Case C-175/09, AXA UK plc

On 28 October the European Court of Justice (ECJ) ruled against AXA UK plc (AXA) in the 'Denplan VAT' case.

The main issue in the case was whether the service of 'collecting payments' provided by a subsidiary of AXA included in AXA's VAT group (Denplan Limited) to UK dentists was to be regarded as: (i) an exempt financial service (service of transfer of money); or (ii) a taxable 'debt collection or factoring' service. The service was provided to support the operation of payment plans between dentists and their patients for which Denplan charged a fee that it deducted from the patients' monthly payments it collected for (and accounted to) dentists via the direct debit system.

HM Revenue and Customs (HMRC) considered that Denplan's fee to dentists was consideration for VATable services provided by Denplan, and as such, should be subject to UK VAT. AXA argued that the fee was for arranging the transfer of money from patients to dentists and should not be subject to VAT.

In agreeing with HMRC's overall position, the ECJ decided that Denplan's fees to dentists for transferring payments from a patient's bank account to the dentist's bank account were consideration for the provision of 'debt collection or factoring' services, (and Denplan's services were also held by the ECJ to be a single service for VAT purposes on the facts). The ECJ considered that the object of Denplan's services to dentists was (in return for the fee) to obtain the payment of monies/debts owed by the patients and to undertake the recovery and management of such debts for the dentists. The ECJ also held as 'debt collection or factoring' services were specifically excluded from the VAT exemptions for transactions concerning payments, the term 'debt collection or factoring' had to be interpreted broadly in that context, while the VAT exemptions had to be interpreted strictly.

The Court's analysis is somewhat surprising and will possibly provide further input to the current ongoing discussions in the European Council concerning the review (see later below) of the exemption for insurance and financial services in the EC Principal VAT Directive (formerly the Sixth VAT Directive).

The Court's decision may mean that businesses in the EU providing similar services, and particularly those providing outsourced services to the financial services sector, will now be forced to review the nature and VAT liability of their supplies. Such businesses may also need to urgently review their contractual arrangements to ensure that they are entitled to charge VAT to their customers if that becomes necessary as a result of the ruling (though this could lead to further irrecoverable VAT for recipients of outsourced services). Otherwise, where contracts do not allow for VAT to be charged in addition to the agreed fee, the tax charge would have to be met from profits.

Case C-40/09, Astra Zeneca UK Limited

Astra Zeneca had previously been offering retail vouchers to employees on a salary sacrifice scheme. It believed it did not have to account for output VAT on the provision of such vouchers as they were not provided to the employee for consideration; instead they were part of the employee's salary which itself was not regarded as consideration for a service (and this approach appeared to be supported by HMRC's guidance in reference to salary sacrifices). Conversely, Astra Zeneca sought to recover input VAT incurred on its acquisition of the vouchers as part of its business overheads.

HMRC rejected Astra Zeneca's input VAT recovery claim, arguing that it did not use the vouchers for the purposes of taxable transactions. Alternatively, it considered that if Astra Zeneca was entitled to an input VAT credit, Astra Zeneca was also required to account for output VAT on the provision of the vouchers to its employees on the basis that either the vouchers were given for consideration, or because they were made available free of charge to employees for private use purposes (the latter being deemed to be a supply of services for consideration under the EC Principal VAT Directive).

Astra Zeneca disputed this, and appealed to the VAT and Duties Tribunal (now the First-tier Tribunal), which referred the matter to the ECJ for consideration.

Taking the view that VAT has a very wide scope, as demonstrated by the broad definitions of "taxable person" and "economic activity", the ECJ held that Astra Zeneca was carrying out economic activities in providing vouchers to its employees in return for those employees' sacrificing part of their salary.

The ECJ also considered that there was a direct link between the value of the salary sacrificed by employees and the provision of the vouchers, and that the employees did bear the cost of the VAT (met via the salary sacrifice) on the provision of the vouchers and as included in the price of the redemption goods/services that could be obtained with the vouchers.

Accordingly, the provision of retail vouchers under the scheme by Astra Zeneca was considered to be a taxable supply of services effected for consideration (which meant that the alternative questions set by the UK tribunal did not apply and that Astra Zeneca was entitled to input VAT recovery).

