VAT Casebook - A summary of recent VAT cases

EC Commission v UK Case C-86/11 Whether non-taxable persons can be included in a VAT group.

The Court of Justice has issued its judgment in the above case. As expected, the Court has dismissed the Commission's action.

In 2008, the Commission sent a formal communication to the United Kingdom Government asserting that the UK's VAT legislation – which permits non-taxable persons (such as pure holding companies or dormant companies) to be included in a VAT Group was incompatible with Articles 9 and 11 of the VAT Directive. The UK considers that its VAT law in this regard is not incompatible and refused to amend it. The Commission brought the present case to the CJEU.

The Commission argued that Article 11 of the Directive must be interpreted as meaning that non-taxable persons cannot be included in a VAT Group. Article 11 permits Member States to regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links. The Commission argued that the expression "any persons" must refer to 'taxable persons' and that as members of a VAT group are to be regarded as a single taxable person, by implication, each constituent member of the group must itself be a taxable person. The Commission also argued that if the expression 'persons' were to be understood as referring to all persons without restriction, then a VAT group could be composed solely of non-taxable persons which would be contrary to the VAT Directive.

The UK argued that the Commission's action was unfounded and should be dismissed. It argued that the words 'any persons' used in the English language version of Article 11 implies that the reference is to persons in general whether they are taxable or non-taxable. Furthermore, if it had been the legislature's intention to exclude non-taxable persons from VAT groups then different wording would have been used.

In its judgment, the Court has found entirely against the Commission. Article 11 does not make any distinction between taxable persons and non-taxable persons. As a consequence, it is not apparent from the wording of Article 11 that non-taxable persons cannot be included in a VAT group.

HMRC v The Honourable Society of Middle Temple [2013] UKUT 0250 TC Whether the supply of buildings for rent and the supply of unmetered water are separate supplies.

The Upper Tribunal has issued its judgment in the above case and has allowed HM Revenue & Customs' (HMRC's) appeal from the First-tier Tribunal's decision. The Honourable Society of Middle Temple (Middle Temple) is one of the four Inns of Court which owns land and buildings which it lets to barristers as chambers and to some other tenants for business use. Middle Temple had 'opted to tax' the land in question and charges VAT on the rent in the normal way. Middle Temple also owns a network of underground pipes through which cold water is supplied to the chambers. Middle Temple effectively buys in cold water from its supplier (Thames Water) and then re-supplies the cold water to its tenants. However, there are no water meters in the chambers and so the tenants are charged for cold water by reference to the area occupied. Middle Temple considers that the supply of the buildings for rent and the supply of unmetered water are separate supplies and that the supplies of water are zero-rated. The First-tier Tribunal agreed with that analysis and allowed Middle Temple's appeal.

HMRC appealed – the only issue arising on the appeal was whether Middle Temple made a single composite supply of the leasing of immovable property incorporating the provision of cold water or two independent supplies of property and water. Citing earlier jurisprudence and case law, HMRC contended that obtaining a supply of cold water from Middle Temple was simply a means of better enjoying the lease of the premises and that the cold water was not an aim in itself for the tenants because the supply of water was of no use without a lease of the premises in question.

Comment – A victory for common sense. This result was expected as the Commission had lost a similar case against Ireland earlier this year. It will be welcomed by all UK VAT groups that have pure holding and dormant companies as members. Given the Commission's stance in this (and other similar cases) it is feasible that it will seek to amend the Directive at a future date. Until that happens, the UK's law in this regard is to be considered as compatible with the Directive.

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Middle Temple argued that the First-tier Tribunal's decision was correct and that under the principle of fiscal neutrality, the tenants should not be treated any differently to similar tenants buying water directly from a third party supplier. Moreover, the supplies in question were clearly separate and, it was contended, that the counterpart to the principle against artificially splitting what, to a consumer, is a single supply is that supplies which are separate from the point of view of the consumer must not be artificially combined.

Having considered the case law of the Court of Justice (in particular the cases of Card Protection Plan, Levob, Field Fisher Waterhouse and BGZ Leasing), and having regard to all of the circumstances in which the letting of the premises takes place, the Upper Tribunal concluded that the First-tier Tribunal erred in law when it concluded that Middle Temple made separate supplies. Accordingly, HMRC's appeal was allowed.

National Exhibition Centre (NEC) [2013] UKFTT 289 (TC) Whether booking fees are regarded as consideration for an exempt supply of card handling services.

The First-tier Tribunal (FTT) has issued its decision in the above case. Allowing NEC's appeal, the FTT has confirmed that, on the evidence, the 'booking fees' paid by customers purchasing tickets for concerts at NEC venues - where such purchases were made by credit or debit cards - was consideration for an exempt supply of card handling services.

The NEC case follows earlier similar cases (in particular Bookit Ltd and Scottish Exhibition and Conference Centre) that were also determined in the taxpayer's favour. Notwithstanding defeat in these earlier cases, HM Revenue & Customs (HMRC) took the view that the facts in NEC's case were sufficiently different such that they could be distinguished.

In essence, HMRC had three principal arguments. Firstly, that the booking fees were consideration for a single taxable supply made by the promoter to the customer that was simply collected by NEC on the promoter's behalf. Secondly, if the Tribunal did not accept the first argument, the booking fee was simply consideration for a single taxable supply of 'booking' services (ie the facilitation of buying a ticket for the concert) supplied by NEC to the customer. Finally, if the Tribunal did not accept that argument, whilst the supply made by NEC was one of 'card handling', this was not exempt from

VAT as, according to earlier case law, NEC did not obtain the necessary authorisation codes and could not therefore be providing a 'financial' service.

On the evidence, the FTT concluded that all of the contentions advanced by HMRC were wrong. There was a single supply of card handling services by NEC to the customer and it was irrelevant that NEC did not obtain the authorisation codes. The booking fees were paid by the customer in consideration of the payment handling service and, as a consequence, NEC's supply was exempt from VAT under the provisions of Article 13B(d).this case, legitimate expectation is the sole ground of appeal.

W M Morrison Supermarkets PLC [2013] UKUT 0247 (TCC) Whether the supply of disposable barbecues is subject to VAT at standard rate. The Upper Tribunal has issued its judgment in the above case. The issue to be decided in the case was whether W M Morrison Supermarket PLC's (hereafter Morrison) supply of disposable barbecues was a single composite supply subject to VAT at the standard rate or whether there were separate supplies of the individual elements of the barbeque. If the latter, the supply of the charcoal should have been subject to VAT at the reduced rate of 5%. Morrison had submitted a voluntary disclosure to reclaim VAT it considered it had overpaid and HM Revenue & Customs (HMRC) rejected the claim. The First-tier Tribunal found against Morrison and it appealed to the Upper Tribunal.

