that person to a deduction of input tax? In the case of an application of goods (within the meaning of Article 16), is the cost price within the meaning of Article 74 to be calculated solely on the basis of those costs that are subject to input tax? Does the cost price include only direct production or generation costs, or does it also include indirectly attributable costs such as financing costs?
Thursday 16 May
Opinion – C-171/23 UP CAFFE
Topics – obligation to determine liability for VAT – fraud committed through the creation of a new company
A Croatian referral asking whether EU law imposes an obligation on the national authorities and courts to determine liability for VAT (and not to refuse a claim for a refund) where the objective facts of the case indicate that VAT fraud has been committed through the creation of a new company, that is to say, by interrupting the continuity of the previous company’s taxable activity, in the case where the taxable person knew, or ought to have known, that he was participating in such an activity, and where, at the time when the chargeable event occurred, national law did not provide for such a determination of liability?
Opinion – C-184/23 Finanzamt T II
Topics – VAT Groups – Scope of VAT and deduction
A German referral asking whether a VAT Group has the effect of removing supplies of goods or services made for consideration between its members from the scope of VAT? Do supplies of goods or services made for consideration between those persons fall within the scope of VAT in any event in the case where the recipient of the supply of goods or services is not (or is only partly) entitled to deduct input tax, as there is otherwise a risk of tax loss?
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New Referrals
- C-72/24 Keladis I – A Greek referral concerning values used to determine the customs value of imported goods. The questions referred include – Are the statistical values referred to as ‘threshold values’/‘fair prices’ available to the national customs authorities through their respective electronic systems? Do they meet the requirement of accessibility for all economic operators and do they contain solely aggregated data, as defined in Regulations Nos 471/2009 and 113/2010 on Community statistics relating to external trade with non-Member States, as in force at the relevant time? In the context of ex post controls in which it is not possible to physically check the imported goods, may those statistical values be used by the national customs authorities solely in order to substantiate their reasonable doubts as to whether the value declared in the declarations represents the transaction value, that is to say, the amount actually paid or payable for those goods, or may they also be used to determine the customs value of the goods? Is the use of those statistical values to determine the customs value of certain imported goods, which is equivalent to the application of minimum values, consistent with the obligations arising under the World Trade Organization International Agreement on the Determination of Customs Valuation? Is the reservation in favour of the principles and general provisions of the aforementioned International Agreement valid only where that method is applied, or does it govern all the alternative methods for determining the customs value? Finally, irrespective of the preceding questions, are the provisions in the Greek legislation concerning the determination of the persons liable for payment of import VAT sufficiently clear, pursuant to the requirements of EU law, in so far as they designate the ‘deemed owner of the imported goods’ as the person liable?
- C-121/24 – Vaniz – A Bulgarian referral asking whether Articles 44 and 205 of the VAT Directive, and the principles of transparency and proportionality of liability, permit the initiation, after the principal debtor has ceased to exist as a legal person, of a procedure intended to establish a person’s joint and several liability to pay VAT and the extent of such joint and several liability? Do they, following the removal of the debtor from the commercial register without a legal successor assuming that debtor’s rights and obligations, allow the existence of a registered claim against that debtor, for which a third party is liable a posteriori (knowledge based solely on experience or personal observation)?
- C-125/24 Palmstråle – A Swedish referral asking whether Article 143(1)(e) of the VAT Directive and Articles 86(6) and 203 of the Union Customs Code should be interpreted as meaning that both the substantive and the procedural conditions laid down in Article 203 must be fulfilled in order for relief from import duty – and thus exemption from VAT – to be granted on re-importation where a customs debt under Article 79 of the Union Customs Code has been incurred through non-compliance with the presentation obligation laid down in Article 139(1) of the Union Customs Code?
Upper Tribunal
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Marshmallow product is not ‘confectionery’ and qualifies as zero-rated
Topics – zero-rating – food items – confectionery
HMRC v Innovative Bites Limited
The Upper Tribunal (UT) has released its decision in this case concerning the VAT treatment of a food product called ‘Mega Marshmallows’.
Supplies of food of a kind used for human consumption are zero-rated for VAT, pursuant to Group 1, Schedule 8, VATA94. However, zero-rating does not apply to certain ‘excepted items’. Excepted Item 2 refers to confectionery.
Innovative Bites Limited (IBL) is a wholesaler of American sweets and treats and sells, inter alia, an oversized marshmallow which was originally imported from the United States. It is now produced and imported from Belgium. The marshmallows are broadly cylindrical in shape, approximately 5cm in height with a diameter of 3.5 – 4.5 cm. In comparison, regular marshmallows are also cylindrical, 2cm in height with a diameter of 2.5cm. The size of the marshmallows means that they are more easily and more effectively roasted on a skewer over an open fire or flame.
