October 2014

Background

In the context of international trade, a “fixed establishment” is a place (other than the main head office of a business) that has the “human and technical resources” to make or receive supplies.  This is relevant when looking at cross border services to determine where the supply is made from, where it is received and, therefore, where it should be taxed.

The Welmory case

In certain circumstances, it is possible for a fixed establishment to be created through a business’ relationship with a third party (e.g. if a business operates in a particular territory through a dependent agent). The CJEU was asked to consider whether a supplier had created a fixed establishment for its customer.

Welmory  Limited (based in Cyprus) provided an auction website for customers to use to buy goods in Poland.  The website was managed by Welmory Sp z.o.o (based in Poland).  When Welmory Poland invoiced Welmory Cyprus for its website management services, it believed the services were received in Cyprus and, as a cross border supply, did not charge Polish VAT.

The Polish tax authorities disagreed, and argued that the supply should be liable to Polish VAT, because Welmory Poland acted as the “human and technical resources” of Welmory Cyprus, creating a fixed establishment for Welmory Cyprus in Poland.  As a domestic supply, this would be liable to Polish VAT.

The CJEU confirmed the factors that are relevant when considering whether a third party can create a fixed establishment for another business.  In particular, it noted that whilst Welmory Poland did indeed provide some business infrastructure for Welmory Cyprus, it did not do so in the context of enabling Welmory Cyprus to receive its own website management services.

It is for the Polish Courts to apply the CJEU decision to the facts of the case.  However, it was noted that the webservers, software, key decision makers and the people able to conclude contracts were not based in Poland.  If these facts are confirmed by the Polish court, then we would expect it to conclude that Welmory Cyprus does not have a fixed establishment in Poland and the supplies properly take place cross border.

What does this mean for other taxpayers?

The prospect of suppliers routinely creating fixed establishments for their business customers would be worrying for many international businesses, in terms of the level of complexity it would create.  However, this CJEU case doesn’t really tell us anything new – there are circumstances in which the relationship between a business and a third party can create a fixed establishment but the nature of the infrastructure being provided (and in relation to which supplies) needs to be considered on a case by case basis.

If you would like to discuss the impact of this case on your business in further detail, please contact Julie Park on 0208 941 9200 or Julie.Park@thevatconsultancy.com.

From 1 January 2015, supplies of digital services (telecoms, broadcasting and electronically supplied services) to private individuals in other EU Member States will be liable to VAT in the customer’s country.  Rather than registering for VAT in every Member State where customers are located, businesses can discharge their EU VAT obligations via the MOSS.                                                                                                                            

Registration is now open and can be accessed via HMRC’s online services:

https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop

For further information, please contact Julie Park on 0208 941 9200 or julie.park@thevatconsultancy.com

Overview

Direct mail is frequently used by financial institutions to target new customers, whilst many charities will use it to solicit donations.  As both types of organisations are unable to recover much VAT, they benefit significantly from the availability of zero-rating for printed matter.

For the agencies supplying these mail packs, the rules regarding zero-rating are complex, in terms of:

• what types of printed matter qualify (and therefore, whether the mail pack qualifies overall);  and
• the treatment of other services provided as part of the print process e.g. design, artwork, fulfilment and postage.  On their own, many of these services would be standard rated.  The question therefore arises as to whether they form only a minor part of the contract (“ancillary” to the main supply of printed matter), to enable them to be zero-rated as well.

The question of zero-rating has become even more important, since the changes which resulted in more postal services being subject to the standard rate of VAT – as the benefit of zero-rating as a single supply of printed matter has increased.

The debate with HMRC

The question of zero-rating these additional services has been the subject of much discussion between HMRC, individual taxpayers and representative bodies over the last two years.  Many agencies that supply mail packs to financial institutions or charities have been visited by HMRC anti-avoidance officers, whilst other agencies have contacted HMRC to obtain rulings on the VAT liability of particular supplies.

Many agencies consider that HMRC’s guidance is unclear in relation to:

• the difference between zero-rating of “delivered goods” and the standard rating of “direct mail” services; and
• the point at which additional services no longer qualify as “ancillary” to the supply of printed matter and therefore liable to VAT at the standard rate.

HMRC have attempted to clarify their position and recognise that past guidance has been unclear, with contradictory rulings issued.  Updated guidance is expected shortly and HMRC have indicated that from October 2014, they expect agencies to apply the zero-rate correctly.

Key considerations

That still leaves agencies with the question of which supplies qualify for zero-rating and this will be influenced by:

• the terms of the contract with the customer;
• the scope of the additional services – including the cost and time input relative to the print;
• how the postage services are procured i.e. whether the agency is acting as a principal or merely as an agent between Royal Mail and the client.

Based on the above, we consider that it is still possible for some mail packs to qualify for zero-rating, although these are likely to be subject to scrutiny from HMRC.  As such, the VAT liability will need to be carefully considered for each type of mail pack being supplied to a client that cannot recover all of the VAT it incurs.  Although it is possible that HMRC will adopt a light touch in respect of past errors (given the lack of clarity in their guidance), this isn’t guaranteed it would be prudent to review all such contracts within the last four years, to avoid potential assessments and penalties.

For further information please contact:

Steve McIntyre  (steve.mcintyre@thevatconsultancy.com)

Rowena Clifton (rowena.clifton@thevatconsultancy.com)

HMRC have published Revenue Brief 32/2014, confirming that whilst their policy post-BAA remains unchanged, they have updated their guidance on deal costs.

What was the BAA case about?

The Ferrovial Group set up a new company (ADIL) to acquire the shares of airport operator BAA.  ADIL incurred £6m of VAT on professional costs at a time when it was not registered for VAT.  After the takeover, ADIL joined the BAA VAT group and sought to recover the VAT incurred.

In order to recover the VAT, the taxpayer needed to prove that ADIL was carrying on an economic activity (or intended to) at the time the costs were incurred, and that there was a direct link between the takeover costs and the taxable supplies of the BAA VAT group.

The Court of Appeal found that at the time the costs were incurred, ADIL’s only intention was to take over the group by acquiring the shares.  There was no intention to carry out an economic activity such as providing management services (or to even join the BAA VAT group), even though this did come later.

What next?

HMRC’s guidance has been updated to reflect the specific scenario that was considered in the BAA litigation.  Although BAA was denied leave to appeal to the Supreme Court, HMRC have indicated that they will review their policy again once a number of similar German cases (Larentia and Minerva) have been heard in the Court of Justice of the European Union (CJEU) in 12 to 18 months time.

Despite the ruling in BAA, deal costs remains an area where many businesses may still be eligible to recover a proportion of the VAT they incur.  However, as the BAA case shows, VAT needs to be considered early on, not just in the context of the structure of the transaction, but also the post takeover activities and good quality documentation will be critical.  BAA demonstrates just how difficult it is to deal with VAT effectively after the deal is done.

For further information on the recovery of VAT on deal costs please speak to Julie Park (julie.park@thevatconsultancy.com or 0208 941 9200).