In a long and complex judgment which refers extensively to previous case law including such cases as Card Protection Plan (CPP), Commission v France (gas and electricity case), Talacre Beach Caravan Sales Ltd (Talacre) and Commission v France (Undertakers case), the Upper Tribunal has concluded that the correct test to be applied in order to ascertain whether there is a single or multiple supply will always be that laid down by the Court of Justice in CPP. In other words, the questions to resolve are firstly, whether there is a principal element of the supply to which all other parts are ancillary and, secondly, whether, in the eyes of the customer, the ancillary element provides a means of better enjoying the principal element. If the answer to both of these questions is yes, then there is a single supply.

Comment – another in a long line of single v multiple supply cases. The Upper Tribunal is of the view that where there is genuine contractual freedom to obtain services from a third party and, consequently, a separately identified charge is made for the service, this supports the existence of several independent supplies rather than a composite supply. Unfortunately, this was not the case here.

Comment – this is a significant victory for NEC and follows similar decisions of both the Tribunal and the Court of Appeal in similar cases. Given that it is only a First-tier decision, it is only binding on the parties to the appeal. It remains to be seen whether HMRC will appeal. However, it seems clear that, despite the earlier defeats, HMRC is intent on fighting this cause so an appeal cannot be ruled out. If they have not already done so, businesses with similar fact patterns as NEC should consider the submission of protective claims for overpaid VAT.

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In the Morrison case, the supply of the charcoal element was ancillary to the principal supply and was a means of better enjoying the utility of the disposable barbecue. Morrison argued that the Court of Justice judgment in Talacre meant that the UK was not entitled to employ a CPP type analysis. In the absence of CPP, it was contended for Morrison that the analysis adopted by the Court of Justice in the Undertakers case was the correct approach. In other words, it was entitled to 'carve out' the charcoal element of the supply and apply the reduced rate of 5% to that element as it constituted a 'concrete and specific aspect' of the disposable barbecue. The Court concluded that neither Talacre nor the Undertakers case assisted Morrison. Talacre would have only provided assistance if the UK legislation had specifically referred to charcoal in barbecues being subject to the reduced rate (which it does not) and the Undertakers case would only apply where the domestic legislation seeks to restrict the application of a reduced rate of VAT (which the UK's law does not do). According to Justice Vos, the First-tier Tribunal was correct when it concluded the UK domestic legislation does not seek to carve out the charcoal element of the supply. Moreover, it is not open to a taxpayer to carve out an element of what would otherwise be treated as a single supply in order to apply a reduced rate to that element. After all, HMRC is simply seeking to apply Schedule 7A which, on its terms has no application to disposable barbecues.

AES-3C Maritza East 1 EOOD Case C-124/12 (AES) Whether input tax incurred on transport and clothing used for taxed operations is reclaimable.

The CJEU has issued its judgment in the above case without the benefit of an Advocate General's opinion. This was a referral to the CJEU by the Bulgarian courts and related to whether VAT input tax incurred by AES on the provision of transport services, protective clothing and similar costs could be reclaimed. AES has no employees itself but, instead, it contracts with a third party (AES Services) for supplies of staff. AES owns and operates a power station and, due to its remote location, it needed to arrange for the transportation of the hired-in workers. Similarly, under Bulgarian health and safety requirements, AES was obliged to equip the workers with suitable protective clothing. The Bulgarian tax authority argued that as the staff were not employees of AES, the input VAT could not be reclaimed. AES argued that although the workers were not employees in the strictest sense, the workers were 'economic' employees since AES derived a benefit from their work. It therefore contended that the costs incurred were for the purposes of its taxable activities and should be fully reclaimable.

The CJEU considered the relevant case law (including case C-258/95 Fillibeck) and re-confirmed that the right of deduction contained within the VAT Directive is a right which is an integral part of the VAT scheme and which, in principle, may not be limited. The deduction system is intended to relieve the trader entirely of the burden of the VAT payable in the course of its economic activities which ensures neutrality of the tax system for businesses involved solely in taxable activities. The Court also confirmed that the right of deduction enshrined in the Directive is only subject to the condition that the goods or services must be used for the purposes of the taxed operations of the taxable person. The fact that the workers were not employees of AES was neither here nor there as the costs incurred on transport and clothing were clearly used for such purposes. The Bulgarian authority's contention that the input VAT was not deductible ran counter to the principle of neutrality as it was clear that the costs had been incurred by AES for the purpose of its own taxed transactions. Accordingly, the input VAT was deductible.

PPG Holdings BV – Case C-26/12 Whether VAT on the management of pension funds is reclaimable.

The CJEU issued its judgment in this Dutch case relating to whether VAT incurred on the management and operation of a pension fund could be reclaimed. Ignoring the recommendations set out in the earlier Advocate General's opinion, the Court has ruled that the Directive on VAT must be interpreted as meaning that where, as in this case, a taxable person has established a pension fund as a separate legal entity, VAT incurred on the management and operation of the fund can be claimed. This is on condition, however, that there is a direct and immediate link between the costs in question and an output transaction or transactions which give rise to a right of deduction. The Court has also confirmed that a pension fund of this nature cannot be classified for VAT purposes as a 'special investment fund'.

In accordance with Dutch law at the time, PPG established a pension scheme for the benefit of its employees. In order to protect the pensions, the scheme was established as a separate legal entity. One of PPG's subsidiaries entered into contracts with suppliers of services relating to the administration of the pensions and the management of the assets of the fund. The cost of these services were paid for by the subsidiary and were not passed on to the fund. The Dutch tax authority argued that as the recipient of these services was the fund, the subsidiary was not entitled to reclaim the VAT incurred.

Comment – This is a difficult judgment to get to grips with but sets out the basic rules for when the various analyses of compound and multiple supplies are to be employed. For that alone, it is well worth a read

Comment – Why this case was referred to the CJEU in the first place is something of a mystery. However, that aside, the Court has come to what can only be described as a sensible and correct judgment. To have come to any other conclusion would, in the circumstances, have been somewhat absurd.

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PPG argued that the costs were general costs of its undertaking which entitled it to claim deduction of the VAT.

In her earlier opinion, Advocate General Sharpston was of the view that only the pension fund itself would be entitled to reclaim the VAT incurred on the costs and then, only if there was a link to its own taxable activities. By its judgment, the Court has dismissed that view. By setting up the fund in the way it had, PPG had complied with its legal obligations imposed on it by Dutch law. In the circumstances, if the costs incurred on the operation and management of the fund were part of PPG's general costs (which it was for the national court to decide) and the costs were attributable to activities giving rise to a right of deduction, the VAT would be reclaimable.

Medicom SPRL (C-210/11) and Maison Patrice SPRL (C-211/11) Whether VAT is accountable on the private use element of a business asset.

The CJEU has issued its judgment in the above two cases which, due to the similar issues were joined together. Both cases have, yet again, been decided without an Advocate General's opinion. The main issue in both cases related to the use of a building by the taxpayer's staff for private purposes. Each building had been adopted by the taxpayers as business assets but contained a dwelling for the private use of staff free of charge. In both cases, the taxpayers declared the use of the private quarters as a benefit in kind.

