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Steve Allen of VAT Advisers Ltd highlights a further selection of recent VAT cases.

ECJ Says Dutch Input Tax Block On Entertainment And Cars IS Compatible With EU Law

This case involves two joined Dutch appeals, with both cases concerning exclusions from the right to deduct input tax which the Netherlands had maintained upon adopting the Sixth VAT Directive.

The first case concerned input tax recovery on cars, where the Dutch authorities disallowed the VAT on the basis that they had not been used wholly for the needs of the company.

The second case concerned input VAT recovery on a wide range of goods and services, including the provision of food and drink to staff, business gifts, and the provision of accommodation and recreation to staff. The case also looked at the Dutch treatment where part-consideration is received, which allows input tax to be recovered up to the equivalent value of the consideration received, with the balance being blocked.

This case caused a flurry of activity earlier this year when the Advocate General's (AG's) Opinion was released, as it suggested that some of the Dutch input tax restrictions were incompatible with EU law because they were not properly defined. This led to speculation that the case could invalidate the UK’s block on business entertainment, which was of a similar nature. However, the ECJ has subsequently disagreed with the AG, finding that all the Dutch input tax restrictions in place at the date of adoption of the Sixth VAT Directive were actually compatible with European law.

Having concluded that the exclusions from credit were compatible with EU law, the ECJ proceeded to look at a third question in the second case. This looked at subsequent amendments to the rules regarding the provision of food and drink which may, in certain specific situations, widen the scope of input tax credit exclusion. Here, the ECJ did agree with the AG that the essential changes reduced the scope of the exclusion from input tax credit which is compatible with derogations under Article 17(6) of the 6th Directive. The existence of a theoretical scenario which might result in the widening of the exclusion did not preclude such amendments.

X Holding BV (C-538/08) and Oracle Nederland BV (C-33/09), European Court of Justice, 22 April 2010

Comment: the fact that the ECJ has subsequently ignored the AG’s Opinion presumably means that the UK law is no longer under threat.

ECJ Says Taxpayers' Claim for Compound Interest on VAT Refunds was Out of Time

On 25 March 2010, the Court of Appeal released its Judgment in a high-profile compound interest case, finding for HMRC. Although the taxpayers lost their appeal on whether compound interest is properly payable from HMRC on VAT refunds, it seems they only lost on the basis that they had brought their claims too late.

Whilst the decision appears to have ended this particular litigation, the CoA suggested that the underlying issue concerning a taxpayer’s entitlement to seek compound interest should, in an appropriate case, be the subject of a reference to the ECJ.  As the claimants lost on time limits, a reference was not possible, and whilst the arguments for compound interest are compelling on the basis of current case law, it now looks likely that a resolution of this issue will not be reached for some time yet.

In reaching its conclusion, the Court took account of its decision in FII Group in February 2010. The combined effect of these decisions is to create a degree of uncertainty in relation to the time limits applying to the bringing of such claims. The argument that the six-year time limit for the issue of High Court claims in VAT cases runs from the discovery of the liability mistake (or the date upon which a taxpayer could reasonably  have discovered the mistake), remains a forceful one. However, on the basis of FII, the Courts could ultimately decide that taxpayers will only be entitled to compound interest on tax overpaid in the period beginning six years before they issue their High Court claim.

If the latter scenario was accepted by the Courts, it could give rise to a rolling deadline operating in similar fashion to the four-year cap on reclaiming overpaid tax. However, as the decision in FII was solely concerned with direct tax, it is also possible that the Courts will restrict its application to direct tax cases.

Businesses should continue to apply a cautious approach to making claims of this nature, but where claims appear arguably valid, urgent consideration should be given to the issue of High Court proceedings. [ See also VAT Case Update I for further information on the "Compound Interest Project" - Ed. ]

FJ Chalke Ltd & Anor (a.k.a ‘VIC GLO’) Court of Appeal (EWCA Civ 313), 25 March 2010