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Steve Allen of VAT Advisers Ltd reports on a selection of recent VAT cases.

ECJ says Provision of Retail Vouchers in Exchange for Salary is a Taxable Supply

The Appellant is a global pharmaceutical company which allowed its employees to exchange part of their remuneration for retail vouchers under a salary sacrifice arrangement. It purchased the retail vouchers at a discount to their face value, and incurred VAT on their purchase. The employees sacrificed salary to the extent of the discounted price that had been paid for the vouchers by the Appellant. Initially, the Appellant did not reclaim the VAT incurred on the purchase of the vouchers, nor did it account for output VAT on the provision of them to the employees. However, following advice, the Appellant submitted a VAT reclaim on the basis that they were a business overhead cost. HMRC rejected the claim on the basis that the Appellant was either not entitled to reclaim the input VAT, or, if it was entitled, that output VAT must be accounted for on the value provided to the employees (i.e., value of salary sacrificed).

The ECJ agreed with HMRC’s argument that the provision of the vouchers comprised a supply of services (the sacrificed salary being consideration for those services). As such, output VAT was due on the value of salary sacrificed. However, the Appellant was also entitled to reclaim the VAT incurred on the purchase of the vouchers.

The decision has worrying implications for any business that currently operates a salary sacrifice scheme of some kind. Any scheme that allows the provision of retail vouchers to employees is now likely to be subject to some investigation from HMRC, and could be assessed for VAT due for the previous four years.

Astra Zeneca (C-40/09)  ECJ, 29 July 2010

Tribunal says Expenses from Third Party Builders related to Exempt Insurance Supplies

The Appellant is a not-for-profit company whose primary purpose is to help raise standards in the new housebuilding industry, and provide new homeowners with consumer protection.

When a builder registered with the Appellant completes the construction of a new home, it pays over a fee to the Appellant, which then carries out an inspection of the building. If the building passes the inspection it is accepted for cover under the Appellant’s ‘Buildmark’ policy. Under this policy, builders are obliged to correct any relevant defects, but if they fail to do so, the Appellant will either pay the homeowner the cost of the remedial works, or else pay a third party builder to carry them out. It is the VAT incurred by the Appellant on these remedial works which is in dispute.

The Appellant argued that the third party’s services are used for the purposes of its taxable activity of ensuring compliance with warranties undertaken by registered builders in favour of homeowners. In other words, the Appellant discharges the registered builder from its obligations by engaging another builder to undertake the work. The Appellant said it acts for and on behalf of the original builder, and supplied these services on to the original builder. In contrast, HMRC contended that the services are used for the purposes of the Appellant’s exempt supplies of insurance services.

After examining the relevant arrangements and agreements, The Tribunal found that the Appellant’s liability is as an insurer, and that it is put on risk from when the Buildmark policy is granted. The Appellant receives the third party’s building services as principal, and the services are incurred in relation to the exempt supply of insurance to the homeowner, rather than in relation to any taxable supplies to the original builder. The appeal was thus dismissed.

National House Building Council (TC00611)

Tribunal says Management of Foreign Currency Exposure for Loans is an Exempt Supply

This case concerned the correct VAT liability of ‘managing foreign currency exposure of multi-currency loans’ which were provided by third party lenders. The Appellant argued its supplies were exempt, but HMRC argued they were taxable supplies of debt management by a person other than the one who had granted the credit.

The Tribunal said the Appellant used its best endeavours to reduce the capital value of the loans through forex transactions, even though it only instructed brokers to carry out these forex deals (the brokers were occasionally part of the lender’s Treasury team but were usually independent of the lender), and did not do the exchanges itself. Viewed in total, the services were ‘transactions concerning currency’ under Art 135(1)(e), and thus were exempt. The Tribunal said the exemption under this heading went beyond the mere payment or transfer of currency, as the latter was exempt under the different heading of ‘transactions concerning payments/transfers’ (Art 135(1)(d)).

Where the broker being instructed was independent of the lender, the taxpayer’s services were also exempt as ‘negotiation concerning currency’, since the Appellant brought together the broker, the lender, and the banks. It did not matter that the underlying loan had already been granted before the Appellant became involved – the negotiations were relevant to the later forex deals and the FNBC case confirmed the currency deals were transactions.

Interestingly, HMRC wanted any decision reserved until the Axa case was decided, if the Tribunal was minded to find for the taxpayer, but the Tribunal declined to reserve its decision due to the delay this would cause.

The ECU Group plc (TC00585)