Earlier case law of the CJEU, in particular the cases of Lennartz and Seeling had determined that where a taxable person chooses to treat capital goods that are used both for business and private purposes, the VAT incurred on the purchase of those goods is, in principle wholly and immediately deductible. The question to resolve was whether Article 6(2)(a) of the 6th VAT Directive meant that, in each case, the taxpayers were liable to account for VAT on the 'private use' of a business asset or whether the deemed supply should be categorised as a 'leasing or letting of immovable property' which would be VAT exempt.

The Court has held that, as one of the essential characteristics of a supply involving the leasing or letting of immovable property is the payment of rent, the free use of

the property by the staff could not be characterised as the letting or leasing of immovable property. In addition, the fact that the use of the property is reported as a benefit in kind could not be taken to constitute a quasi-rent bringing the deemed supply within the definition of letting or leasing. Case law has determined that a taxable person is entitled to treat a building as forming part of the assets of his business and to reclaim any VAT incurred on the purchase or construction as his input tax. However, where a taxable person makes such a choice, and the building is then, subsequently, used for the private purposes of his staff, he is then required by Article 6(2)(a) of the Directive to pay VAT on the full cost incurred to effect such use.

Ibero Tours GmbH – Case C-300/12 Whether supplier discounts should reduce the value of the supply for VAT purposes.

The Advocate General has issued his opinion in the above case on 18 July 2013. The opinion has not been issued in the English language and, as a result, this Case Alert has been based on an unofficial translation from French.

The case concerns whether the principle established in the earlier case of Elida Gibbs (Case C-317/94) – that retrospective discounts given by the supplier should reduce the value of a supply for VAT purposes by the amount of the discount – could apply in a case where a travel agent gave a discount to a traveller.

Ibero Tours GmbH (Ibero) is a travel agent and sells holidays on behalf of tour operators. In consideration of that supply, Ibero charges the tour operator a commission. In order to attract customers, Ibero financed a discount from the tour operator's price. Ibero argued that, as in Elida Gibbs, the amount of VAT that should be paid on its commission should be reduced to take account of the discount allowed to the customer.

The Advocate General has agreed with Ibero. In essence, the Elida Gibbs principles apply to such a scenario. If the taxable amount was not reduced by the value of the discount allowed, the tax authority would collect a greater amount of VAT on the sale of the package than had been paid by the final consumer. This would be contrary to the principle of fiscal neutrality. Elida Gibbs established in 1996 that the operation of the VAT system should not result in the tax authority receiving an amount of tax higher than that ultimately paid by the final consumer.

Comment – The court has recognised here that the taxpayer's hands were tied. It was required by law to establish a separate entity for the pension fund. To deny the recovery of VAT on costs which would otherwise have been recoverable if the pension fund had been 'in house' would, according to the court, have offended the principles of the VAT system which guarantee the neutrality of the tax for fully taxable entities. The existing system in the UK, which allows for recovery of VAT in similar situations seems, therefore, to be compliant with EU law.

Comment – it would have been interesting to see what the Court would have said if the staff had been asked to make a nominal payment for the private use of the building. By allowing free use of the property, there is no leasing or letting and the taxpayers are required to pay VAT on the cost of making the property available

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HMRC v Pendragon Plc Whether a scheme of arrangement was abusive.

The Court of Appeal has issued its judgment in the case of Pendragon Plc (Pendragon), restoring the First-Tier Tribunal's decision. The principal issue in this case was whether or not the scheme of arrangement put in place by Pendragon was 'Halifax' abusive. Briefly, the scheme allowed VAT to be accounted for on the supply of ex-demonstrator cars under the second hand margin scheme rather than under the normal rules. Given the scale of the operation, the arrangement provided a significant tax advantage to Pendragon.

The First-tier Tribunal allowed Pendragon's appeal. Importantly, based on evidence gathered at the hearing, it found as a fact that the sole or main purpose of implementing the scheme was for the purposes of obtaining finance for the group's working capital and not for the purpose of obtaining a tax advantage. On appeal, the Upper Tribunal reversed the First-tier's decision concluding that, by making that finding, it had erred in law. Accordingly, the Upper Tribunal allowed HMRC's appeal holding that the sole aim of the scheme was to obtain a tax advantage.

By a unanimous verdict, the Court of Appeal has allowed Pendragon's appeal from the Upper Tribunal. The Court did not comment on whether the scheme was abusive or not but simply focused on the role of the Upper Tribunal as an appellate court. In simple terms, as the First-tier Tribunal had found, as a fact, that the scheme was introduced to obtain finance and not to obtain a tax advantage. As an appellate court, it was not open to the Upper Tribunal to interfere with that finding and it had, therefore, erred in law. Accordingly, under English law, the Court of Appeal was bound to restore the decision of the First-tier Tribunal.

University of Cambridge [2013] UKFTT 444 (TC) Whether VAT incurred on investment management is reclaimable.

The First-tier Tax Tribunal (FTT) has released its decision in the above case which concerned whether VAT incurred by the University on investment management fees could be reclaimed.

The University operates an endowment fund which invests in a range of securities including equities, property, bonds, cash deposits and other investments. It incurs fees on the management of its investments and some of these fees bear VAT. The income generated from the various investments is distributed to support all of the University's activities which include exempt supplies (education and research) and taxable supplies (commercial research, publications, consultancy, etc). The University argued that following the CJEU's judgments in Kretztechnik (C-465/03) and Securenta (C-437/06), as the input VAT was incurred on fees relating to the investment fund that supports all aspects of the University's economic activities, the tax should, in part at least, be reclaimable. HMRC took the view that the fund management fees related to the fund's non-economic activities and could not therefore be reclaimed.

The FTT concluded that, looked at objectively, the investment activity, which was not itself an economic activity, should be regarded for VAT purposes as an 'overhead'. This was because, in its view, the activities of the fund supported the other economic activities of the University. As an overhead, the VAT incurred on the fund management fees is therefore deductible (either wholly or in part) in accordance with the taxpayer's partial exemption method. Although the fund's activities and the University's activities were, in fact, separate activities, the former were effected for the benefit of the latter. The costs of the investment activity were incurred solely for the benefit of the University's economic activities in general and, objectively, were not incurred for the purpose and benefit of its non-economic activity. The input VAT in question therefore fell to be apportioned under the agreed partial exemption method.

Comment – this opinion of the Advocate General is only the starting point in the resolution of this dispute. We await the judgment of the full Court. However, assuming that the Court agrees with the Advocate General, this will be big news for travel agents that offer similar discounts to customers. Indeed, it is likely to have much wider application to all situations where an agent offers a discount to the principal supplier's customer and finances the discount from any commission it receives. This opinion also falls quickly on the heels of a similar UK Case involving TUI Travel. If the full court agrees with the Advocate General, the decision in Tui Travel must surely be overturned.