Though the ECJ's decision appears to be correct on general VAT principles, there is some concern regarding the future of salary sacrifice schemes, especially schemes that involve the provision of other types of vouchers. It is not clear yet what HMRC's response or revised policy will be in relation to salary sacrifice arrangements, though it is thought that HMRC will not seek to recover output tax retrospectively, particularly given employer reliance on HMRC's previous guidance. Businesses should however also watch for third-party administrators, whose arrangement fees could give rise to a VAT charge.

Case C-53/09, Loyalty Management UK and Case C-55/09, Baxi Group Limited

The ECJ has ruled in the joined cases of Loyalty Management UK and Baxi Group Limited that payments made by a loyalty scheme operator or trader which related to a retailer's supply of goods/services to consumers on redemption of loyalty reward points were third party consideration for that retailer's supply of goods/services to its customers and not for services separately provided by the retailer to such operator or trader. Where the operator or trader was not the recipient of a supply of services to it by the retailer, the result was that such operator or trader could not deduct/recover as input VAT the VAT paid by them to the retailer. The ECJ's decision may increase the costs of operating loyalty schemes to the extent there is irrecoverable VAT and/or cause them to lose popularity.

Background: Loyalty Management UK

Loyalty Management UK runs the Nectar customer loyalty scheme in which customers can earn points through shopping at select retailers (sponsors) that the customers are then able to redeem for further purchases (reward goods/services) at select retailers (redeemers) at reduced prices or for free. The sponsors paid Loyalty Management UK a specified price plus VAT for each point awarded and for marketing the scheme, whilst Loyalty Management UK paid redeemers a fixed charge based on points redeemed including VAT.

In the UK, HMRC considered that the payments made by Loyalty Management UK to redeemers constituted third party consideration for the supplies of reward goods/services from the redeemers to customers, and not for supplies to Loyalty Management UK. This meant that Loyalty Management UK was not entitled to recover the input VAT incurred on its payments to the redeemers.

The Court of Appeal disagreed with HMRC and held that the payments made by Loyalty Management UK were payments for redemption services to them by the redeemers, such that input VAT was recoverable. HMRC sought leave to appeal to the House of Lords (now the Supreme Court), which referred the case to the ECJ.

Background: Baxi Group Limited

Baxi Group Limited is a manufacturer and wholesaler of boilers and other central heating technology. Baxi identified that, in the majority of cases, it was the plumber, builder or other installer who made the decision as to what appliances to install in a house. Baxi therefore established a scheme to reward points to installers for buying and using their products, which installers could then redeem against reward goods at reduced prices or for free. Baxi (sponsor) then outsourced the scheme administration to @1 Group, which acted as operator and redeemer, providing services such as registering customers, telephone help-lines and website support, marketing and promoting the scheme, as well as managing the redemption of points including selecting/sourcing reward goods from Baxi and despatching such goods to installers. @1 Group's fees were paid by Baxi paying to @1 Group an amount equal to the recommended retail price (RRP) of the reward goods it sourced including VAT. As a result, @1 Group earned its profit margin on the difference between the RRP paid to it by Baxi and the price @1 Group paid for the reward goods sourced from Baxi.

Similarly to Loyalty Management UK, HMRC rejected Baxi's claim to recover all of the input VAT charged by @1 Group on the basis that part of the payment represented @1 Group's services with the balance representing third party consideration for the reward goods supplied to the installers. The Court of Appeal ruled in favour of Baxi so, again, HMRC sought leave to appeal at the House of Lords which referred the case to the ECJ.

ECJ decision

Unusually, given the profile and complexity of the matters, the ECJ did not seek an Advocate General's opinion. In its ruling, effectively overruling the UK's Court of Appeal, the ECJ:

  • concluded that the economic reality of the schemes was that reward goods (and some services) were being provided for VAT purposes by redeemers to customers, and that the supplies of goods by sponsors giving rise to the award of loyalty points and the supplies of reward goods by redeemers in exchange for those points on redemption were separate transactions;
  • identified a direct link between the payments made by Loyalty Management UK / Baxi and the loyalty points redeemed, as those payments were made as a result of the customer redeeming points in return for reward goods/services;
  • was also able to identify a clear link between the value of the payments made by Loyalty Management UK / Baxi and the supply of the reward goods/services by redeemers, on the basis that, in both cases, the payments corresponded or represented the price payable by customers for such reward goods/services; and
  • therefore held that the payments constituted third party consideration for the reward goods/services.