The marshmallow’s packaging includes the words “made to a delicious American recipe” and “perfect for roasting”. The packaging also provides instructions for roasting the marshmallows.
IBL is a wholesaler, and sells the marshmallows to UK retailers including Asda, Morrisons, Iceland and The Range. IBL also sells a large number of other mallow products which are held out for snacking, and which are standard-rated.
At the First-tier Tribunal (FTT), IBL asserted that the ‘Mega Marshmallows’ are intended to be roasted over a campfire or barbecue and then eaten or used as an ingredient in what is called a ‘s’more’ – a traditional American night-time campfire treat, consisting of a roasted marshmallow and a layer of chocolate between two digestive biscuits. IBL considers that the product would not usually be consumed as a snack without being roasted. In brief, it is intended to be roasted before being eaten, or then used as an ingredient in preparing a s’more. As such, it does not fall within the term confectionery and should properly be considered a supply of food and zero-rated.
The FTT allowed IBL’s appeal against HMRC’s decision that supplies of ‘Mega Marshmallows’ are standard rated supplies of confectionery pursuant to Excepted Item 2. The conclusion reached by the FTT was that Mega Marshmallows are not confectionery and that the supply is therefore zero-rated. The conclusion was based on the findings that Mega Marshmallows are sold and purchased as a product specifically for roasting. The FTT considered, inter alia, the marketing, the packaging, the size of the product, the positioning in supermarkets and the seasonal fluctuation in sales when reaching its findings.
The primary issue to be decided by the UT is whether or not Mega Marshmallows fall within Excepted Item 2, which covers confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance. Note 5 provides that for the purposes of Item 2, ‘confectionery’ includes chocolates, sweets and biscuits; drained, glacé or crystallized fruits; and any item of sweetened prepared food which is normally eaten with the fingers.
HMRC argues that Note 5 is a deeming provision, if an item falls within a description in Note 5 it is automatically within the ambit of Item 2 and that is the end of the matter – the item is deemed to be confectionery. Referring to WM Morrison Supermarkets plc v HMRC it is only if an item does not fall within the description in Note 5 that a multi-factorial assessment is required to determine whether it falls within Excepted Item 2.
IBL disagrees, asserting that Note 5 is not a deeming provision in the sense that if a product falls within it at first glance, then the product must be deemed to be confectionery. Instead, it enlarges the definition of confectionery, which the court must consider in a multi-factorial assessment.
Considering firstly, whether Note 5 is a deeming provision, the UT noted that the language used is not indicative of a deeming provision – it does not use words such as ‘treated as’ or ‘is taken to be’. Note 5 simply states that confectionery ‘includes’ followed by a list of items/descriptions. The UT considered that the words used in Note 5 do not create a legal fiction, there is a distinction between provisions that serve to clarify to avoid potential doubt (one aspect of an ‘inclusive definition’) and provisions that ‘treat’ something as if it were something that in reality it is not.
With regard to the correct approach to construing Note 5 and Item 2, the UT found HMRC’s arguments to be confusing, with no clear indication of when a multi-factorial assessment is appropriate. It is IBL’s case that such an assessment is always required.
The UT considered that classification of food products is fact specific and that depending on the facts, a multi-factorial assessment may be required in order to classify the product, whether that is in relation to construing Note 5 or Item 2. In construing Note 5, a Tribunal should commence with considering whether the product at issue falls within any of the descriptions in Note 5. The UT considered that there may be no need for a multi-factorial assessment if a product can be readily classified as satisfying a description in Note 5, e.g., a packet of sweets or a box of milk chocolates. Where the answer is not readily ascertainable a multi-factorial assessment might simply involve consideration of very basic factors and need not involve overly technical or expert evidence. In other cases, a more extensive multi-factorial assessment may be required.
Considering whether the FTT erred in misapplying Note 5, the UT found no error of law in the FTT’s approach, or in its identification of the issue as to whether the term confectionery includes an item intended to be subject to another cooking process before being eaten. There was no material error of law in the FTT’s analysis and weighing of the relevant factors and the conclusion reached was one that was open to it on the facts.
Considering whether the FTT erred in law and in fact by placing undue weight on, inter alia, the marketing of the Mega Marshmallows, the UT disagreed that marketing is only a factor to be considered where there is evidence that consumers used Mega Marshmallows for the marketed purpose. It is potentially relevant in all cases. In this case there was a ‘basket’ of evidence from which the FTT drew inferences as to how consumers used the product. There was no material error of law in the FTT’s analysis of the evidence and the weight it afforded to the evidence.
Dismissing the appeal, the UT held that there was no error of law in the FTT’s decision.
Comments: Businesses selling similar products, and those which arguably require an additional process to be undertaken before consumption, should consider the VAT liability applied and whether this decision presents an opportunity to reclassify the goods from standard-rated to zero-rated. The judgment may also give scope for reviewing whether certain products fall within the definition of confectionery. In particular, and following on from the judgment of the Upper Tribunal in Morrisons, there may be foods that fall within the definition of Note 5 but are not confectionery when considered from a multi-factorial approach. This may be more likely, the healthier the food.