Comment – Given the unanimous verdict in this judgment (3-0), it seems unlikely that leave to appeal to the Supreme Court will be granted although the possibility cannot be ruled out. The success of this case for the taxpayer rests solely on the fact that it managed to persuade the First-tier Tribunal (the fact finding court in these proceedings) that the sole or main aim of establishing the scheme of arrangement was not for the purpose of obtaining a tax advantage. Once that fact was established unless the finding was perverse, it was inevitable that the Upper Tribunal's judgment would be reversed. The case highlights the need to ensure that there are sound commercial reasons for implementing any type of scheme of arrangement which results or could result in the obtaining of a tax advantage.

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Rapid Sequence Limited [2013] UKFTT 432 (TC) Whether the supply of locum doctors is exempt or a taxable supply of staff.

The First-tier Tax Tribunal (FTT) has issued its decision in this case relating to the VAT treatment of supplies of locum doctors. Rapid Sequence Ltd (the company) was an employment business supplying locum doctors to National Health Service (NHS) hospitals as a principal. The Company paid the locum doctors an agreed hourly rate, and, in turn, it received a payment from the NHS for the provision of these services. The FTT was required to determine whether the Company was providing an exempt supply of medical services, or, as HMRC argued, a taxable supply of staff.

The FTT considered that although the services provided by the Company came within the plain meaning of the relevant UK legal provisions - which allows for the exemption of the supply of a deputy for registered medical practitioners - that law must be considered in conjunction with the EU's Principal VAT Directive. The Directive provides that Member States shall exempt "the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned". The FTT found that the Company was not providing "medical care" as it had no control over the locums, who were supervised by the NHS hospitals. Therefore, it deemed the supply by the Company to the NHS to be a supply of staff and not medical care.

The FTT concluded that the provisions of UK VAT Law go beyond the scope of the exemption for medical care permitted by the Directive. To be consistent with EU law it therefore decided that UK law must be interpreted as meaning exemption should only apply to "the provision of [medical care services provided by] a deputy for a person registered in the register of medical practitioners". Following this revised wording, the FTT concluded that the Company was not providing medical care services, but supplying staff, and therefore rejected the Company's appeal.

Credit Lyonnais Case C- 388/11 Whether income generated should be included in partial exemption method.

The CJEU has issued its judgment in this long-running case relating to whether income generated by branches established in other EU Member States and in third countries should be included in the bank's partial exemption method. The case began its long and tortuous journey as far back as 1988 when the French tax authority refused to take into account the income from overseas branches in the numerator and denominator of the deductible proportion.

Credit Lyonnais argued that the income of its branches should be taken into account in so far as those branches were, in effect, part of a single taxable person. It contended that the interpretation preferred by the French tax authority was incompatible with the principle of fiscal neutrality. The tax authority argued that each branch established in other Member States should be regarded separately and should determine a deductible proportion in its own right which would then preclude a right of deduction in favour of the principle establishment. Moreover, branches established in third countries should be regarded as 'distinct business sectors' for the purposes of exercising the right to deduct.

The CJEU confirmed in its judgment that the provisions of the Directive in question must be interpreted as meaning that, 'in so far as the calculation of the deductible proportion constitutes an element of the deduction system, the manner in which that calculation must be carried out falls, along with that deduction system, within the scope of the national legislation to which an activity or transaction must be linked for tax purposes'. The Court has previously held that the 'fixed establishment' in a Member State and the principal establishment situated in another constitutes a single taxable person subject to VAT, it follows that a taxpayer is subject, in addition to the system which applies in the State of its principal establishment, to as many systems of deduction as there are Member States in which it has fixed establishments. Accordingly the CJEU has found in favour of the French Tax Authority.

Comment – as a First-tier Tribunal decision, it is binding only on the parties. HMRC has 56 days to appeal (14 October 2013) and, in the circumstances, it must be expected that HMRC will appeal. In the meantime, taxpayers in similar situations should consider lodging claims with HMRC to recover any input VAT disallowed in the previous four years.

Comment – Despite the loss for the taxpayer, this decision may represent an opportunity for the NHS Trusts and other users of locum doctors. The FTT decision highlights that HMRC's previous interpretation of the UK law was overly restrictive. In addition, the Tribunal's conclusion around conforming interpretation from EU Directive to local legislation appears open to challenge. In light of the sums involved, it is likely that the underlying arguments will not rest here. We suggest that all users of locum staff review their position with a view to submitting protective claims, where appropriate.

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Klinikum Dortmund GmbH Case C-366/12 Whether supplies of drugs to out-patients is a closely related supply and thus exempt from VAT.

The Advocate General has released her opinion in this case which relates to whether the supply of drugs for the treatment of out-patients is 'closely related' to supplies of medical care services and whether such services must be provided by the person who provides the medical care.

The taxpayer in this case is a non-profit-making body which manages a hospital providing both in-patient and out-patient care. It also dispensed drugs from its in-house pharmacy both in respect of prescriptions issued by its own doctors, but also prescriptions issued by doctors acting independently of the hospital. The questions that arose in the dispute between the taxpayer and the German tax authority were whether 'closely related activities' include supplies of goods as well as services, whether a 'closely related activity' must be performed by the same taxable person as also provides the medical care and, finally, whether a 'closely related activity' is exempt from VAT if the medical care is not covered by Article 13A(1)(b) (care provided in a hospital etc) of the 6th Directive but under Article 13A(1)(c) (care provided by medical practitioners) instead.

The Advocate General has confirmed that, in her opinion, the term 'closely related activities' encompasses supplies of both goods and services. She also confirms that the exemption for 'closely related activities' is not dependent on their being supplied by the person who provides the care in question. On the third question, there is no provision within Article 13A(1)(c) (as there is in Article 13A(1)(b)) for 'closely related activities' to benefit from VAT exemption. As such, Mrs Sharpston considers that, where such activities are physically and economically dissociable from the provision of medical care and are not closely related to hospital and medical care within the meaning of Article 13A(1)(b) they do not qualify for exemption from VAT. As a result, the supplies of drugs by the hospital in respect of prescriptions drawn up by the independent doctors could not benefit from the exemption provided by the Directive.

Commission v Spain (and other Member States) (Case C-189/11) Whether the TOMS should apply to wholesale tour operators who sell to other business customers.

The European Commission took action against various Member States which it considered were not operating the Tour Operators' Margin Scheme (TOMS) correctly. Although not a party to the litigation, the resulting judgment of the Court of Justice of the European Union (CJEU) is likely to have a significant impact on UK Tour Operators and on the cost of holidays.

The CJEU has delivered a landmark judgment in a number of cases brought by the European Commission against various Member States. In essence, the Court has held that the TOMS should apply to wholesale tour operators who sell to other business customers.

