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VAT News for the Week to 9 March 2007
HMRC have issued three documents to members of the JVCC foreshadowing changes to the VAT invoicing requirements, which they propose to introduce by August 2007.
The background is that the European Commission has challenged the United Kingdom to the effect that the UK has not properly implemented aspects of the Invoicing Directive. The tone of the HMRC documents is that the UK is obliged to amend the national legislation to take account of this challenge but that it will in practice do so in a manner which causes minimum disruption to current practices. The new buzz phrases "light touch" and "the need for and length of any soft landing in respect of penalties for non-compliance" appear!
The documents are: a JVCC information paper requesting responses by 18 May 2007, a draft SI amending the VAT Regulations and a partial Regulatory Impact Assessment (see ).
The changes are:
  • invoicing numbering – reference to "an identifying number" replaced by "a sequential number based on one or more series which uniquely identifies the document"
  • section 50A Margin Scheme supplies – new requirement to show reference to the treatment in one of three ways
  • section 53 TOMS supplies – new requirement to show reference to the treatment
  • reverse charge supplies of goods and services to a person in another Member State – new requirement to show statutory basis under which UK VAT is not chargeable, either by reference to the EU Directive or the VAT Act, or simply "any indication that the supply is one where the customer is liable to pay the tax" (note that this requirement extends to the intra-EU supply of any goods or services which would be exempt if supplied domestically)
  • domestic reverse charge supplies, ie the investment gold scheme and, if it ever happens, the "MTIC goods" accounting scheme – new requirement to show statutory basis under which the supplier is not charging tax or simply "any indication that the supply is one where the customer is liable to pay the tax"
  • "Article 28 simplification invoices" and "section 14(2) invoices" – confirmation of requirement to show the statutory basis, either by reference to the EU Directive or the VAT Act, or simply "any other indication".
COMMENT: Whilst it may be good PR for HMRC to peddle the "we are doing our bit to protect business from overburdensome and unnecessary EU requirements" line and whilst no doubt this fits into the reducing burdens on business programme, there must be some concern if HMRC are hinting that a light touch will be applied and that the finer details will not be vigorously enforced, ie as we are talking about systems matters, businesses must be able to operate in an environment of some certainty.
The Tribunal Centre has released this decision early, presumably on the basis that it is of particular interest.
The decision concerns the effect, in terms of reducing the taxable value of the supply of a car in an HP deal, of a particular structure, named the "Ford Bonus Retail Program", which Ford proposes to introduce if it does indeed reduce the taxable value.
In order to get the matter before the Tribunal, it was necessary to create what is termed in the decision a "pilot transaction" and a single transaction was set up, with an employee of Ford Credit Europe Bank plc as the customer, with a nominal amount of tax involved.
The structure is described as follows in the decision:
The Bonus Scheme
(1) The essence of the Bonus Scheme is that:
(a) Ford sells the car to the Dealer;
(b) the Dealer sells the car to FCE;
(c) the Customer enters into a standard HP Agreement with FCE. The Customer is then entitled to the Bonus.
(2) Customers who enter into an HP Agreement to finance the purchase of the car are entitled to a Ford Bonus which is a series of payments by Ford to FCE which reduces the amount payable each month to FCE by the customer, provided that the customer complies with the conditions.
The stages
(4) The stages involved are as follows:
i. the car is made;
ii. the car is advertised when there is a promotion;
iii. the Customer makes inquiries about the cars;
iv. the Customer is given information about that car and its costs including if the car is bought on HP Ford will make the Ford Bonus available;
v. the Customer decides to buy the car on HP;
vi. the Customer enters into the standard FCE HP Agreement;
vii. the Customer is provided with the Bonus Certificate;
viii. Ford makes payments to FCE on behalf of the Customer that are accepted by FCE as reducing the amount payable by the Customer.
ix. An Agreement between Ford and FCE provided for this.
Ford and FCE are members of the Ford VAT group. The documentation expressly provides that the payments by Ford to FCE give rise to a reduction in the capital sum due under the HP agreement.
Counsel for Ford argued that, based on Elida Gibbs, the effect of the payments by Ford to FCE is to reduce the value of the taxable supply of the car within the HP agreement, ie the VAT valuation should not exceed the amount that the final consumer pays. The documentation characterises the payments as giving rise to a reduction in the capital sum due under the HP agreement and there is no reason or case law which requires the recharacterisation of the payment for VAT purposes.
Counsel for HMRC argued that the "real deal" here was one which the customer would see as an interest-free deal rather than a reduction in the capital payable. Accordingly, based on Primback, there is no reduction in the value of the taxable supply within the HP agreement and the payment from Ford to FCE is third-party payment of the interest.