For further information please contact Andy Jones.
HMRC Material
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Revenue and Customs Brief 4 (2024): Interpretation of VAT and excise law from 1 January 2024
This Brief explains how VAT and excise legislation should be interpreted in light of:
- The Retained EU Law (Revocation and Reform) Act 2023
- The bespoke solution introduced for VAT and excise in Finance Act 2024
Both came into effect on 1 January 2024.
The Retained EU Law (Revocation and Reform) Act removes the supremacy of EU law. However, with the aim of retaining stability, when it was introduced the Government advised that a bespoke solution would be introduced for the VAT and excise regimes. The bespoke solution, section 28, Finance Act 2024, outlines how VAT and excise legislation should be interpreted in light of the Retained EU Law (Revocation and Reform) Act.
HMRC policy for VAT and excise is unchanged. Section 28, Finance Act 2024 means that UK VAT and excise legislation will continue to be interpreted in the same way as it was before 1 January 2024. Drawing on rights and principles that have always applied for interpreting UK law, including the principle of abuse. This means, the principle of consistent interpretation (sometimes known as the ‘Marleasing’ principle) continues to apply in interpreting VAT and excise legislation.
However, businesses will no longer be able to rely on the ‘direct effect’ of EU law. It will no longer be possible for any part of UK legislation to be quashed or disapplied on the basis that it’s incompatible with EU law, as UK law is now supreme. This does not lead to any changes in HMRC policy.
For further information please contact Mitchell Moss.
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Manage your import duties and VAT accounts
This Guidance provides details regarding the service used to obtain import VAT statements and certificates, manage your payment accounts, and manage or view authorities.
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Update – Use the New Computerised Transit System
This Guidance explains how to access and use the New Computerised Transit System (NCTS) to submit electronic transit declarations. Information about the New Computerised Transit System Phase 5 web portal test service has been added.
Please also refer to Access trader testing for the New Computerised Transit System Phase 5.
For further information regarding global trade please contact Gerard Koevoets.
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Update – VAT refunds using the DIY housebuilder scheme
This Collection brings together guidance regarding reclaiming VAT using the DIY housebuilder scheme for new builds, conversions and charitable buildings. Information about filling in a schedule of invoices before starting a self-build project has been added.
Please also refer to Authorise a tax agent (64-8).
EY Global Tax Alerts
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France
The tax authorities have published a ruling on the VAT treatment applicable to non-fungible tokens (NFTs), concluding that NFTs are not subject to any specific VAT scheme and that general VAT rules apply.
Where an NFT is used as a certificate of ownership for tangible or intangible property, a transaction involving the transfer of the NFT does not relate to the token itself, but to the good or service it represents. Therefore, it is necessary to examine each situation on a case-by-case basis and apply the ordinary VAT rules that would have been implemented if the goods or services had been delivered or supplied without the use of an NFT.
The tax ruling also details the VAT treatment of three specific transactions carried out using NFTs: (1) creation and sale of digital collectible cards associated with NFTs; (2) creation and sale of digital graphic works associated with NFTs; and (3) financing of a video game in the process of being created through the issuance of NFTs.
For additional information on NFTs and VAT, see EY Global Tax Alert: EU VAT Committee publishes working paper on non-fungible tokens.
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British Columbia
The 2024-25 budget announced retroactive amendments to the Provincial Sales Tax (PST) Act that seek to expand the definition of software and the taxability of the "use" of software in British Columbia (BC). The proposed amendments are consistent with the Government's current administrative position with respect to the interpretation of the term "software," which emanates primarily in response to a 2023 Supreme Court decision.
Provided the Bill is passed, the amendments to the definition of "software" and "use" of software will be effective as of 1 April 2013. Although clearly retroactive, it remains the Government's position, as stated in Information Notice 2023-005, that the legislative amendments only serve to provide "certainty" and support for how PST was administered prior to the court decision.
European Commission
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VAT Committee – 124th meeting
The VAT Committee was set up under Article 398 of the VAT Directive to promote the uniform application of the provisions of the Directive.
Following its latest meeting, it has released the following Working Papers (WP):
- Agenda
- WP 0924 – Commission – Centralised Clearance – Commission services opinion on the way forward for the declaration and payment of import VAT. The delegations are requested to take note of the updated information on the evolution of the UCC CCI electronic system and to check whether the information for their Member State in Annex 2 is still correct. The delegations are asked to discuss how exchanges of information, as described in sections 3.2 and 3.3, are taking place? How are Member States preparing for Phase 1 and is there anything that should be clarified at Commission level?