In the UK, TOMS is currently only applied at the retail stage of the supply chain and tour operators are permitted to calculate the total VAT due under TOMS on a gross annual basis offsetting losses against profits. The judgment marks a significant change in the application of the scheme that may require a number of changes to UK law and guidance which are now anxiously awaited by the industry.

The most significant change could be the loss of the widely used “transport company structure” under which tour operators do not pay 20% VAT on EU flights. The structure relies on the purchase of the transport and onward sale by the transport company being on a wholesale basis and therefore subject to normal VAT rules. The loss of the structure is likely to result in increased costs for the industry as 20% VAT would be payable on EU flights. A further, and potentially costly, change is the Court’s ruling that under TOMS, VAT must be calculated on a transaction by transaction basis. Under current rules businesses are able to offset lower margins on non-EU sales against higher margins made on EU sales and the loss of this gross calculation could lead to higher taxes being paid.

Comment – Undoubtedly, Credit Lyonnais will be very disappointed with this result. It has taken almost a quarter of a century for the matter to be definitively resolved. Ultimately, the Court considered that individual States are entitled to lay down the rules of deduction in their respective territories and that this can be done without offending the principle of fiscal neutrality.

Comment – this is an interesting opinion and we await the full court's judgment in due course. The fact that Mrs Sharpston has confirmed that, in her view, 'closely related activities' can be provided by different suppliers to the medical care and still benefit from exemption would seem to raise further questions in respect of the First-tier Tribunal's decision in the recent case of Rapid Sequence Ltd.

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Loughborough Students' Union Whether the Union was managed and administered on a voluntary basis falling within the cultural services exemption.

The Upper Tribunal has issued its judgment in this case which related to two main issues. Firstly, whether the Students' Union (the Union) was managed and administered on an essentially voluntary basis such that the cultural activities it undertook qualified for VAT exemption. Secondly, whether the condition of exemption was met, namely that the primary purpose of the events organised by the Union was for fund raising. The First Tier Tribunal (FTT) had decided against the Union on both matters. The Upper Tribunal's decision is not wholly conclusive and refers the case back to the FTT.

On the 'managed and administered' point, the Union argued that the FTT had erred in law in that it had failed to take account of facts established in evidence. Counsel for the Union submitted that as the sabbatical officers of the Union were students or ex-students of the University, had no previous work experience or qualification and were in receipt of a salary well below the market rate, they should be regarded as 'amateurs' working for the Union essentially as volunteers. Unfortunately for the Union, the Upper Tribunal agreed with the FTT. On the evidence, the FTT found that the sabbatical officers played a significant part in the higher decision-making process of the Union and the FTT was, therefore, right to conclude that the Union was not managed and administered on an essentially voluntary basis. Consequently, the admission to events run by the Union could not fall within the cultural services exemption. As far as the 'fund raising' point was concerned, the Union argued that the FTT had failed to address its arguments that UK law, which requires the primary purpose of the fund raising to be to raise money, is contrary to and ultra vires the VAT Directive. Counsel for the Union argued that the Directive does not impose a primary purpose condition. As such, the only restriction to allowing exemption is whether granting exemption could lead to distortion of competition and, in the Union's case; it was argued that such distortion did not arise. The FTT

had only considered this point with regard to the UK law and had, thus, not considered the distortion of competition point at all. The Upper Tribunal concluded that to determine whether the UK law on fund raising is ultra vires, the issue of distortion of competition needs to be considered and resolved. These are issues of fact and, as a consequence, this issue must be referred back to the FTT for determination.

Rank Group PLC Whether gaming machines with the element of chance are subject to VAT and not exempt.

The Court of Appeal has handed down a unanimous judgment in this appeal brought by HMRC. Allowing HMRC's appeal, the Court has held that, for the purposes of what was note 3 to Group 4 of Schedule 9 to the VAT Act, the definition of a 'gaming machine' includes those machines where the 'element of chance' is provided by equipment separate from but linked to the machine itself. As a consequence of that definition, the machines in question were subject to VAT and were not exempt.

In this long-running battle, Rank Group claimed that machines where the Random Number Generator (RNG) was not physically housed in the machine itself, but was located somewhere else, were not within the note 3 definition of 'gaming machine'. However, HMRC argued that the 'machine' in question should be regarded as constituting all of the equipment and apparatus necessary to play the game. This should include both the terminal where the game physically takes place and the any equipment or apparatus linked to the terminal by means of a cable and which is intended and designed to be used with that terminal for the purposes of playing the game. HMRC submitted that Parliament could not rationally have intended to draw a distinction between, on the one hand, machines where the playing equipment was all contained in one box and, on the other, arrangements where the RNG is located elsewhere.

The Court of Appeal concluded that a purpose built system comprising a terminal with a separate, but connected, RNG can be properly characterised as a 'machine' even if the separate elements constitute separate items of equipment. To treat the RNG and terminals as separate machines is unrealistic. As such, machines configured in this way must be regarded as gaming machines falling within the definition of note 3. That means that during the period in question under the appeal, the income from those machines was not exempt from VAT but was subject to VAT at the standard rate.

Comment: The judgment is a binding judgment as it comes from the full Court. However, given the significance of the changes it is likely that the industry will want to consult with HMRC, UK Treasury and the EU Commission before any changes to the law are made. Impacted businesses in the industry will need to start considering now what these changes will mean for their business models. In particular, businesses will need time to adjust to any new rules and therefore there may be transitional periods announced before any changes are made.

Comment – The decision on the 'managed and administered' point follows previous case law (Bournemouth Symphony Orchestra) – but we will have to await the re-hearing of the 'fund raising' point to establish whether UK VAT law is ultra vires.

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Dixons Retail plc (Case C-494/12) Whether fraudulent card transactions are regarded as supplies of goods for VAT purposes.

The Court of Justice has issued its judgment in the above case without an Advocate General's opinion.

Dixons, like many other High Street retailers accepts payment for supplies of goods by credit card. In Dixons' case, it had entered into agreements with American Express (AMEX) and with National Westminster Bank (Streamline). Under the terms of those agreements if a customer used a card as a means of payment Dixons was obliged to accept the card and Amex / Streamline were obliged to make payment after deduction of a charge. In cases where a card was subsequently found to have been used fraudulently, but Dixons had complied with Amex / Streamline's security requirements when accepting the payment, Dixons claimed a refund of the VAT accounted for on such supplies. The claim was made on the basis that there was, in effect, no supply of the goods to the fraudster (because the fraudster could not offer genuine consideration), and it was equivalent to theft. Dixons argued that, in essence, the payment made by AMEX / Streamline could not be considered to be consideration for a supply and was, in fact, compensation under the contract for the supply of card services (and thus outside the scope of VAT).

