The Court of Justice of the European Union ("CJEU") has given its judgment in this case in favour of Ireland and has ruled that non-taxable persons may be included in VAT groups.

History of the case

In 2009 the Commission announced infringement proceedings against eight member states (including the UK) on the grounds of failing to correctly implement the Sixth Directive in allowing non-taxable persons to be members of VAT groups.

Commission v Ireland (C-85/11) has been used as a test case as the other proceedings will be judged without hearings. The judgments are expected on 25 April 2013 (an updated LawNow will follow).

Findings of the Court

The CJEU followed the Advocate General’s opinion in ruling that the inclusion of non-taxable persons in VAT groups does not infringe Article 11 of the Sixth Directive (“Article 11”).

The CJEU found that Article 11 imposes no other condition to the inclusion in VAT groups of ‘persons’ other than that though they are legally independent ‘they are closely bound to one another by financial, economic and organisational links’. Indeed the CJEU considered that the wording of Article 11 that companies will be treated as a ‘single taxable person’ relates to the outcome of the VAT grouping and is not a condition for entry to a VAT group. The CJEU stated that looking at the context, objectives and case law of the CJEU there is no foundation for the Commission’s argument that Article 11 should be interpreted narrowly to mean each ‘person’ is as a separate entity a ‘taxable person’.

The CJEU dismissed the Commission’s argument that inclusion of non-taxable persons went against the objective of the EU VAT regime. The CJEU stated that it is clear that the inclusion of non-taxable persons in VAT groups does not conflict with the EU’s objective of simplifying administration and/or combating abuse when such companies ‘independence is purely a legal technicality’. Indeed the CJEU went further to say that the inclusion of non-taxable persons in VAT groups could be indispensable to both VAT groups and tax authorities in achieving the aims of the EU VAT regime.

Significance of the ruling

The ruling confirms that the inclusion of non-taxable persons in VAT groups does not infringe the Sixth Directive. It is expected that the decision in the case against the UK (C-86/11) will follow that of Commission v Ireland. If so the case will confirm current UK practice and will not require a change of law or any restructuring by VAT groups which include non-taxable persons.

It may also serve to allay some of the worst fears expressed over the implications of the recent BAA Ltd case on an acquisition company’s ability to recover the VAT incurred on transaction costs.