However, in considering the facts of Baxi, the ECJ did consider that part of Baxi's payment (i.e. @1 Group's profit margin) to @1 Group was consideration for a separate supply of services from @1 Group to Baxi so that input VAT relating to that proportion of Baxi's payment was recoverable. Whether Loyalty Management UK may be entitled to a similar apportionment has been referred back to be determined by the UK courts.

Adopted changes of the invoicing rules in the EU's Principal VAT Directive

On 13 July 2010, the Council adopted a directive amending the rules on invoicing requirements.

The new rules, which will have to be implemented in all Member States by 1 January 2013, are aimed at simplifying VAT invoicing requirements, in particular as regards electronic invoicing - the view being that the approach to VAT invoicing across Member States has led to a "less-than-harmonised set of rules" on account of the many options that remain available to them, and compliance with regulatory requirements has hindered the take-up of technologies that are necessary for the development of e-invoicing. The Commission has estimated potential annual cost savings of up to €18 billion for EU businesses if obstacles to e-invoicing in VAT rules were to be removed.

The new directive also comprises measures to help tax authorities ensure that tax is paid so as to better tackle VAT fraud. These include establishing deadlines/trigger points for the issuance of invoices and speedier exchange of information on intra-EU supplies of goods and services.

The following are the main changes:

  • A clear jurisdiction rule is established determining which Member State's invoicing rules apply for the invoice issued by the seller, his customer (self-billing), or a third party (outsourcing situations).[1]
  • Electronic invoices and paper invoices are treated equally, and Member States may no longer require electronic invoices to be sent with an electronic signature. Companies must however ensure the authenticity of the origin, the integrity of the content and the legibility of the invoice. This can be done through business controls establishing reliable audit trails linking invoices and supplies.
  • A harmonised time limit for the issue of an invoice for certain supplies is introduced in order to improve the functioning of the internal market.
  • Certain requirements concerning the information to be provided on invoices are amended to allow better control of VAT and create a more uniform treatment between cross-border and domestic supplies and to help promoting electronic invoicing.  

European Commission consultation on tax exemption for cross-border interest and royalty payments underway

This summer the European Commission launched a consultation (with a deadline for comments of 31 October 2010) on the Interest and Royalties Council Directive 2003/49/EC, designed to put intra-group cross-border interest and royalty payments on an equal footing with domestic payments by exempting them from taxes imposed by (source) States from which such payments are made. A summary report on the outcome of the consultation has not yet been published.

The Commission is considering recasting and amending this Directive. The Commission is targeting what it describes as inefficiencies in the functioning of the Directive, such as "burdensome administrative formalities and cash-flow problems" for unrelated parties and possibly for SMEs. They consider that the Directive, in its current form, is too narrow in scope and its inefficiencies are adversely affecting the functioning of the single market. Therefore, the aim of the consultation is to explore options on how to clarify the existing legislation and extend the benefits and scope of the Directive, including aligning it with certain aspects of the Parent-Subsidiary Council Directive 90/435/EEC so that more businesses may benefit from harmonised corporate tax laws in Europe.

Questions posed by the consultation include: allowing different/wider range of types of companies to benefit from the existing measures (which may or may not be listed in the Parent-Subsidiary Directive); expanding what constitutes an "associated company" by reducing the minimum shareholding threshold of 25% to 10% (as required by the Parent-Subsidiary Directive) and taking account of indirect shareholdings to compute the total minimum holding; and extending the tax exemption provided under the Directive to payments between unrelated parties.

The Directive currently covers payments made by permanent establishments of companies situated in an EU Member State. Where such payments are made, the obligation of the source State to exempt the payment from withholding tax is conditional on the payment being a tax-deductible expense for the payer. The Commission's consultation document explains that the purpose of this 'tax-deductibility' requirement is to ensure that the benefits of the Directive accrue only in respect of those payments that represent expenses attributable to the permanent establishment. However, on its wording, the provision could also apply to cases where deduction is denied on other grounds, e.g. where a payment does not meet all the formal requirements for tax deductibility. The Commission's consultation document therefore includes a proposal to clarify this aspect of the Directive i.e. by stating that the Directive covers payments linked to the activities performed by the permanent establishment.

