The Court of Justice of the EU (CJEU) has given what may prove to be the last binding decision on the UK regarding a case the UK courts have referred… read more: click here
The wider application of Sch 10 ‘clawback’ provisions to lease back financing deals.
As you read this piece the UK may already have left the EU, though it hadn’t at the time of writing. The accepted position is that all CJEU decisions pre-dating that departure date become binding decisions at Supreme Court level. We therefore need to pay heed to the dates of decisions. The CJEU’s decision in Mydibel (Case C-201/18) makes the cut, so to speak, and would have done so by two days even had the UK left as planned on 29 March. It is therefore binding precedent.
And it has something direct to tell us… read more here
When Advocate General Kokott gave an Opinion concerning VAT recovery on costs arising from a taxable property development, many of us waited to see if the dog she intended to unleash would bark, or even bite. It turns out that it has yapped irritatingly, but no more.
As I outlined in my comment in Tax Journal (link) AG Kokott’s views were not in line with UK/HMRC policy, and seemed divorced from commercial considerations. She seemed to suggest that costs a developer incurs on enabling works to a municipal authority’s assets (in this case, improving the water supply) are not costs that are proper to the development for the purpose of input tax recovery, simply because the developer’s expenditure does not enhance an asset that the developer owns. She ignored the enhancement achieved to the asset that the developer does own, which is only made operational by enhancing the municipal asset.
She also suggested that the Court of Justice decision in Sveda, in 2015, was related to this question (which is very hard to comprehend) and that it was widely recognised that the Court needed to clarify that decision. We still do not know where she got that view from. However, the possibility of unleashing a dog that would cause the Court to row back on Sveda (which confirmed that VAT on cost components of both a taxable supply and free use can in many cases be fully recovered), or to ‘clarify’ its application, was not a particularly welcome one.
I predicted in my article that the Court would reject the Advocate General’s analysis, and it has. I wondered whether the Court would rise to her bait and review the scope of Sveda. The Court’s decision mentions Sveda, but its comments do not appear to add anything to the original text of the actual decision.
So, given that her advice has been so roundly rejected, why do I think the dog has yapped a little? I think that there is some cause for concern in the rider to the general agreement by the Court that the developer could reclaim VAT incurred on costs which enhanced the municipal asset in a manner which also enhanced its own. This was (to quote verbatim): “That being said, it is also for the referring court to examine whether that service was limited to that which was necessary to ensure the connection of those buildings to the pump station at issue in the main proceedings or whether that service went beyond that which was necessary for that purpose”.
I have highlighted the relevant word – necessary. It is clear that the Court was referring to the possibility of more being done for the municipal authority than was strictly needed for the development per se. Anything more could be regarded as third party consideration for services rendered effectively to the municipal authority. The contribution to that cost would be regarded as a ‘gift’ to the municipal authority (though heaven forbid anyone would take a step further, and view it as a bribe…). It is clear from the facts of the case that the Court did not suspect anything of that sort had arisen in the Iberdrola example, and this part of their decision is essentially hypothetical to that specific case. But it is still part of the decision, and is binding on member states. So, we now have to consider not merely the reasons as to why a business incurs costs relating to third party assets, but also the necessity of it doing so. Where does that leave works that enhance local facilities as part of a development, but where the connection is weaker than in the Iberdrola example? Will HMRC start to argue that there is no necessity in the works performed, and that desirability is not enough?
It reminds me of the Folkestone Harbour tribunal decision where the choice made by the tax payer to build a fountain feature on municipal land as a beacon to draw people to the development was accepted as a genuine commercial cost of the development with allowable input tax. Would that decision be the same in the light of this new Court decision? I am not convinced it would. There may be more to this word – ‘necessary’ than we might like to see.
The Court’s decision in Iberdrola is here
Graham Elliott – 15 September 2017
Charity Tax Brass Tacks
If you need to keep abreast of the key practical issues relating to charity tax, this practical, no-nonsense newsletter is for you.
Gift aid declaration
HMRC has just published its revised gift aid declaration wording which supersedes the version which has applied for a number of years. The idea behind the revision was to shorten the message and make it clearer in its impact. The declaration completely removes pointless references to VAT and Council Tax. However, it includes a much stronger message concerning the need for the donor to pay sufficient income tax or capital gains tax in order to match all of the gift aid claims of the charities.
