Weekly VAT News

Hotel La Tour: VAT recovery on fundraising share sale – CA

To fund the development of a new hotel in Milton Keynes, Hotel La Tour Ltd decided to sell its existing hotel in Birmingham by way of the sale of shares in a subsidiary which owned the hotel. HLT sought to recover the VAT incurred on the marketing and legal costs associated with the sale on the basis that the relevant services were directly and immediately linked to its downstream taxable activities, namely developing and operating the new hotel in Milton Keynes. HMRC denied VAT recovery on the basis that the costs related to the exempt share sale. Both the FTT and UT found in favour of the taxpayer. However, on appeal, the CA has unanimously (3:0) found in favour of HMRC. On revisiting the CJEU’s decision in AB SKF, LJ Whipple held that this judgment preserved the existing rules on direct attribution, but acknowledged that input tax connected with a share sale may have a direct and immediate link either with the share sale or with the taxpayer’s business as a whole, that being a matter for the domestic court to determine. Distinguishing Frank A Smart (which related to a non-business activity), and rejecting the contentions that it was necessary to look at the purpose of the share sale (i.e. fundraising) and that the existence of a VAT group meant that HLT was not engaged in an economic activity, HMRC’s appeal was allowed. The VAT on the costs were used in, were cost components of, and were directly and immediately linked with the share sale which was conducted as part of HLT’s economic activity and exempt for VAT purposes. (Contact: Tim Churchill)

Finanzamt T II: intra-VAT group services – AGO

In two judgments in 2022, the CJEU considered the status of controlling members of German VAT groups. One of those cases (Finanzamt T) has now returned to the CJEU. U-GmbH provided cleaning services to its parent foundation S, which ran a university teaching hospital (and provided non-business tuition alongside VAT exempt medical services). In the opinion of AG Athanasios Rantos, those cleaning services should not be treated as supplies of services as they occurred between two members of a VAT group. On a literal reading of the VAT Directive, taxable supplies could only be made by a “taxable person”, and VAT grouping meant that U and S were treated as one taxable person. Intra-VAT group supplies should therefore be regarded as nothing more than a flow of funds. U could not therefore be seen as supplying its cleaning services “independently” (and the AG distinguished comments on independence in the 2022 cases). Finally, AG Rantos considered the purpose of VAT groups. He accepted that they existed to simplify administration and prevent abuse, but considered that they went further than that and supported organisational fiscal neutrality. It should not make any difference to S whether it employed cleaners direct, or through a wholly-owned subsidiary. The German tax authorities’ concerns about risk of tax loss were misplaced, as they took as their benchmark the provision of cleaning services by an unconnected third party. VAT groups have consequences that go beyond the mere submission of a single VAT return by several companies, or the ability of tax authorities to combine artificially disaggregated entities. In this case, U’s services to S were not within the scope of VAT. (Contact: David Walters)

UP CAFFE: abuse of law and VAT registration – AGO

In 2017, turnover from a restaurant operated by SS-UGO was approaching the Croatian VAT registration threshold. The business was discontinued and restarted by a new company (UP CAFFE). The Croatian tax authorities considered that this was an abuse of law, leading to a referral to the CJEU. In the opinion of Advocate General Julianne Kokott, abuse of law could not apply as a matter of principle because registration thresholds were not directly effective EU law rights. Even if the abuse of law doctrine was available in principle, AG Kokott doubted whether it should apply: the purpose of VAT registration thresholds is to simplify VAT administration, so the test of whether UP CAFFE had acted against the objective purpose of EU law was likely to apply only exceptionally. AG Kokott observed that UP CAFFE’s VAT registration obligations should be determined by reference to its economic substance. If the succession of SS-UGO’s business by UP CAFFE was merely a sham, then the external legal form (i.e., the fact that the business was being conducted by a new legal entity) would not affect VAT registration obligations. However, the Croatian tax authorities' challenge may succeed by reference to the commercial and economic reality of how UP CAFFE started in business, without having to rely on abuse of law. (Contact: Andrew Clarke)

This week’s VAT case calendar

On 30 May, the CJEU will deliver its judgment in DISA, on the differentiated rates of the excise duties on mineral oils, and there will be an Advocate General opinion in Harley-Davidson Europe, on the origin of motorcycles.