Chairman (Shipwright) concludes:
"The transactions in question here involve the sale of goods including the HP transaction (see paragraph 1 Schedule 4 VATA). The goods in question are the car in all the transactions under consideration (ie the sale and the HP transaction). Thus Elida Gibbs and not Primback applies here. The principal in the HP transaction which is the amount payable by the final consumer is accordingly reduced. The amount on which the final consumer pays VAT is reduced and accordingly the amount on which vat is applied between Ford and the dealer. The Dealer and FCE cannot exceed the VAT chargeable on consideration payable by the final consumer ... as reduced by the Ford bonus."
This case, another one involving "test transactions", three in this case, to determine the effectiveness of a particular structure, concerns a structure designed by Nissan's then customs duty manager. In short, the structure sought to create a situation contractually that the UK customer purchased the car from the Nissan UK distribution company before entry into the European Community, ie whilst still on the high seas, and the UK customer made the import entry, albeit appointing the Nissan UK distribution company to handle all formalities on his behalf. The UK dealers are thus excluded from the chain of supply. The intention was to crystalise a VAT charge within the structure by reference to an import VAT valuation based on the "first sale" value under the Customs Code rather than by reference to the invoiced value from the UK dealer to the customer.
The usual structure for the importation of cars into the UK is thus. The cars are manufactured by Japanese company Nissan Motors Ltd (NML). The cars are sold by NML to a French company acting as European distribution company Nissan Europe SAS (NESAS). The cars are then sold by NESAS to a UK company acting as UK distribution company Nissan Motors GB Ltd (NMGB). NMGB is declared as the importer into the UK. The cars are entered into the customs warehouse of another UK company Nissan Motor Manufacturing (UK) Ltd (NMUK). The cars are then released from the customs warehouse to the UK dealers for onward sale to UK customers. Under the Customs Code, the duty valuation is the price at which the car is sold from NML to NESAS, being the sale of a car "sold for export to the customs territory of the Community". HMRC accept that this method of handling importations is perfectly proper and does not involve any value-shifting. In this structure, the VAT "washes through" the input credit mechanism until "sticking" tax is charged on the sale from the dealer to the final consumer.
In October 2004 Customs issued a post-clearance demand, relating to the three test transactions, to NMGB for £7,268, comprising customs duty of £2,485 and VAT of £4,783, on the basis that the declarations based on "first sale" values on these transactions gave rise to an undervaluation. NMUK, which was accepted as a competent party to do so, requested a review.
The primary challenge by HMRC before the Tribunal is that, whilst it is possible to sell the cars to the customers while they are still on the high seas, the structure represents an abuse of rights in that it is designed to circumvent the intention of the Sixth VAT Directive that a final consumer bears VAT on the full value of a supply made to him. As a consequence, the post-clearance demand was properly issued. HMRC also argued that, whatever the intention, the cars were imported by NMGB and not the UK customers.
The three UK customers in the test transactions were Nissan employees, all of whom had already placed orders with a local Nissan dealer for a Nissan car manufactured in Japan. After these transactions had been selected, the customers signed authorities for NMGB to act as their agents in the importation. NMGB undertook to discharge all customs duty and VAT payments under that authority. In practice NMGB prepared all the documentation, leaving the UK customers only to sign the import declarations. The cars were duly delivered to the local Nissan dealer who undertook all the usual pre-delivery checks before releasing the cars to the customers. NMGB paid the customs duty and VAT on behalf of the UK customers. In this capacity NMGB was not able to treat this VAT as its input tax. However, no VAT was due on the supply of the car to the UK customer, as this supply had taken place outside the territory of the EU.
The cost of the cars to the UK customers was exactly the same as it would have been under the normal arrangements, such that the saving of VAT accrued entirely to Nissan. It was, however, stated that, if the structure is effective, its future use would involve part of the benefit being passed to UK customers.
Chairman (Bishopp) considered three preliminary points. Where does the primary burden of proof lie? – answer: primarily on Nissan to prove that the transactions occurred as contended. Is it relevant that the three UK customers were Nissan employees? – answer: no. Were the UK customers, in signing the import declarations, "in possession of the relevant facts"? – answer: yes, a signatory would not typically be expected personally to have full knowledge of all relevant information, merely access to it.
The substantive arguments can be briefly summarised thus. Counsel for Nissan argued that this was a case of an organisation involved in the business of selling cars choosing to declare its imports of cars in a particular way prescribed in the Customs Code and exercising its right to pay duty by reference to the resultant valuation. As such the rule was being used as intended and no abuse was present. Counsel for HMRC argued that this structure was abusive because it sought to rely on one rule, the "first sale" basis of valuation, to circumvent the clear intent of Article 11 of the Sixth Directive that the taxable amount shall be everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser. Chairman (Bishopp) conducts a detailed analysis of Halifax and other cases on abuse of rights.
