Indirect Tax Update 08/2017

1. © 2017 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
Eager anticipation turned into
disappointment this week when
the UK’s Supreme Court decided
to refer the VWFS case to the
Court of Justice of the European
Union for a preliminary ruling.
The issue is whether VAT
incurred on overheads is wholly
attributable to a VAT exempt
activity or whether, as the
taxpayer contends, the VAT
should be apportioned between
taxable sales and exempt sales
under its partial exemption
special method.
The Advocate General has also
issued a couple of important
opinions this week. The first may
present an opportunity for
importers to submit claims for
duty refunds and the second adds
more confusion to the cost
sharing groups debate. The
opinion in the second case is at
odds with the opinion issued by
Advocate General Kokott a few
weeks ago in the DNB Banka /
Aviva cases.
07 April 2017
Supreme Court
Under the VAT Directive, generally speaking, a business which makes only
taxable supplies is entitled to reclaim all of the input VAT it incurs. By
contrast, a business which only makes exempt supplies is not entitled to
reclaim any input VAT at all. Where a business makes both taxable and
exempt supplies, he is permitted to reclaim a proportion of input VAT
which reflects the extent of his taxable supplies. VAT incurred on
overheads of a business should also be apportioned to the same extent.
The issue in the VWFS case is whether the taxpayer should apportion the
VAT incurred on such overheads. The matter is complicated by the fact
that VWFS (like many finance companies) makes taxable supplies of cars at
cost – ie it makes no profit from the sale of the car and makes its profit
from the supply of finance to the customer. HMRC contends that, in such
circumstances the company’s overheads are, thus, only consumed within the
exempt supply of finance and, as a result, VWFS is not entitled to
apportion the overhead input VAT.
VWFS argue that, in essence, once the costs have been identified as
overheads, the Directive stipulates that the VAT must be apportioned.
There is, clearly, a taxable supply of the car (albeit at cost) and VWFS
argues that some overheads must be consumed in the making of the taxable
supply (ie the cars don’t sell themselves).
The Supreme Court has decided that, in order to give a judgment, it needs
to seek clarification from the Court of Justice on the interpretation of EU
law. Specifically, whether EU law permits a taxpayer to deduct VAT on
overheads where those costs are only incorporated into the price of its
exempt supplies.
It seems clear to us that, once a cost has been identified as an
overhead of a business, apportionment between taxable supplies and
exempt supplies is an inevitable consequence under EU VAT law.
HMRC’s contention that the overhead costs must be incorporated
into the price of the sale of the car is a novel argument but is one
which we consider is incorrect. The CJEU will provide the answer in
due course but it may now take another 18 months or so for the final
outcome.
Issue08/2017
Supreme Court refers VWFS to CJEU
Indirect Tax Update

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GRT100456
X BV – Case C-661/15
Court of Justice – Advocate General’s opinion
The Advocate General (AG) has issued an opinion in this Dutch referral to the CJEU. The case
concerns the import value of goods. The AG considers that European law regulations which impose
a 12 month time limit for making post entry amendments to import declarations is actually invalid.
As such, the taxpayer is entitled to rely on the longer three-year period set out in the Customs Code.
In this case, the taxpayer imported cars from Japan. The issue was whether defects to the cars
identified by the manufacturer and subsequently rectified under a contractual warranty meant that the
importer (X BV) was entitled to reduce the import value of the cars. The Dutch customs argued that
the fault was not identified at the point of entry into free circulation and that, as such, no post entry
amendment could be made. In other cases, where the fault had been identified, the post entry
amendment had been made outside the statutory 12 month limit.
On the first point, the AG considers that where the manufacturer identifies a risk that may develop
and affect the safety of the vehicle, the fault must be deemed to have been identified at the point of
entry. On the second point, the AG considers that the implementing regulation which sets a 12
month limit for post entry amendments is contrary to the primary rule (of three years) set out in the
Customs code. As such, X BV was entitled to make post entry amendments to the customs value
going back three years rather than just one.
Comment
Assuming that the full
court agrees with the AG
that the 12 month time
limit is invalid, importers
involved with the
importation of goods that
are later identified as
faulty and are repaired
under a warranty may be
entitled to a customs duty
refund going back three
years.
Importers may also be
entitled to a refund if they
have not made post entry
amendments because
faults were not identified
at the time of
importation.
Cost sharing groups – again!
Comment
This AG’s opinion
resolves very little other
than it confirms that
Germany’s application
of the cost sharing
group rules is too
narrow.
On the wider point of
whether banks and
insurers etc are entitled
to operate a cost
sharing group, we now
have conflicting AG’s
opinions. We will need
to wait for the full
court’s judgments
before we can be
certain of the outcome.
Court of Justice – Advocate General’s opinion
The issue of VAT and cost sharing groups is a topical one. A few weeks ago, AG Kokott issued an
opinion that, in her view, the ability to form a cost sharing group was restricted to businesses that
only made exempt supplies falling within Article 132 of the VAT Directive. According to the AG,
businesses like banks and insurance companies that make exempt supplies falling within Article 135
of the VAT Directive are not entitled to form cost sharing groups as their outputs do not fall within
the category of “supplies in the public interest”.
In this fresh case (Commission v Germany), the Commission has taken infraction proceedings
against Germany because under German VAT law, cost sharing groups are only available to health
professionals and hospitals etc. The AG in this case agrees with the Commission and has confirmed
that Germany’s application to the health professionals etc is too narrow. However, AG Wathelet has
also indicated in his opinion that he considers that banks and insurance companies may form cost
sharing groups. It seems that he considers that it is the exemption for cost sharing groups itself
which is “in the public interest” as the purpose of the exemption is to prevent a VAT cost on
supplies between cost sharing group members. He considers that there is nothing in the Directive to
prevent banks and insurance businesses from taking advantage of that exemption.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Vinny
McCullagh
London & South East vinny.mccullagh@uk.gt.com (0)20 7383 5100