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VAT Voice by Andrew Needham

The Advocate General has given his opinion in two cases that could have a big impact on UK businesses, reports Andrew Needham, Director of VAT Solutions (UK) LtdThe first important case is a referral from the UK courts in the joined cases of Optigen Ltd, Fulcrum Electronics Ltd (In liquidation), and Bond House Systems Ltd v Commissioners of Customs and Excise concerning ‘carousel’ fraud. The second is a referral from the Austrian courts (Kretztechnik AG v Finanzamt Linz Case C-465/03), concerning the recovery of VAT on share issues.

Optigen Ltd, Fulcrum Electronics Ltd (In liquidation) and Bond House Systems Ltd v Commissioners of Customs and Excise

The Bond House Systems Ltd case involved an aggressive line taken by HM Customs & Excise in its fight against ‘carousel’ and ‘missing trader’ frauds. In summary, HM Customs & Excise decided that they would disallow the input tax claimed by legitimate traders involved in a transaction chain where one or more of the other traders were fraudulent. Therefore, if an innocent business got caught up in a trading chain, the purpose of which was to undertake a VAT fraud, nothing in that chain was an economic activity and they could not claim the VAT back, because it wasn’t VAT. The Tribunal supported this view and not surprisingly the decision was appealed to the High Court which referred it to the European Court.

This decision has mainly affected businesses in the mobile phone and computer hardware industries but has worrying implication for other business sectors. These two business sectors have been very badly hit forcing many to suspend trading and even to go into liquidation, as was the case with one of the appellants.

The decision

In a much-awaited decision, the Advocate General (‘AG’) has unequivocally disagreed with the analysis of HM Customs & Excise and the VAT Tribunal. The AG has ruled that each transaction in the chain has to be assessed individually for VAT purposes, and its VAT treatment cannot be coloured by external factors such as the intention of others trader in the chain.

The AG resoundingly found against HM Customs & Excise on all five points referred to him. At present, this is only the AG’s opinion and has to be ratified by the full ECJ, which is expected to be in June 2005 (note - in about 95% of cases, the ECJ follows the AG’s opinion). In view of the strength of the opinion, it seems likely that the ECJ will follow it. In the meantime, HM Customs & Excise has issued a statement saying that they will not change its policy until the ECJ decision is released.

This will affect many businesses that have had large sums of VAT disallowed, as there is now a clear light at the end of the tunnel for these businesses to get their money back. In addition, many businesses have been forced into bankruptcy or suffered financial hardship as a result of HM Customs & Excise’s actions, so they will shortly have the opportunity to sue in the courts for compensation. This could conceivably cost the Government in excess of a billion pounds in repaid VAT and compensation payments.

Kretztechnik AG v Finanzamt Linz (Case C-465/03)

The situation concerning the recovery of VAT on costs relating to the issue of shares goes back to a 2001 Court of Appeal judgment in Trinity Mirror plc v CCE. Trinity Mirror Plc considered that the first issue of a share was not a supply for VAT purposes, so any related input tax was a general overhead and the VAT could be recovered in line with the businesses partial exemption position. HM Customs & Excise considered that the first time issue of a share was a supply for VAT purposes, and furthermore an exempt supply with no right to reclaim any related VAT on costs. HM Customs & Excise has consistently maintained this line, based largely on the 1995 European Court judgment in BLP Group Plc and had rejected any arguments that full or partial deduction should be available by reference to the wider VAT status of the business. The Court of Appeal agreed with HM Customs & Excise and refused to refer the case to the ECJ.

This is an emotive VAT issues for businesses, who feel unfairly treated that there is a VAT cost, often significant, in raising funds to set up or expand fully taxable activities which are otherwise entitled to deduct all VAT on their costs.

The Decision

The Advocate General has now given his opinion in an Austrian VAT case (Kretztechnik AG v Finanzamt Linz Case C-465/03). He has decided that in becoming listed on a stock market, and in issuing shares in that connection to new shareholders in return for the issue price, a public limited company does not make a supply for VAT purposes.

This means that any VAT on associated costs can be treated as a general overhead of the business, so if the business is fully taxable, they will be able to recover all of this VAT.

At present, this is only the AG’s opinion. The full ECJ has to ratify this before any change can take place. If your business has issued shares, and as a result, suffered a restriction in the amount of VAT it can reclaim, it can only go back three years to reclaim it. If the VAT was incurred more than three years ago, it is out of time and you will not be able to recover the VAT charged whatever the ECJ decides.

The ECJ normally reaches a decision about 6 months after the AG has expressed his opinion. So if your company incurred these costs more than two to two-and-a-half years ago, you would want to put in a protective claim to HM Customs & Excise to make sure that you do not go out of time and lose the chance to recover the VAT you are entitled to.

In this particular case, you only need consider putting in a protective claim if you are close to the three-year limit for making reclaims. So, if you only recently incurred the costs, there is no need to make a protective claim; just wait for the ECJ’s decision. You may consider making the claim yourself, or getting a professional adviser (like ourselves!) to do it for you. If you decide to make the claim yourself, you should write to HM Customs & Excise saying that you are making a protective claim based on the AG’s opinion in the Kretztechnik AG v Finanzamt Linz case and attached a schedule of the relevant invoices that you have not claimed the VAT back on.

As a result of this decision, a number of the large national accountancy practices have been going around businesses and small firms of accountants offering to put in protective claims for any businesses affected. However, it must always be borne in mind that the Opinion is only a recommendation, and that the Court is not bound to follow it in its judgment. Therefore, you may go to some considerable expense in making a protective claim and then find that the ECJ does not follow the AG’s Opinion and then you have lost your money. If you do receive an approach, consider asking for a contingent fee so that you only pay if you receive a repayment.

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc