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Andrew Needham, Director of VAT Solutions (UK) Ltd, highlights recent VAT decisions.

ECJ says supplies of dental prostheses to other EU Member States is taxable

The ECJ recently delivered its judgment in a case concerning the treatment of intra-EU supplies of dental prostheses.
 
The Appellant is a Luxembourg company that makes and repairs dental prostheses for customers in Germany. Under Luxembourg law, these goods and services are exempt from VAT in accordance with Article 13A(1)(e) of the Sixth Directive (i.e. Luxembourg does not treat these supplies as taxable under the transitional provisions of Article 28(3)(a) and point 2 of Annex E.

The Appellant argued before the Luxembourg national courts that it had a right of deduction of input VAT on expenditure related to these supplies as follows:

• on both the goods and services element before 1 January 1993 by virtue of their falling within Article 15, thus giving a deduction right under Article 17(3)(b) as it then read;
• on the goods element after 1 January 1993 by virtue of it falling within Article 28cA(a), thus giving a right of deduction under Article 17(3)(b) as it now reads.

The Appellant’s argument relied on an interpretation that Article 13 addresses supplies made within the territory of the Member State, but that the provisions of Articles 15 and 28 take precedence where transactions are between Member States.

The Luxembourg tax authority argued that, on the contrary, the special exemption of Article 13A(1)(e) took precedence over the more general provisions of Article 15 & 28.

The Court did not accept the Appellant’s argument against the detail and purpose of the Sixth Directive provisions, and concluded that if the Appellant’s argument was accepted, a number of distortions would be created.

A further twist in the case is that Germany does treat such supplies as taxable under Article 28(3)(a) and point 2 of Annex E, and thus subjects the dental prostheses to German VAT.  It was suggested, therefore, that the inability to take an input tax deduction in Luxembourg gave rise to double taxation. The Court rejected this suggestion, noting that whilst this may indeed give rise to a distortion in Germany, it cannot in any way authorise Luxembourg to justify the correction of the position by a measure in Luxembourg which would itself create a distortion in that country, and which would not be in accordance with the Sixth Directive.

Administration de l’enregistrement et des domaines v Eurodental Sarl (C-240/05), 7 December 2006

Tribunal allows VAT recovery on share acquisition costs 

The Appellant provides property management services to a number of associated businesses. It acquired a 40% shareholding in an insurance broker, and reasoned that, although this was a minority shareholding and did not make an appointment to the board of the broker, it did have a more ready access to obtaining the insurances which it needed to arrange in the course of its operations.

The disputed matter was the deductibility of expenses of the acquisition. HMRC argued the 40% shareholding was merely an investment, and that the acquisition costs had no direct and immediate link with the Appellant's taxable supplies.  The Tribunal Chairman considered the ECJ judgments in ‘CIBO Participations’ and ‘Kretztechnik’, and found that the necessary linkage to taxable supplies was present.  The taxpayer’s appeal was therefore allowed.

Maybeck LLP (VTD 19,898)

Tribunal says intermediary services provided to a mortgage lender is taxable

A recent case which involved a detailed look at the financial services exemption under UK and EU law.

The background to the appeal is that only solicitors and licensed conveyancers are allowed to prepare the instruments necessary to transfer or charge any property in the remortgage process, and hence mortgage lenders must instruct independent solicitors if their own in-house solicitors do not prepare mortgage deeds. The business of the appellant is to contract with mortgage lenders to provide a service which the appellant identified as having four distinct parts:

• negotiating the appointment of, and fees payable to, the panel solicitors who will provide the conveyancing services
• managing payment of the fees due to the panel solicitors for conveyancing services
• managing appointment of solicitors to the panel and monitoring allocation of cases
• performing quality assurance checks on the efficiency and competency of the panel solicitors

The Appellant argued that there was a composite supply, of which the first two elements were the dominant part (i.e. a mix of the provision of financial services and intermediation/negotiation thereof), with the latter two elements being ancillary such that there was a single exempt supply. Alternatively, the Appellant argued that there was a multiple supply, with the first two elements being exempt, and the latter two elements being taxable. HMRC argued that there was a single supply, with no dominant/ancillary constituents or element of financial intermediation/negotiation.  The true nature of supply was a taxable service of management, administration, auditing and IT services in connection with the allocation and appointment of the panel solicitors to handle the conveyancing work.

The Tribunal Chairman, in applying ‘Card Protection Plan’ principles on single and composite supplies, agreed with HMRC that the Appellant made single composite supplies subject to VAT at the standard rate. The appeal was thus dismissed.

Morpheus 2002 Ltd (VTD 19,854)