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Andrew Needham of VAT Advisers Ltd highlights a further selection of recent VAT case decisions

Tribunal says taxpayer's supplies did not qualify as exempt examination services

The issue was whether specific supplies of services (i.e., the 'E - Marking Service') made by the Appellant to the local examination syndicate (‘the syndicate’) of a top university were exempt from VAT, on the basis that the syndicate is an eligible body within the meaning of VAT Act 1994 Sch 9 Group 6 Item 3(a) Note 4. The aforementioned E-Marking Service permitted the syndicate (as awarding body) to mark exam papers online, and perform a series of controls on the quality of the marking.

The Tribunal found that the Appellant’s supplies comprised three broad elements: exam paper management; standardisation; and marking with a view to forming 'an accurate judgment of each candidate's performance in the exam relative to his peers'. HMRC contended that the Appellant’s supplies consisted of bespoke sophisticated IT software and associated support services, which enabled the syndicate to deliver its examination services. However, said HMRC, the essential character of the supplies was IT services, not examination services. In those circumstances, the Appellant’s services were standard-rated.

The Tribunal also found that although the software was bespoke to fit the needs of the syndicate, the core applications used were not unique to the educational sector. Furthermore, the Appellant did not have a hand in setting the curriculum, devising exam questions, monitoring the performance of examiners, or the validation or accreditation of exams. There was a clear division of responsibility between the Appellant and the syndicate, with the Appellant’s role being limited to the functionality of the process for delivering exams and the devising of IT solutions. The actual supplies themselves had no intrinsic educational content. Art 13(1)(i) of the Sixth Directive exempts education and vocational training including services closely linked thereto. It makes no specific mention of examination services, so the interpretation of the services in Note 4 must be construed strictly. In not fitting into any of the specified categories mentioned in Note 4, the Tribunal looked at whether the Appellant’s services qualified as ‘other services provided with a view to ensuring educational and training standards are maintained’.

The Tribunal decided that the Appellant’s services were too remote and not sufficiently closely linked to education to fit into Note 4. The Appellant’s supply of IT services was separate and distinct from the syndicate’s supply of examination services. This was substantiated by the fact that the syndicate still provided examination services for some subjects using the traditional paper-based process.  The Tribunal held that the Appellant's supplies were not examination services, and the appeal was thus dismissed.

RM Education plc (VTD 20,911)

ECJ says 'unjust enrichment' rules cannot be applied to VAT claim on chocolate teacakes

The case relates to output VAT overpaid  by a household name retailer on zero-rated teacakes, and looked at the taxpayer's rights under European Law to rely on domestic zero-rating, and HMRC's application of the unjust enrichment defence before May 2005. [This is the long-running Marks & Spencer saga, which TaxationWeb has been following for many years - Steve Allen of VAT Solutions (UK) Ltd. prepared a useful summary of the history of the case up yo this point in his article Marks & Spencer gets to have its (Tea)Cake and Eat It! - Ed.]

HMRC had always considered that the Appellant’s chocolate covered teacakes were biscuits rather than cakes, and as such, were standard-rated. In 1994, HMRC accepted they had made an error, and that the teacakes were zero-rated. Following initial litigation, HMRC accepted the claim should not be time-barred, but insisted on only repaying 10% of the £3.5 million VAT repayment on 'unjust enrichment' grounds.

After going through the domestic courts, the House of Lords referred the case to the ECJ. The questions asked whether a taxpayer has a direct Community right or rights under general Community principles to zero-rate, and if so, whether the UK's unjust enrichment rules at that time were contrary to the Directive. This difference in treatment was between payment and repayment traders prior to 26 May 2005. Prior to this date, claims made under VATA 1994 s 80 were subject to the unjust enrichment defence only in respect of claims for 'repayment' of output VAT overpaid. Any repayment trader making an output tax claim did not at that time come within the terms of the unjust enrichment provisions of s80, as the claim would be for output tax overdeclared rather than overpaid, as repayment traders do not pay any VAT to HMRC. The ECJ ruled that whilst there is no directly enforceable Community law right to zero-rating, with it being a derogation, such derogations do not extend to removing claims for VAT mistakenly accounted for on zero-rated supplies entirely from the scope of the Directive, and the principle of fiscal neutrality provides a right for taxpayers to recover such sums mistakenly charged.

In terms of unjust enrichment, the ECJ looked at two principles. Firstly, the Court said that although unjust enrichment is a valid defence, it was contrary to the principle of fiscal neutrality to apply unjust enrichment to a payment trader but not a repayment trader, where they have marketed similar goods. With regards to the principle of equal treatment, which appeared to be broader in scope, this required that similar situations should not be treated differently unless differentiation is objectively justified. The Court indicated that the difference in treatment between similar claims by repayment and payment traders was not justified. The ECJ left it for the national court to determine whether these principles had been contravened.

