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

Mercedes Benz Italia: when finance activities are ‘incidental’

In Mercedes Benz Italia SPA (C-378/15) the CJEU considered the deductibility of input VAT when a company makes partially exempt supplies. Mercedes Benz Italia’s (MBI) main activity related to marketing the group’s brands in Italy. However, over 70% of its turnover came from exempt interest on loans made to its subsidiaries. MBI was required to calculate the proportion of input VAT recoverable based on the turnover of taxable supplies as a proportion of total supplies (ignoring incidental finance transactions). MBI argued that the Italian method used to calculate deductible VAT (where the interest was included in the calculation ) was incorrect and that its finance activities were incidental financial transactions under article 174(2) of the Principal VAT Directive and should be excluded.

The CJEU held that the level of turnover generated could be an indication of whether transactions were incidental. However, the fact that financial transactions generated a higher turnover than MBI’s main activity was insufficient in itself to prevent those activities from being incidental. The activities would still be classified as incidental if they did not constitute the ‘direct, permanent and necessary extension of the business’ and if they did not entail ‘a significant use of goods and services subject to VAT’.

Why it matters

This is a significant decision for partially exempt businesses using the standard partial exemption  method. When the standard method is used incidental real estate and financial transaction supplies can be excluded from the turnover calculation. The judgment suggests undue emphasis should not be placed on the level of turnover generated by those activities in comparison to the company’s main activities (although this may still be indicative of whether transactions are incidental). Businesses arguing that such activities are incidental should instead be prepared to show that there is no close relationship with their taxable activities and that the incidental activities make only limited use of the goods and services on which input VAT is incurred. Businesses may also seek to agree specifically how to allocate their input VAT based on use, via a partial exemption special method.


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 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.