Commissioner Šemeta launches Tax Policy Group to push forward fundamental issues in taxation

On 7 October 2010, Commissioner Algirdas Šemeta chaired the first meeting of the new Tax Policy Group, which brings together personal representatives of EU Finance Ministers to discuss key tax policy issues. The Group will work on fundamental topics such as how taxation can contribute to a stronger Internal Market, to the growth and competitiveness of Europe's economy and to a "greener" economy. It will also serve as a forum for deeper discussion on priority matters, such as financial sector taxation, common consolidated corporate tax base and the new VAT Strategy.

Commissioner Šemeta said: "Fiscal coordination is essential if the EU is to re-build a strong and robust economy. The Tax Policy Group will be a very important tool in ensuring that Member States' tax policies complement, rather than contradict each other, and that the right measures are taken at EU level to promote growth and prosperity." Commissioner Šemeta announced the establishment of the Tax Policy Group as one of his top priorities as Taxation Commissioner, seeing it as a crucial means of maintaining political momentum on key issues related to taxation at EU level.

The Group will provide a regular fixed forum for high-level discussions to explore the scope and priorities for tax policy coordination within Europe. It will help the Commission and Member States to exchange views on proposals before they are put on the table, and to push forward discussions on important taxation dossiers.

At the first meeting, the group looked at the recommendations in Professor Monti's report on the re-launch of the Internal Market, including how to address obstacles and bottlenecks in areas such as corporate taxation, consumption taxes and environmental taxation. It will also look at how tax policy coordination could better contribute to fiscal consolidation and improve the effectiveness of national strategies.

At the request of the ECOFIN Council at the end of September, the Tax Policy Group also focussed on the issue of financial sector taxation (see below), taking into account the Commission's recent policy orientations in this area.

Commission Commission outlines vision for taxing the financial sector

On 17 June 2010 EU leaders chose to go down the path of introducing national bank levies, leaving the decision on global transactions tax plans to be tackled by the G20 later in the year.

The proposed measures, which would at least in part be used to establish a fund to cope with future bank bailouts, also seeks to "set incentives to contain systemic risks". European Commission projections indicated that the levies could raise as much as €20 billion annually if a tax on financial transactions was also introduced.

On 7 October 2010 the European Commission set out its ideas for the future taxation of the financial sector. Working on the basis that the financial sector needs to make a fair contribution to public finances, and that governments urgently need new sources of revenue in the current economic climate, the Commission put forward a two pronged approach. At a global level, the Commission supports the idea of a Financial Transactions Tax (FTT), which could help fund international challenges such as development aid or climate change. The FTT would tax every transaction based on its transaction value, resulting in substantial revenues. At the EU level, the Commission recommends that a Financial Activities Tax (FAT) would be the preferable option. The FAT would tax profits and remuneration derived from activities of financial sector companies, targeting the financial corporations rather than each actor involved in a financial transaction (as would be the case with the FTT). If carefully designed and implemented, an EU FAT could generate significant revenues and help to ensure greater stability of financial markets, without posing undue risk to EU competitiveness.

The Commission presented these ideas in its Communication to EU Heads of State and Government at the European Council at the end of October, and has promoted these ideas at the G20 Summit in Seoul in early November with a view to encouraging international partners to agree on a global approach.

The Commission will also begin an in-depth Impact Assessment to further examine the ideas it set out in its Communication, with a view to coming forward with policy initiatives in 2011. For the full Communication, see: ec.europa.eu/taxation_customs/index_en.htm. For more information, also see: MEMO/10/477.

Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: "There are good reasons for taxing the financial sector, and feasible ways to do so. I believe that the ideas that the Commission has put forward today are the right ones to ensure that the financial sector makes a fair contribution to the most pressing EU and global challenges."

However, this has not been without criticism. Opponents argue that it could lead to many firms departing the EU for Switzerland or offshore locations. This would be particularly bad for the UK, where 80% of Europe's financial services sector is based. UK government representatives have also expressed some concerns, notably, that it could lead to monies raised in the UK being used to support failing institutions in Europe.