The First-tier Tribunal referred the matter to the CJEU for a preliminary ruling. In its judgment, the Court has concluded that the concept of 'supply of goods' in Article 5(1) of the 6th Directive and Article 14(1) of the VAT Directive (which replaced the 6th Directive) covers any transfer of tangible property by one party which empowers the other party to actually dispose of it as if he were its owner. In other words, there is no requirement in VAT law for there to be a transfer of legal title. For there to be a supply of goods, all that is necessary is for there to be a transfer of possession which gives the transferee the right to dispose of the goods in question. In a fraudulent card transaction, the court therefore recognised that there is actual transfer of possession (to the fraudster) who is then free to dispose of the goods as if her were the owner. The supplies in question were, therefore, supplies of goods for VAT purposes.

As far as the 'consideration v compensation' argument was concerned, the Court held that payment of the price of

the goods was made by the card issuers and that those payments constitute consideration for Dixons' supply of goods to the fraudster.

HMRC v Our Communications Ltd [2013] UKUT 0595 (TCC) Whether Repayment Supplement is payable when claims are made in some manner other than by way of a return.

The Upper Tribunal has issued its judgment in this appeal by HMRC relating to the issue of whether Repayment Supplement is payable in circumstances where a VAT credit is claimed other than through a VAT return.

Our Communications Ltd had originally submitted a return but, later, discovered that it had made an underclaim and submitted a voluntary disclosure. HMRC took longer than the statutory 30 days to repay the claim and Our Communications Ltd claimed Repayment Supplement. The First Tier Tribunal (FTT) allowed the appeal on the basis that the wording of section 79(2) referred to the submission of a 'return or claim'. The voluntary disclosure was not 'a return' but was 'a claim' and, accordingly, the FTT considered that all of the conditions were met for Repayment Supplement to be payable.

HMRC appealed with permission of the FTT. HMRC contended that the FTT had erred in law in its construction of section 79. According to HMRC, it is implicit in the wording of section 79 that it only applies where the amount in question is shown as due 'on the requisite return or claim' which, in the case for a claim for payment, is the return for the prescribed accounting period concerned. Counsel for Our Communications Ltd argued that the FTT's decision was not flawed and was correct in all respects. The statutory language was clear. As a matter of policy and fairness, it was argued that the purpose behind section 79 of spurring HMRC to efficiency was equally applicable to claims made in some manner other than by way of a return.

The Court concluded that HMRC's interpretation was to be preferred. The expression 'return or claim' can, in the circumstances, only mean 'the return for the prescribed accounting period' and cannot refer to claims made outside of a VAT return.

Comment – This judgment is hugely disappointing not only for Rank Group PLC but also for hundreds of smaller claimants standing behind the case. We understand that Rank has already sought leave to appeal to the Supreme Court. Although unanimous, the Court of Appeal's judgment is completely at odds with both the First-tier Tribunal and the High Court which both found against HMRC.

Comment – a disappointing defeat for Dixons. Although one can see the merit of Dixons' case, it is clear that the Court took the view that, irrespective of the intentions of the parties, there was a clear transfer of tangible property and Dixons received the price for the goods – albeit from a third party card issuer. That was enough to conclude there had been a supply of goods for consideration.

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Leeds City Council Whether the three year cap is ineffective for periods after December 1996.

The Upper Tribunal has issued its long-awaited judgment in this interesting case which relates to the validity of the three-year-cap (the cap) post 1996. Previous case law (including Marks & Spencer, Conde Nast and Fleming) eventually established that the introduction of the cap in July 1996 was contrary to EU law in that it failed to implement a transitional period within which accrued EU law rights could be exercised. This case seeks to take the argument one step further and attempts to render the cap ineffective for periods after December 1996.

The primary submission for Leeds City Council (Leeds) was that the UK had failed to implement Article 4(5) of the then 6th Directive into UK law. This provision states that Member States must treat Public Bodies (such as Leeds) as non-taxable persons in relation to certain transactions in which they engage as public authorities. The failure to implement this Article meant that, under UK law, Leeds was required to account for VAT on various sources of income when under the Directive, it should have been treated as a non-taxable person. The UK eventually accepted that VAT should not have been paid on the supplies in question and agreed to repay all VAT paid prior to December 1996.

Leeds contended that because of the UK's failure to implement Article 4(5), it should receive special treatment and the cap should be disapplied. According to Leeds, the refusal to pay refunds for later years offended the principles of effectiveness, legal certainty, proportionality, legitimate expectation and equivalence. However, HMRC submitted that the various claims were legitimately time barred by the operation of section 80(4) of the VAT Act 1994.

The Court disagreed with Leeds on all points and also refused a request by Leeds to refer the matter to the Court of Justice. In essence, for various reasons, the Court held that none of the EU principles relied on by Leeds had been breached.

The Bridport & West Dorset Golf Club (Case C-495/12) Whether green fees paid by non-members of non-profit-making golf clubs are exempt from VAT.

The Court of Justice of the European Union (CJEU) has issued its judgment in the long-awaited VAT on 'green fees' case. In summary, the CJEU has ruled that green fees collected from visitors to non-profit-making golf clubs cannot be excluded from the VAT exemption provided for within the VAT Directive.

The matter was referred to the CJEU by the UK's Upper Tribunal. In essence, HMRC's policy in relation to the payment by visitors of green fees was that these fees were to be regarded as 'additional income' (additional to the subscription fees that are paid by members of a golf club for the right to play golf). The VAT Directive specifically allows Member States to deny VAT exemption in cases where the supply in question is not essential to the exempted transactions or where its basic purpose is to obtain additional income for the body in question. However, in its judgment, the CJEU has ruled that the term 'additional income' does not include income from the supply of the right to play golf. Accordingly, to differentiate between the granting of such rights to members and non-members would be to deprive the relevant provision of the Directive of its true meaning.

The payment of green fees by non-members of a non-profit-making golf club must, therefore, be exempt from VAT. As a second point, HMRC also took the view that allowing visitors' green fees to be exempt could lead to distortion of competition between 'private' non-profit-making golf clubs and proprietary 'for profit' clubs. As such, the Directive gives Member States the power to deny exemption. The CJEU dismissed this argument on the basis that Article 132(1)(m) of the Directive provides a mandatory exemption for supplies of the right to play golf whether that supply is made to members or non-members of non-profit-making golf clubs. The very existence of an exemption means that there is 'built-in' distortion inherent in the Directive and, as a result, to deny the exemption on distortion of competition grounds would call into question the very scope of the exemptions provided by the Directive.

Comment – The wording of section 79(2)(a) clearly suggests that the first condition (for repayment supplement to be payable) is dependent on the requisite return or claim (emphasis added) being made by the due date. While the Upper Tribunal appears to prefer that a "claim" is just a claim made on a VAT return, there may be scope for this view to be challenged at the Court of Appeal.

It is not clear whether this will be the end of this particular fight but given the amount of supplement at stake (approximately £72,000), a further appeal cannot be ruled out.

Comment – The judgment merits a fuller reading. However, clearly, the Upper Tribunal was not persuaded here that the failure of the UK to implement Article 4(5) gave Leeds any kind of special status. Nor was it convinced that any of the EU principles had been breached. The taxpayer may seek leave to appeal to the Court of Appeal (which may itself refer the matter to the CJEU). The case serves as a useful reminder that, where an opportunity exists, taxpayers should always make protective claims and not sit on their hands.

