This month we finally see the long-awaited VAT grouping changes arrive, the concept of fixed establishments is under the spotlight, and we look at a curious case of tribunals reaching the opposite conclusion on very similar facts.
VAT grouping for non-corporates is now a reality
On 1 November 2019 the long wait for the extension to the VAT grouping rules finally came to an end. Sole proprietors and partnerships can now apply to be VAT grouped with the corporate entities they control (subject to conditions).
Sole proprietors and partnerships operating businesses that are established in the UK and in control of one or more companies, are eligible to register in a VAT group with those companies. There are advantages, the more obvious being that transactions between the VAT group members are largely disregarded for VAT purposes. However, VAT grouping can bring some disadvantages and is not suitable in every situation. For example, the joint and liabilities of VAT group members for the VAT debts of the group and the impact on partial exemption recovery methods already in place.
Comment: The opportunities the new rules may bring for improving VAT efficiency or reducing irrecoverable VAT costs are very welcome. Unfortunately, the rules do not extend further to non-incorporated associations. In addition, trusts registered as partnerships of the trustees for VAT purposes are also not likely to benefit, although this point is still under review. The original European case decisions that forced the UK change went much further and we might hope to see future announcements with further extension to other bodies if these changes are well received.
Please get in touch with your usual Saffery Champness contact or Nick Hart if you wish to discuss this further.
EU Advocate General’s opinion on fixed establishments
The Advocate General’s (AG’s) opinion in Dong Yang Electronics (C 547-18) has been released. AG opinions are not binding on the European Court, but they provide the court with guidance and are often influential. The case, originating in Poland, suggests a subsidiary company of a non-EU parent company, cannot create a fixed establishment (ie a presence for VAT purposes) of that parent company (other than in some circumstances where contractual arrangements are put into place which artificially reduce a VAT liability).
The UK approach to fixed establishment (which is an important concept within the place of supply of services rules), involving a separate legal entity, has long been based on the DFDS European case decision. DFDS is not popular and this AG’s opinion is quite dismissive of DFDS overall.
Comment: Whilst it feels logical that a subsidiary company in an EU country should not create a fixed establishment of its non-EU based parent company, HM Revenue & Customs’ (HMRC’s) current guidance to officers does mention one significant point that the AG has not addressed. In HMRC’s view, a fixed establishment can be created by a third party (which could be a subsidiary company) acting as a ‘dependent agent’.
We await the court’s judgement in Dong Yang Electronics with interest and it may settle the argument that DFDS cannot be widely applied to determine whether a fixed establishment of a non-EU company is present or not.
If you have fixed establishment concerns regarding EU based subsidiaries within your corporate group, particularly in a post-Brexit scenario, please contact Sean McGinness to discuss this further.
RSR Sports Limited and single supplies of services
The First Tier Tribunal (FTT) decided that RSR was providing a single composite VAT exempt childcare service in respect of the children’s holiday camps it was operating. HMRC argued that the service was providing activities and that the childcare was a by-product of the predominantly vatable service.
Comment: This is perhaps not a remarkable decision in itself, which turned on its facts, and there was some reasonable justification for the conclusion reached. What is more interesting is how similar the facts were in this case to a previous FTT decision in Sports Academies Limited (covered in our June 2016 VAT Update). In that case, the FTT decided a very similar single composite service was, in fact, vatable.
Even the tribunal chairman felt it necessary to justify the decision in RSR by saying:
“Finally, in relation to the fact that my conclusion in relation to the Holiday Camp Services differs from the conclusion which was reached by the First Tier Tribunal in Sport Academies in relation to somewhat similar services, I am, of course, not required either to follow the latter decision or to identify a meaningful distinction between the facts in the two cases.”
This is a welcome reminder that until decisions reach at least Upper Tribunal level, they do not set a precedent for the taxpayer or HMRC to rely on. In cases involving goods and services that arguably have a bundle of elements, it pays to tread very carefully before reaching a conclusion on the VAT treatment. The available case law on single and multiple supplies can often appear contradictory and the principles derived abstract and impractical.
For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.