On January 14, 2016 HM Revenue & Customs (HMRC) issued Revenue and Customs Brief 3 (2016): review of VAT grouping provisions following the Larentia + Minerva and Marenave (C-108/14 and C-109/14) and Skandia (C-713) judgments. Via the Brief the HMRC informs the public of its decision to launch a consultation on VAT grouping provisions and to highlight the planned approach.
According to the Revenu and Customs Brief Article 11 of the Principal VAT Directive allows member states to treat two or more businesses established in the territory of that member state as a single taxable person (often called a VAT group) if the businesses have close economic, financial and organisational links.
The Brief continues by stating that UK VAT grouping legislation (VAT Act 1994 s43-43D) currently allows two or more companies or limited liability partnerships - known as ‘bodies corporate’ - to register as a VAT group if:
· each body is established in the UK
· they are under common control, for example a parent company and its subsidiaries
In the Joined Cases C-108/14 (Larentia + Minerva) and C-109/14 (Marenave) (ECLI:EU:C:2015:496) the Court of Justice of the European Union (CJEU) ruled as follows:
1. Article 17(2) and (5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2006/69/EC of 24 July 2006, must be interpreted as meaning that:
– the expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in their management and which, on that basis, carries out an economic activity must be regarded as belonging to its general expenditure and the value added tax paid on that expenditure must, in principle, be deducted in full, unless certain output economic transactions are exempt from value added tax under Sixth Directive 77/388, as amended by Directive 2006/69, in which case the right to deduct should have effect only in accordance with the procedures laid down in Article 17(5) of that directive;
– the expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in the management only of some of those subsidiaries and which, with regard to the others, does not, by contrast, carry out an economic activity must be regarded as only partially belonging to its general expenditure, so that the value added tax paid on that expenditure may be deducted only in proportion to that which is inherent to the economic activity, according to the criteria for apportioning defined by the Member States, which when exercising that power, must have regard to the aims and broad logic of the Sixth Directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to economic and to non-economic activity, which it is for the national courts to establish.
2. The second subparagraph of Article 4(4) of Sixth Directive 77/388, as amended by Directive 2006/69, must be interpreted as precluding national legislation which reserves the right to form a value added tax group, as provided for in those provisions, solely to entities with legal personality and linked to the controlling company of that group in a relationship of subordination, except where those two requirements constitute measures which are appropriate and necessary in order to achieve the objectives seeking to prevent abusive practices or behaviour or to combat tax evasion or tax avoidance, which it is for the referring court to determine.
3. Article 4(4) of Sixth Directive 77/388, as amended by Directive 2006/69, may not be considered to have direct effect allowing taxable persons to claim the benefit thereof against their Member State in the event that that State’s legislation is not compatible with that provision and cannot be interpreted in a way compatible with it.
In the Revenue and Customs Brief it is stated that as a result of this judgment the UK Government expects to make changes to UK law and VAT grouping provisions.
According to the Brief these changes are likely to include:
· extending VAT grouping to non-corporate bodies
· identifying new rules to determine ‘close economic, financial and organisational’ links for corporate and non-corporate bodies, replacing the current “control” test based on a company law definition of a subsidiary
In the Revenue and Customs Brief the UK Government states that it will also will use the opportunity to find out what businesses and their representatives think about other grouping related matters, particularly those where the provisions differ across EU member states, as identified in the Skandia case . According to the UK Government this information will help inform future discussions with the European Commission and other member states.
In Case C-7/13 Skandia America (ECLI:EU:C:2015:496) the CJEU ruled as follows:
1. Articles 2(1), 9 and 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a group of persons whom it is possible to regard as a single taxable person for value added tax purposes.
2. Articles 56, 193 and 196 of Directive 2006/112/EC must be interpreted as meaning that, in a situation such as that in the main proceedings where the main establishment of a company in a third country supplies services for consideration to a branch of that company in a Member State and where the branch belongs to a group of persons whom it is possible to regard as a single taxable person for value added tax purposes in that Member State, that group, as the purchaser of those services, becomes liable for the value added tax payable.
The consultation process:
With respect to the consultation process the Customs and Revenue Brief states that:
· During January and February 2016 HMRC will meet with business representative bodies to explore and develop new ideas on VAT grouping;
· During February and March 2016 HMRC will use the feedback to develop a series of policy options. These will form part of the formal consultation which will begin in spring 2016.;
· During spring 2016, HMRC will launch a formal written consultation. This will provide anyone who has an interest in VAT grouping with an opportunity to reflect on the policy options and proposals developed during the informal dialogue. HMRC will ask for feedback on the impact and workability of these proposals to help us determine the final shape of VAT grouping provisions. The formal consultation period will last for 12 weeks;
· During summer/autumn 2016, the UK Government will publish a summary of the formal consultation responses, and use it to finalise the government’s proposals for reform of VAT grouping provisions.
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