Chairman observes:
"There can, in my view, be no real doubt that the purpose of the scheme is to secure a tax advantage; that would be so even if [Nissan] had not conceded as much. The scheme depends on the formal application of article 29 of the Code in order to reduce the amount of VAT paid by the final consumer to an amount less than that consumer would have had to pay if the scheme were not in operation. The result is, in my view, clearly contrary to the purpose of Article 11 of the Sixth Directive. The customer has obtained the car he wanted, at the price he expected to pay, by a means which has diminished the tax due to a level below that proportionate to the price, and to the benefit of the seller. Can it be said that NMGB has demonstrated another, commercial, purpose to the scheme? In my view it cannot: it is true that it is in the business of selling cars, but the scheme does not advance that purpose. Instead, it distorts Nissan’s normal method of distributing within the UK cars it has manufactured in Japan, and it cannot be said that the scheme achieves anything apart from the tax advantage. The real substance of the transactions is that NMGB sold cars to customers in order that they could enjoy those cars in the UK; it did not sell cars on board a ship, leaving the customers, even notionally, to their own devices in what they did with those cars after their purchase."
Chairman also looks at the manner of implementation of the structure and finds that this fell some way short of achieving the intended effect. It appears that, as three transactions already in process were chosen as the test transactions and, as the minimum was done to vary the ordering arrangements, in particular those involving the dealer, the Chairman considered that Nissan had failed to create an audit trail to support the transactions as represented and had failed to create an impression that the dealer was no longer part of the chain of supply.
Chairman concludes:
"I am satisfied that, in the three individual cases with which I am concerned, NMGB did not succeed in its intention of making sales of the cars to the customers while the cars were outside Community territory, but that in reality the cars were sold by NMGB to dealer, and by dealer to the customers. But even if the cars had been sold to the customers outside Community territory, the true substance of the transaction was in each case the sale of a delivered car within the United Kingdom. In such a case, NMGB is liable to account for output tax on its full selling price. Although, as I have indicated, the post-clearance demand must, I think, be discharged, the substantive appeal is determined in the Respondents’ favour."
Chairman was clearly troubled by aspects of this case, as evidenced by the fact he says so and that ten months elapsed from hearing to decision. Unusually he adds a postscript. First, the Chairman considers a suggestion from HMRC Counsel that the "first sale" valuation was not intended for use by a private importer and rejects this as an absolute statement.
Secondly, the Chairman offers the following observation:
"That, however, was not my concern, which is the acceptance by both parties of the proposition that the first transaction value is available to the customer, if Mr Davison’s scheme operates as intended. In my view they are mistaken in that acceptance. There is, it seems to me, a logical difficulty in arguing that the sale by NMJ to NESAS (or the sale by NESAS to NMGB) is 'for' export to the Community when in fact the car is intended to be the subject of a sale on the high seas to a customer who, however notionally, is entirely at liberty to take it anywhere in the world he wishes. Even if, because it is already on a ship, he is forced to allow it to reach the UK, he is not obliged to import it, but may arrange for it to be sent elsewhere, without passing through UK customs controls. The sale 'for' export to the Community is that by NMGB, assuming the customer in fact imports the car, since only then can an intention to import the car into the Community be demonstrated. In other words, it does not seem to me that Article 147 of the Implementing Regulations can be used in respect of sales indefinitely in the past. Where, as here, there is a sale to a purchaser (NMGB) which certainly does not intend to import the goods into the Community, but whose objective is to dispose of them outside it in order to satisfy the condition on which the scheme depends, the chain is broken. If, instead, the correct view is that the sale by NMJ to NESAS is 'for' export to the Community the logical consequence matches the conclusion I have already reached, that NMGB was in fact selling a car imported into and delivered within the UK, since it necessarily implies that no other outcome was possible (and, indeed, the scheme could not accommodate to any other outcome)."
HMRC have released an updated version (dated February 2007) of Notice 701/31: "Health and care institutions" (see ). This notice contains new guidance on the use of Intense Pulse Light (IPL) Machines. This information was in Business Brief 03/06.
HMRC have published the notes of a JVCC meeting on 24 January 2007 (see ). Of interest may be: paragraph 14 – VAT registration delays; paragraph 17 – use of agent authorisation form 64-8; and paragraph 19 – proposed MTIC reverse charge (HMRC remain optimistic!).
The European Court released on 8 March 2007 the Opinion of A-G Sharpston in two cases:
C-434/05 Stichting Regionaal Opleideingen Centrum Noord-Kennemerland/West-Friesland (Horizon College) v Staatssecretaris van Financien (referral from the Netherlands Hoge Raad)
C-445/05 Werner Haderer v Finazamt Wilmersdorf (referral from the German Bundesfinanzhof).
