Reduced VAT for e-pubications

EU citizens could pay less for e-books after plans to allow member states to reduce VAT on e-publications were backed in committee on 3 May.

An EU Commission proposal to enable member states to charge a reduced rate of VAT on e-books, which would bring them into line with VAT levied on printed matter, was backed by the 48 votes to 1 with 2 abstentions by the Economic and Monetary Affairs Committee. The proposal will now be voted by Parliament as a whole on May 31st.

 

Article 50, the Repeal Bill and the future of VAT

At the end of last month the UK formally triggered Article 50 and the Government published a White Paper on the Repeal Bill, which has clarified how the UK will treat existing European Case law after the UK leaves the EU. This will impact on the future of VAT. Details of the repeal bill can be found here

Background

Currently the European Communities Act 1972 (ECA) gives effect to EU treaties in UK law and provides for the supremacy of EU law. It also requires UK courts to follow the rulings of the Court of Justice of the European Union (CJEU). Some EU law applies directly without the need for UK implementing legislation, but other parts of EU law have to be implemented in the UK through via domestic legislation.

The intention is that the Repeal Bill will repeal the ECA. It will also convert EU law into UK law as it stands at the point of the UK’s exit from the EU. This will give some certainty to businesses and allow them to continue operating in the knowledge that rules will not change significantly and suddenly on the UK’s exit from the EU. It will then be down to Parliament or where appropriate, the devolved legislatures, to amend, repeal or change any piece of EU law (once it has been brought into UK law) once the UK is out of the EU.

The Bill creates powers to make secondary legislation to enable corrections to be made to laws that would otherwise no longer operate appropriately once the UK leaves the EU and will also enable changes to domestic law to reflect the content of any withdrawal agreement made under Article 50. It will also give the UK Government once we havelef the EU powers to change the scope and operation of domestic VAT .

Existing EU case law

Following the EU referendum, there had been significant speculation and varying views on how the UK would treat existing CJEU case law, and its impact on the UK tax legislation once  the UK leaves the EU. The repeal bill clarifies that  case law precedent from the CJEU will continue to apply (for a time at least) and that any uncertainties/disagreements over the meaning of UK law after the UK leaves the EC derived from EU cases will be decided by reference to the CJEU case law as it exists on the day the UK leaves. So the European Court of Justice will no longer have any jurisdiction in the UK, but its existing case law, up to the date of withdrawal, will continue to be binding on UK courts as they interpret EU law that has been converted into domestic law.

The bill  is therefore  likely to give CJEU case law similar precedent status to decisions of the UK Supreme Court and both HMRC and appellants  may continue to rely on case law as they have up to this point.  After exit UK legislation (including that relating to UK VAT) passed by Parliament will take precedence over preserved EU-derived law and thus UK VAT and tax law is likely to start to diverge from EU law gradually as UK case law develops. The Office of Tax Simplification  is also currently considering changes to UK VAT that could be made once the UK exits the EU.

Customs issues

Some bills will be necessary to ensure the law continues to function properly from day one, and this includes a Customs bill to establish a framework to implement a UK Customs regime, because this cannot be met by incorporating EU law.

The likelihood is that a Customs border will come into existence early in 2019 with the potential to cause disruption to movement of goods coming in and out of the UK. It is hoped that the Government will publish proposals as soon as possible. The Customs Declaration Services (CDS) programme was intended to replace the existing system for handling import and export freight (CHIEF) from January 2019. Now that the Government has made a decision to leave the EU Customs Union, there is serious concern that this project will be in place on time.

There is still much uncertainty which can only be addressed when the terms of the UK’s departure from the EU are clearer.

EU Judgment: Member States can decide which supplies of cultural services may be exempt from VAT

On 15 February 2017, the Court of Justice of the European Union (CJEU) released its decision in the British Film Institute’s (BFI) UK VAT case concerning HMRC’s decision to refuse BFI’s claim for overpaid VAT in the period 1990 to 1996 on the sale of tickets for admission to screenings of films.

The First-Tier Tribunal had held that admission to a cinema or other venue showing films by a non-profit making body and registered charity, was a cultural service for the purpose of Article 13A(1)(n) of the Sixth Directive, now Article 132(1)(n) of the VAT Directive (Directive) and that in the absence of domestic implementing legislation during the claim period, the EU provisions had direct effect. Thus in its view BFI’s film admission income was exempt from VAT.

The Upper Tribunal upheld this decision and HMRC appealed to the Court of Appeal. The Court of Appeal referred the case to the CJEU asking whether the cultural services exemption has direct effect, so as to
exempt BFI’s supplies in the absence of any domestic implementing legislation. The referral also asked whether any discretion is given to Member States to discriminate between cultural services in their application of the exemption.

The CJEU, agreeing with the Advocate General (AG), found that where the subject matter of the provisions of an EU directive appear to be unconditional and sufficiently precise, they may be relied upon before the national courts by individuals where the Member State has failed to implement the directive in domestic law within the period prescribed or where it has failed to implement the directive correctly. However, in the current case the exemption laid down in the Directive refers only to ‘certain cultural services’ and the Directive does not specify which cultural services the Member States are required to exempt. The CJEU held that as Member States have discretion in the application of the exemption for cultural services, the Directive cannot be relied on directly by a taxable person. That meant HMRC’s interpretation of the EU provision applied.

Why it matters: This judgment is disappointing for those hoping to widen the narrow interpretation the UK placed on the exemption- for example those operating botanical gardens and holding events that may be cultural but are not theatrical, choreographic, or musical. It confirms that HMRC does have discretion to allow exemption for some cultural services whilst taxing others. Post Brexit however, there could be an opportunity for those in the cultural charity sector to lobby for an amendment to the UK legislation.

C-592/15 British Film Institute

EU Commission: digital single market strategy

The European Commission has adopted a package of proposals to facilitate cross-border B2C e-commerce in the EU (see www.bit.ly/2gLHVns). The majority of the proposals were set out in the Commission’s recent VAT action plan.

The proposals include:

  • a new threshold to be introduced in 2018 which allows small businesses to account for VAT in their home jurisdiction if their cross-border turnover on supplies of e-services is less than €10,000
  • the process will also be simplified for businesses whose cross-border turnover is less than €100,000 by only requiring them to obtain one piece of evidence for identifying the location of their customers, rather than two.
  • The mini-one stop shop (MOSS) which already applies to e-services will be extended in 2021 to the online supply of goods, to allow online businesses to account for VAT under a single quarterly return via a portal in their home jurisdiction. The thresholds set out above will then also apply to goods sold online from 2021. This proposal is intended to be less costly for businesses that will no longer need to register in multiple jurisdictions.
  • The current exemption from VAT for imports worth less than €22 from outside the EU will be removed from January 2021, on the basis that it leads to unfair competition for EU companies who have to charge VAT on the supply, and creates the opportunity for VAT fraud by mis-declaring the value of goods.
  • electronic publications – Member states will also be able to apply the same reduced or zero rate to as they do to their printed equivalents. Under the current rules, e-publications must be taxed at the standard rate. This change will enter into force once the proposal is agreed by all member states.

Why it matters

In addition to e-book suppliers, these measures should be welcomed by all SME cross-border businesses, which should benefit from reductions in EU VAT compliance costs. It seems likely however, that the UK will have left the EU by the time most of these changes come into effect. This does not mean that UK businesses selling into the EU can ignore the changes. It is just that they are likely to lose the ability to use the MOSS in the UK. They will therefore need to register in each EU country or register to use the MOSS in another EU country.

Brexit and VAT

In the April/May Newsletter we outlined what might happen if the UK voted to leave the EU. Following Friday’s result here’s a more detailed look.

What happens to VAT now?

In the short term, nothing changes. Formal exit would start when (or is it if?) the UK triggers Article 50 of the Lisbon Treaty, which covers the voluntary exit of an EU member state. There would then be a renegotiation period of up to two years when the UK and remaining 27 member states will agree separation terms. This will include agreeing on how UK companies will comply and report VAT transactions with companies and individuals in the rest of the EU.

The Brexit vote is therefore unlikely to result in immediate changes to indirect tax law, practices and policy. But on formal Brexit there will be major changes coming.

What will happen to EU trade?

If and when we leave the EU it is unlikely that UK businesses will be able to trade in goods across the EU in the same way that they have been doing since the single market was introduced in 1993. The major VAT change would be the loss of intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU (exports from the UK), and subject to EU VAT.  The requirement to complete Intrastat and EC Sales Lists will end, but new import and export documentation, generally done by the freight forwarders or customs brokers, will have to be completed. This can cost around £20 per export or import. We would also have a new Customs land border with Ireland.

VAT MOSS

The Mini One-Stop Shop or ‘VAT MOSS’ that was so much in the headlines recently would continue for businesses selling electronic services to consumers in the EU. UK businesses making such supplies would still have to register, either by registering in every member state into which the supplies are sold, or via the MOSS. The main change here is that UK suppliers would have to choose an EU member state in which to register under the MOSS. Unfortunately, the plans for a minimum supply threshold for VAT MOSS registration that was so hard fought for by micro-businesses and the UK government is now likely to be abandoned by the rest of the EU.