Given that the ECJ judgment came out in April last year, the return of the case to the House of Lords suggested that we would see the national court's interpretation and views. However, HMRC have decided not to pursue the case, and have repaid the claim. The HoL therefore allowed the Appellant’s appeal with minimal comment. It is not clear why HMRC waited so long to decide not to pursue the case. Certainly, the decision indicates that they thought they would lose this case as soon as the ECJ had given its views.

HMRC's withdrawal leaves us all in the same position as we were after the ECJ decision, in that HMRC cannot reasonably apply the defence of unjust enrichment to any claim for overpaid output VAT by a payment trader made before 26 May 2005. Consequently, where such a claim still remains open, HMRC should now repay the claim subject to verification. Where a claim was made, rejected, or settled in part, but not appealed, and is hence closed, taxpayers can still seek repayment on the basis that HMRC are required to revisit the claim following the decision in this case. UK legislation contains a valid three-year time limit for claims, thereby blocking any fresh claims from being submitted for periods over three years old. Also, the discrimination point has been dealt with regarding claims made after the 2005 law change, so UK law is now EU-compliant in this area. This would suggest that the potential for revisiting blocked claims is limited to those claims which have already been lodged with HMRC before May 2005.

Marks & Spencer plc, ECJ (C-309/06), 10 April 2008, and House of Lords, 4 February 2009

Comment:  HMRC have since accepted in R&CB 05/09 that VAT refund claims made before 26 May 2005 are not now subject to unjust enrichment.

ECJ says 'Lennartz' does not apply to assets put to taxable/non-taxable use

This case concerned the issue of whether the ‘Lennartz’ principle of upfront recovery could be applied to capital goods where there is mixed use. The AG’s Opinion in the case created some interest due to unofficial translations casting doubt on its application in such circumstances. However, the ECJ judgment has largely ignored the AG, finding that input tax incurred in making both taxable and non-taxable business supplies cannot be recovered in full. The Court made a clear distinction between this and Lennartz type cases where the mix is business and non-business (i.e., private use).

The Appellant promotes the interests of the agricultural sector in four Dutch provinces. Its members, who are traders in that sector, pay a membership subscription to it, the greater part of which goes towards activities designed to promote their general interests. During 2000, the Appellant acquired goods and services which it used both for its activities subject to VAT and for other unrelated activities. The Appellant applied for full deduction of the amounts of input VAT paid in respect of those goods and services, including those relating to its activities in promoting the general interests of its members.

By its first question, the national court sought to establish whether there was a right to deduct VAT under Articles 6(2) and 17(2) of the Sixth Directive, where the taxable person has used those goods and services both for the purposes of its business and, according to the wording of the question referred, ‘for purposes other than business purposes’. This refers to the services provided by the Appellant which promote the general interests of the members.

Article 6(2)(a) of the Sixth Directive provides that the following shall be treated as a supply of services for consideration:

“the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for the purposes other than those of his business where the value added tax on such goods is wholly or partly deductible.”

The Court referred to the Charles and Charles-Tijmens case, which looked at the mixed use of capital goods for business and private purposes, and which allows the taxable person to treat mixed-used capital assets as being immediately recoverable in full, with output tax on private use being accounted for under Article 6(2)(a). However, the Court distinguished this case from the Appellant’s circumstances, not only on the basis that the Tijmens case involved immovable property, but also that the asset in question was put to non-business/private use. In contrast, the Appellant in this case was putting goods and services to a non-taxable use, but as these activities constituted its main corporate purpose, they could not be considered as being for ‘purposes other than those of his business’. The Court also cited the Securenta ECJ case (C-437/06), which stated that non-economic activities such as those in the present case cannot give rise to a right to deduct.

It was not disputed that the Appellant’s activities of promoting the general interest of the group are not activities subject to VAT. The Court did agree with the AG’s Opinion to the extent that Article 6(2)(a) is not intended to result in such outside-the-scope-of-VAT transactions being considered as for ‘purposes other than’ those of the business. Such an interpretation would render Article 2(1) of the directive meaningless.

Consequently, the Court’s answer to the first question is that Articles 6(2)(a) and 17(2) must be interpreted as not being applicable to the use of goods and services allocated to the business for the purpose of transactions other than the taxable transactions of the taxable person, as the VAT due in respect of the acquisition of those goods and services, and relating to such transactions, is not deductible. In light of the answer given to the first question the court did not deem it necessary to answer the second.

Vereniging Noordelijke Land- en Tuinbouw Organisatie, ECJ (C-515/07), 12 February 2009