Both cases concern the scope of exemption for education services but it is perhaps a little surprising that A-G Sharpston has rolled them into a single Opinion, as they concern different sub-paragraphs of EU law. Possible explanations are that Herr Haderer was not represented before the Court and that the A-G suggested that a consistent approach is required to the cases, as both have a common theme of whether an intermediary provider of education between the supplier and the students prejudices the exemption.
Horizon College is an educational establishment in Alkmaar which provides secondary-level and vocational education. Horizon seconds members of its teaching staff to other educational establishments to cover for temporary staff shortages. Horizon continues to meet the teachers' salaries and recharges these at cost, without profit and without VAT. The Dutch tax authorities took the view that VAT should have been charged.
The referral asks if the recharges are exempt under Article 13A(1)(i) as the supply of education, or as the supply of services closely related to education.
Paragraph 47 suggests that the Commission, supported by the Netherlands and Greek governments, takes the view that the nature of the supply is not one of education but is a supply of staff to the intermediary establishment not covered by any part of the exemption.
Horizon argued that, since teachers provide education to students whether they are employed by the establishment in which they actually teach or by another establishment which makes them available, the service of making teachers available falls within the notion of education for the purposes of Article 13A(1)(i).
A-G Sharpston concludes that the fundamental nature of the supply is one of staff rather than education.
However, she also has to consider if the supply is "a service closely related to education".
Paragraph 71 suggests that Horizon and the Commission take the view that the supply of teaching staff by one educational establishment to another is in principle a supply of a service closely related to education (which seems to contradict the paragraph 47 comment on the Commission’s view).
A-G Sharpston agrees that this view is immediately and obviously correct. However, she suggests that exemption is dependent upon a number of conditions set out in the Stichting Kinderopvang Enschede C-415/04 case:
  • the education provided by the intermediary establishment must meet the conditions for exemption pursuant to Article 13A(1)(i)
  • the supply of staff must be "essential to the transactions exempted"
  • the basic purpose must not be to obtain additional income by carrying out transactions which are in direct competition with those of commercial enterprises liable for VAT
  • there must be adherence to any conditions for exemption imposed pursuant to Article 13A(2)(a)
  • the supplying body must itself be a body or organisation referred to in Article 13A(1)(i).
Herr Haderer is a freelance teacher specialising in pottery and ceramics. He entered into a contract with the Berlin local authority, expressly stated not to create an employment relationship, whereby he provided classes at various educational establishments. Herr Haderer did not charge VAT and the tax authorities took the view that he should have.
The referral asks, in the context of the Article 13A(1)(j) exemption for tuition given privately by teachers, whether the exemption applies only to education provided directly to students as recipients of the services or whether it also applies to situations, such as the one here, where the education is provided directly to students but where the school or university attended by the students is the recipient of the services.
Paragraph 47 states that the Commission is of the view that Herr Haderer’s activity may be categorised as a provision of tuition within the meaning of subparagraph (j), because he did personally provide tuition. The identity of the recipient of the service is not specified in the terms of the exemption, as is the case for certain other exemptions. It is thus of no consequence in that regard.
A-G Sharpston disagrees with the Commission, stating "I do not think that tuition given to a class of students under the aegis of an educational establishment, organised by that establishment on its premises and under its responsibility, can be covered by the wording, particularly when the financial and contractual arrangements are conducted independently by the educational establishment with, on the one hand, the students and, on the other hand, the teacher."
The AG's conclusions are:
"I am therefore of the opinion that the Court should give the following answers to the questions raised by the Hoge Raad in Case C-434/05:
"On a proper construction of Article 13A(1)(i) of Sixth Council Directive 77/388/EEC, the temporary supply of a teacher to an educational establishment, in order to provide teaching services under the responsibility of that establishment, does not constitute provision of education or vocational training or retraining, but does in principle constitute the supply of a service closely related thereto.
"In order to qualify for exemption from VAT under that provision, the supply in question must be made by a body or organisation as referred to therein, and must comply with the requirements of Article 13A(2)(b) of the same directive, as clarified by the Court in its judgment in Case C-415/04 Stichting Kinderopvang Enschede and, where applicable, with those of Article 13A(2)(a).
"In Case C-445/05, I am of the opinion that the Court should reply to the Bundesfinanzhof as follows:
"On a proper construction of Article 13A(1)(j) of Directive 77/388, the concept of tuition given privately by teachers does not include a situation in which a self-employed teacher contracts with an educational establishment to provide tuition to students in courses organised by that establishment on its premises and under its responsibility, for which the establishment and not the teacher receives payment from the students."
The full Opinion can be accessed here .
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