In the future

Without the VAT Directive and the European law framework, a major  issue will be around the interpretation of VAT law.  Tax law is interpeted by the courts and thus is subject to change according to tax cases. Before the UK actually secedes, the UK courts are still bound by decisions of the Court of Justice. With effect from the date of secession, taxpayers will no longer be able to rely on the “direct effect” of EU laws and the UK Supreme Court will become the final arbiter of all cases relating to VAT, instead of the European Court of Justice (ECJ). But of course previous UK court decisions will in many cases have been decided by reference to the VAT Directive and ECJ cases, so it’s far from clear how the courts will deal with this. In addition there are likley to be “holes” left in UK law which will need to be plugged. All of that is going to take time.  The VAT rules in the UK, in common with many other parts of our legislation have evolved over the last 40+ years using EU concepts; the UK courts will in future need to build a whole new framework of interpretation. That could mean we will have to revisit many questions about how VAT works in the UK.

VAT rates

The current EU rules are: a minimum 15% standard rate; and only two reduced VAT rates which must be 5% or higher. On secession the UK will be able to set its own standard rate (or introduce higher rates) and to change reduced VAT rates on products like domestic fuel, women’s sanitary products and e-books. The EU has however already announced plans to allow similar freedoms to other EU countries within the next 18 months under the current EU VAT Plan.

Similarly, the UK will no longer be required to keep the VAT exemptions (mostly there for social reasons, but also applied to many financial transactions) in the EU VAT Directive. The UK will be able to set its own exemptions, change the current ones or remove them. It seems unlikely that the UK would want to impose significant change on financial services but it could, for example choose to ignore recent changes, which were not to its liking, such as the imposition of taxation on outsourced financial services.

Changes to other social exemptions could have major implications for the cultural, leisure and charitable sectors. Some of these, including the cultural services, sporting and education exemptions, have been the subject of VAT planning and contentious VAT claims. Change may be some time off, but the UK (or England if it comes to that) could in future move to prevent what it sees as anomalous treatments, when it will be able to do that without reference to any overriding EU legal principles.

If you have other immediate questions not answered above, please get in touch.

Sveda and free admission

In recent years HMRC have developed a policy of restricting input tax recovery using a ‘cost component’ approach. Under this policy they have argued that VAT is recoverable on goods and services only if they can be shown to be ‘cost components’ of a taxable supply made, and in addition that for VAT to be fully recovered the cost of the goods and services bought must be shown to be funded by that taxable supply.
Recently the European Court rejected this approach.  Sveda (Case C-126/14),  a corporate business, not a charity, incurred VAT on the cost of capital assets as part of a government grant-funded Lithuanian heritage trail, where the public were allowed in free, but in which Sveda operated a souvenir shop and tearoom.  HMRC attended the hearing and in it’s view Sveda’s VAT recovery on the costs of building the park should have be restricted because the costs would not be recovered from the sales income in the shops. The AG had rejected this and considered that the question of VAT recovery in this case was not determined by reference to whether the taxpayer intended to factor the costs into the price of its output transactions.

The Court followed the AG and ruled that EU law permits a taxpayer to reclaim input VAT on the acquisition of capital investment goods (the trails, etc.) which are directly destined for free use by the public, but where they can be used for a secondary purpose as a means to attract visitors to a place where the taxpayer intends to supply goods and/or services.
The AG had said that the right to deduct input tax depends upon the objective use or purpose of the purchase. In this case, the facts were that the objective purpose of the trail was to attract visitors to the café and shop. The fact that the assets were primarily used for free access by the public did not break the link with Sveda’s taxable supplies. In fact, the AG said this link could only be broken if the recreational path was used primarily to make an exempt supply or if the use of the recreational path was used primarily by Sveda for the purpose of a non-economic activity. Here the referring Lithuanian national court had specifically ruled that the activities of Sveda were economic activities, and thus there was no question of non-economic use of the recreational paths by Sveda.
Why it matters
This is a significant case for organisations offering free admission to attractions or buildings, as HMRC had recently begun to argue that even where taxable outputs were being made the VAT on costs could have no “direct link“ to a taxable supply unless it could be demonstrated that the costs had been incorporated into the price of a taxable output. Where grant funding was received this made full VAT recovery impossible, and that argument was in our view wrong, and is now clearly unsustainable. Similarly, some HMRC officers have recently insisted that grant funding is automatically indicative of a non-business activity and requires input tax to be restricted– this is also unsustainable.