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ATP Pension Service (Case 464/12) Whether the management of pension funds is exempt from VAT. The Advocate General has issued his opinion in the above case which, once again, relates to the question of whether the management of pension funds should be treated as exempt from VAT. This is the third case to have reached the Court of Justice (CJEU) on this point. In both Wheels Common Investment Fund (Wheels) and PPG Holdings (PPG), the Court concluded that the pension funds were not within the definition of 'special investment funds'.

In this case, (a referral to the CJEU from Denmark), the Advocate General appears to differentiate between Wheels/PPG and the fund involved in the ATP case. The Opinion of the Advocate General is not yet available in English. The conclusions in this Case Alert are therefore based on an unofficial translation from the French language version.

In the ATP case, while pension contributions to the fund were made by employers (from employee's salaries), employees were also entitled to make contributions. In addition, self-employed individuals could also participate. Furthermore, the risks of investment are borne by the beneficiaries and not by the employer. In the Advocate General's opinion, this was sufficient to differentiate the case from Wheels and PPG which were established on the basis that the employers bore the investment risk and were simply fulfilling a contractual obligation to provide the employee with a pension.

In conclusion, the Advocate General states that the term special investment funds should include occupational pension schemes where those schemes pool the assets of several beneficiaries for the purposes of spreading risk. This is only the case, however, where it is the beneficiaries who bear the investment risk and it is up to the national courts to determine whether these conditions are met. It makes no difference that employers make contributions to the fund or that payments from the fund can only be made at retirement age of the beneficiary.

Wakefield College TC03108 Whether the construction of a new building used solely for a charitable purpose qualifies for zero-rating.

This is an unusual case in that this is actually the second decision made by the First-tier Tribunal. Having previously dismissed the College's appeal, the First-tier Tribunal was instructed by the Upper Tribunal (to whom the College had appealed) to consider two pertinent issues that it had failed to consider in the original appeal.

The issue at the heart of the case was whether the construction of a new building at the College qualified for zero-rating as being used solely for a charitable purpose. The original appeal was dismissed on the basis that the building in question was used for both business and non-business purposes. The Tribunal considered that the extent of business use (income received from fee paying students) meant that the use of the building would not meet the 'solely' test. However, the Upper Tribunal referred the case back to the First-tier Tribunal for it to give further consideration to the issue of whether such income should be rightly classified as non-business income.

As is common with Further Education colleges in the UK, there is a mixture of 'free' education provided to 16 to 19 year olds [18 in Scotland],which is accepted as being non-business income and 'discounted' education where students only pay part of the fees that are due. The College contended that the provision of this discounted education should also be regarded as non-business income. The College relied on the Court of Justice judgment in the case of Commission v Finland which held that fees paid to lawyers, which were based on the customer's ability to pay, could not constitute consideration for the supply of legal services as there was no 'direct link' between the amount paid and the service. The Tribunal concluded that, on the facts, given the varying factors such as age, previous academic achievements, the receipt of state benefits, low income and personal factors, the College's case was analogous with that in Commission v Finland. Accordingly, the part-payment of fees by students cannot be regarded as constituting consideration and the income must therefore be regarded as non-business.

Comment – Advocate General Cruz Vilalon makes an important distinction between defined benefit schemes (as in Wheels and PPG) and defined contribution schemes (as here). It will be interesting to see whether, in due course, the full court agrees with him. If it does, then the management of defined contribution schemes should benefit from VAT exemption.

Comment – a resounding victory for the golf clubs. For clubs that have submitted claims for overpaid VAT, this ruling should now mean that those claims will be paid with interest. Any club that has not made a claim will be restricted to a claim covering only the last four years.

Comment – Assuming that HMRC now accepts that any remaining business income received by the College is below the de-minimis threshold, the construction of the building should qualify for zero-rating. However, the decision may have wider application in that it confirms that if customers only pay a proportion of the full price of a supply, the partial payment that is made may not always be regarded as consideration. In the absence of consideration, a supply of goods or services cannot be within the scope of VAT.

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Ibero Tours GmbH (C-300/12) Whether supplier discounts should reduce the value of the supply for VAT purposes.

The Court of Justice has delivered its judgment in this case and has overturned the opinion of the Advocate General released in July 2013.

The issue in this case was quite straightforward. Ibero Tours GmbH (Ibero) is a Travel agent selling holidays to customers on behalf of Tour Operators. Ibero offered customers a discount on the price of the holiday which it financed out of the commission it was due from the Tour Operator. Ibero argued that, following the Court of Justice judgment in Elida Gibbs (case C-317/94) (a case decided in 1996), it was entitled to reduce the value of its supply of agency services by the amount of the discount that it offered to the customer. When the Advocate General released his opinion last year, he agreed with these arguments. However, the full court has stated that the principles established in the Elida Gibbs case do not apply to Ibero.

The Court has stated that Article 11A(1)(a) of the 6th Directive requires the 'taxable amount' to be calculated by reference to 'the consideration which has been or is to be obtained by the supplier from the customer, or a third party'. In the Ibero case, the supplier of the holiday is the Tour Operator for whom Ibero acts as an agent. The Tour Operator receives the full price of the holiday from Ibero (albeit after Ibero has offset its commission) and, as such, the taxable amount can only be determined by reference to the amount it receives.

According to the Court, the financing by Ibero of part of the price of the holiday (by allowing a discount to the final consumer) does not affect the consideration received by the Tour Operator. Consequently, it follows that the 'taxable amount' in relation to Ibero's commission cannot be reduced by reference to the value of the discount given (on its own initiative and at its own expense) to the final consumer.

Reed Employment Ltd [2014] EWCA Civ 32 Whether the unjust enrichment defence infringes EU principles.

The Court of Appeal has released its judgment in this long-running case. The appeal relates to the issue of whether the unjust enrichment defence relied upon by HMRC infringes the EU principles of equal treatment, fiscal neutrality and effectiveness. The appellant had submitted two claims for VAT overpaid on the supply of temporary workers. However, it had lost its appeals in both the First-tier Tribunal (FTT) and in the Upper Tribunal (UT). In both those appeals, it sought to argue that claims submitted in 2009 were simply amendments to a previous claim but the FTT and UT rejected those appeals. At the Court of Appeal, the appellant submitted that the 2005 amendments to the UK's law on 'unjust enrichment' contravene the various principles of EU law such that the defence of unjust enrichment was not available to HMRC.