- WP 1085 German consultation on small Enterprises operating under public law – The German authorities have informed the Commission services that, in accordance with Article 281 of the VAT Directive , they wish to consult the VAT Committee on the introduction of a simplification measure for the deduction of input tax by public bodies with a limited business activity.
Delegations are asked to express their opinion on the Commission services’ opinion.
- WP 1084 – Danish Question on School and University Education – Denmark wishes to consult the VAT Committee on the application of the VAT exemption for school and university education in the VAT Directive.
Delegations are asked to express their opinion on the Commission services’ opinion.
- WP 1083 – Slovenian consultation on VAT grouping – The Slovenian authorities wish to consult the VAT Committee on the introduction of the VAT grouping scheme into their national legislation, in accordance with Article 11 of the VAT Directive. The Slovenian provisions on VAT groups will enter into force on 1 January 2025 and the scheme will be effective as from 1 January 2026.
Delegations are asked to express their opinion on the issues raised.
- WP 1082 – Slovakian question on activities of bodies governed by public law – In their submission to the VAT Committee , the Slovak authorities raised several questions concerning the application of the VAT Directive – Article 2(1), Article 9(1) and Article 13(1) – as far as the activities carried out by ‘public bodies’ are concerned. The questions raised concern the interpretation of the terms ‘economic activity’, ‘activities or transactions in which they engage as public authorities’ and ‘significant distortions of competition’ in relation to public bodies.
Delegations are asked to express their opinion on the Commission services’ opinion.
- WP 1080 – Danish question on Crypto Art – Questions regarding the VAT treatment of various digital services related to computer games and works of crypto art have been raised to the VAT Committee by Denmark. The submission of these questions comes after the VAT Committee had the occasion to discuss various issues involving non-fungible tokens. The VAT Committee at its last meeting discussed the VAT treatment of sales of skins in the secondary market which leaves the question of works of crypto art to be dealt with.
The delegations are requested to give their opinion on the issues raised and, in particular on the application to works of crypto art of: the VAT exemption for financial services under Article 135(1)(e) of the VAT Directive; the margin scheme under Article 311(1)(2) of the VAT Directive; a VAT reduced rate under Article 103 of the VAT Directive; and the exemption for supplies of services by artists under Article 371 of the VAT Directive.
- WP 1073 – Commission – New Legislation – SME Scheme – The date of implementation of the changes introduced by Council Directive (EU) 2020/2851 to the special scheme for small enterprises is fast approaching. The VAT Committee has already discussed certain aspects of these changes in response to questions put forward by individual Member States. That has resulted in various guidelines being agreed. Alongside this, work is ongoing to assist Member States in putting in place the IT systems needed for the operation of the updated scheme. In view of questions raised in that context, the Commission services believe it may be useful to look at the entire scheme as updated and its future functioning in view of addressing any issues there may still remain to be addressed.
Delegations are asked to express their opinion on the Commission services’ opinion.
- Information Paper – Recent CJEU judgments
- Information Paper – Commission – Options
- Agenda
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VAT Expert Group – 35th Meeting
The European Commission has made available the Minutes from the VAT Expert Group (VEG) meeting held on 18 March 2024 together with Presentation – VEG reflection on the future of VAT.
The Group discussions included:
- VEG 114: Updated SME Explanatory Notes
- VEG 115: SME Guide
- Next steps in the Implementation of the new rules on the SME scheme
- VAT after ViDA – Exchange of views
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Group on the Future of VAT – Agenda of the 44th Meeting
The European Commission has published the agenda from the 44th meeting of the Group on the Future of VAT, which includes:
- Implementation of the new Special scheme for Small Enterprises (SMEs)
- VAT in the Digital Age (ViDA) – Single VAT Registration – Implementation – First analysis
- ViDA package: State of play of the negotiation process in Council
- Customs reform, including the VAT proposal (COM(2023) 262 final)
Council of the European Union
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Proposal for an implementing decision authorising Romania to continue to restrict the right to deduct the input VAT on expenditure related to motor vehicles not used exclusively for business purposes
The Council of the European Union has published a proposal for a Council implementing decision, following a request from Romania, for an extension of the derogation from Article 168 and Article 26(1)(a) of the VAT Directive in order to continue to restrict the right to deduct the input VAT on expenditure related to motor vehicles not used exclusively for business purposes, and to relieve taxable persons from having to treat the private use of such vehicles as a supply of services for consideration.
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Proposal for an implementing decision authorising the Republic of Latvia to continue to apply a special measure to exempt from VAT taxable persons whose annual turnover is below an agreed threshold and to increase the threshold to EUR 50,000
The Council of the European Union has published a proposal for a Council implementing decision, following a request from the Republic of Latvia, to continue to apply a special measure derogating from Article 287 of the VAT Directive to exempt from VAT taxable persons whose annual turnover is no higher than EUR 50,000 (previously EUR 40,000).
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