A message to the effect that enough tax must be payable by the donor has always been required on the gift aid declaration, but this has now been supplemented by a direct message to the donor that he is liable to pay any shortfall of tax between what he pays and what the charity claims. This legal obligation has always been present, but most people have been unaware of it including many tax inspectors and charities. This has arguably led to a somewhat casual view of the position by donors, some of whom appear willing to sign gift aid declaration forms whether or not they will pay enough tax. The form, however, still does not say to whom the donor is liable for the tax. The answer is that he is liable to HMRC, and not to the charity.
The new wording is available at this link: https://www.gov.uk/guidance/gift-aid-declarations-claiming-tax-back-on-donations
We are told that the words will become compulsory with effect from 6 April 2016. Up until then the old wording can be used. Any gift aid declarations signed before 6 April 2016 with the old words will continue to have force. However, this will not change the underlying legal position, that the donor is liable for any shortfall.
Charities will want to consider how they position this change. On the one hand they could use it as an opportunity to draw specific attention to the issue in order to save donors from the potential embarrassment of having to pay tax (which they have not earned) to HMRC. On the other hand they may decide that this will have a negative impact on donor morale, and cause even those donors who pay enough tax to be concerned about the ramifications and to refuse to sign a gift aid declaration.
This is particularly difficult when dealing with ‘enduring gift aid declarations’. These are declarations which cover future donations as well as current and past ones. People cannot be sure whether they will pay enough tax in the future. But they are supposed to write to the charity to cancel any declaration which is no longer valid owing to their failure to pay sufficient tax. The difficulty is that most people do not recall the gift aid declarations they have signed. In particular, if they have no reason to claim tax on their own tax return (only relevant to people who pay above the basic rate) it is likely they have no record or recollection of the declarations they have signed. This is a significant potential burden on donors which may cause them to fret about any involvement in gift aid.
VAT victory at European Court
The case of Sveda UAB could well go down in history as one of the most important with regard to the ability to reclaim VAT on expenditure.
The curious thing about this case, which related to a commercial company, was that it involved their spending money on something that was provided free of charge to the public. In their case this was a decorative woodland pathway which led to their shop. The other interesting fact was that 90% of the cost was covered by government grant. The net result was that many potential customers used the decorative pathway without bothering to enter the shop. However, the intention was that certain of those who took this delightful walk would be tempted to buy something at the end of it.
The UK government supported the stance of the national government involved (Lithuania) in saying that no VAT should be reclaimed because the facility was for free of charge use, and not connected with the making of taxable supplies. Alternatively, it said that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.
The Court of Justice rejected both of these arguments. Whilst the path could be used free of charge, the purpose from the company’s standpoint was to generate more traffic towards its shop, and thus generate more taxable sales. This meant that although the cost had a link with the provision of a free facility, it also had a link with the making of taxable supplies. There were no exempt supplies involved, and this was thus sufficient for full VAT recovery. There was no suggestion that the company could only reclaim the percentage of the cost it met, and this supports our general view that grant funding does not, in itself, mean that VAT cannot be claimed (although in certain cases, where an activity is fully grant funded, that would be the result).
What does this mean for charities?
We have to interpret this with caution, since the case concerns a commercial company. Charities usually have purposes that go beyond creating taxable transactions, whereas a commercial company will exist only to sell goods and services. But, in theory charities ought not to be treated fundamentally differently just because they have a duality of purpose. For this reason the case may very well be helpful in creating circumstances where a charity can reclaim VAT where the costs are used for purposes which involve making taxable supplies and involve the free provision of services. However, the case does not tell us how far this principle could be taken. We have to be wary of assuming that it will work where a fundamentally free facility is provided by a charity, in circumstances where a certain amount of taxable spin-off activity arises. This may put disproportionate emphasis on the minor taxable supplies, thus bypassing the fundamental non-business purpose in the costs. But that does not mean that a case which involves a more even-handed mix of taxable and non-business activities would fail to meet this particular test. We have yet to test the boundaries of this new principle, and it will be interesting to see how this develops in the future.