In a detailed and complex judgment, the Court of Appeal has unanimously ruled that the UK's 2005 amendments to the law on unjust enrichment did not contravene the EU law principles. Dismissing Reed's appeal, the Court has confirmed that following earlier Court of Justice judgments (in the cases of Weber's Wine World (Case C-147/01) and Marks & Spencer (Case C-309/06)) a Member State is entitled to introduce an unjust enrichment defence with retroactive effect even where such introduction has the effect of treating claims differently. Reed had argued that its earlier claim was not subject to an unjust enrichment defence. Consequently, as the 2009 claim covered the same period of time as the earlier claim, it should, equally, not be subject to such a defence. The Court of Appeal disagreed. It confirmed that, as far as unjust enrichment is concerned, what matters is the date that any claim is paid not the date that the claim was made or the period to which it relates. It is inherent that different rules will apply to claims made both before and after a change in the law. As a consequence, neither the principle of equal treatment nor the principles of fiscal neutrality or effectiveness had been breached in this case.

This is a blow to travel agents who had hoped that the Court would follow the opinion of the Advocate General. In his opinion issued on 18 July 2013,he considered that the principle of fiscal neutrality would be breached if the tax authority collects more VAT than has been paid by the final consumer. It is not clear why the full Court did not even consider that line of argument. The court focuses on the fact that, although the consumer pays the price less the discount to Ibero, nonetheless, Ibero pays the full price to the Tour Operator after netting off its commission.

Comment – Given the value of Reed's claims (approximately £139 Million), it is possible that leave to appeal to the Supreme Court may be sought. The case of Weber's Wine World appears to set a clear precedent however and Reed may therefore find it difficult to obtain permission. The Court of Appeal clearly considers that EU law is clear as it refused Reed's request to refer questions to the Court of Justice.

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Brockenhurst College [2014] UKUT 0046 (TCC) Whether supplies made as part of vocational training are regarded as closely related supplies and exempt from VAT.

The Upper Tribunal has dismissed HMRC's appeal and held that supplies of catering and entertainment provided by students at Brockenhurst College, as part of their vocational training, are closely related supplies to the provision of education and are, therefore, exempt from VAT.

To allow students enrolled in courses related to catering and hospitality to learn skills in a practical context, the college ran a training restaurant. Members of the public dined in the facilities and paid £10 for the privilege. All aspects of the restaurant's operation from planning to execution were pioneered by the catering students. Similarly, as part of the performing arts curriculum, the college also staged concerts and performances where members of the public paid an entry fee.

The training restaurant used by the catering students as part of their vocational training was considered by the Tribunal as both essential and integral to the student's education. These facilities allowed students to obtain experience in applying classroom theory to practice within a realistic working environment. Such practical experience was an imperative part of the curriculum and adherence to this yielded an enhanced education experience for the students.

The Tribunal concluded that the supplies of both catering and entertainment were an ancillary supply, in that they did not constitute an end in themselves, but a means for students to better enjoy the principal supply of education. The students in this case directly benefited from the participation in making the supplies and, without this practical experience, they would be disadvantaged, in comparison to other graduates, when leaving full-time education for employment. Accordingly, there is no requirement in the Principal VAT Directive for the closely related supplies to be made to the same recipients as the principal supply. The fact that the meals provided within the training restaurant were enjoyed by members of the public and not the students is, therefore, immaterial.

Esporta Limited ("Esporta") [2014] EWCA Civ 155 Whether late paid membership fees constitute consideration for a supply of services.

The Court of Appeal has dismissed Esporta's appeal and held that the Upper Tribunal (UT) was right to conclude that the late paid fees for membership of a health and fitness club constitute consideration for a supply of services for VAT purposes and are therefore subject to output tax.

Esporta operates a number of health and fitness clubs for members of the public to join for a minimum commitment period of 12 months. Fees are paid in advance by monthly direct debit instalments. When members default on their payments, access to the club is denied and Esporta seek to recover the outstanding membership fee for the remainder of the commitment period or where this period has ended, until the expiry of a three month notice termination period. No termination of membership takes place.

The underlying question in this case was whether Esporta provided services to the defaulting members in return for the overdue fees charged. The FTT held that there were no such services and the overdue fees represented compensation or damages for breach of contract and therefore not subject to output tax. However, the UT concluded that the fees constitute consideration for the supply of the right of access to the gym facilities for the commitment period and therefore chargeable to output tax.

In dismissing the appeal the Court of Appeal stated that the contractual terms are the starting point when analysing this type of issue and the court has to consider whether those contractual terms reflect the economic and commercial reality of the transaction. On this basis, in return for the promise to make payments Esporta supplied members with the right of access to the health and fitness clubs, as oppose to actual access, as held by the FTT. There was thus a direct and immediate link between the supply and the monthly payment.

It was concluded therefore, that there was a continuing supply of a conditional right to use the premises throughout the commitment period and the period up to the date of expiry of the notice termination period. This supply takes place regardless of whether the member exercises his right to make payment and does not relate to the actual use of the premises.

Comment – The judgement in this case is interesting and demonstrates that a narrow analysis of the subject matter of the supply is inconclusive. A more comprehensive examination of all of the circumstances in relation to the aims and effects of the supply is required. Potentially the case provides a catalyst for other educational institutions providing similar qualifications to examine the VAT treatment of their own supplies and, where appropriate, submit retrospective claims on overpaid VAT.

Comment – although this will be a blow to Esporta and other gyms, the outcome of each case will depend entirely on the terms and conditions of the contracts between the gym and the member.

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Way Ahead Group Limited (WAG) [2014] UKFTT 178 (TC) Whether booking fees are regarded as consideration for an exempt supply of payment processing services.

The First-tier Tribunal (FTT) has issued its decision in the above case. Allowing WAG's appeal, the FTT has confirmed that, on the evidence, the 'booking' fee paid by customers purchasing tickets for theatrical, sporting and other events - where such purchases were made by credit or debit cards - was consideration for an exempt supply of payment processing services.

WAG is a ticket selling agency, supplying tickets - as agent for the principal event promoters - to customers and operated booking services through websites, call centres and a number of box office retail outlets. On the supply of such tickets WAG charged a fee equal to 10% of the face value in respect of a booking fee.

HMRC argued that the booking fees were consideration for a single taxable supply provided by WAG to the customer, albeit that this supply was split into two separate fees; transaction fees and booking fees. The fall-back position adopted by HMRC was that the booking fee, on its own, is consideration for a single standard-rated supply. In expressing their argument HMRC contested that the Promoter and WAG were not just providing a card-handling service but were, in fact, a ticket-booking and ticket-delivery service.

Referring to similar cases in this area, HMRC also argued that the booking fees charged by WAG did not meet the criteria for exemption on two grounds: (i) the services were considered to be the collection of money from a customer and therefore constituted debt collection services (AXA - Denplan) and (ii) WAG did not obtain card authorisation codes direct from card issuers (Bookit). Both of these arguments were quashed by the FTT. The case concerns the making of payments by the customer not the collection of debts. Similarly, confirmation of actual payment was a matter of no importance to the customer. By making a payment on a debit/credit card the customer intended for that payment to be made, the technological process involved is a matter of indifference to the customer.

In light of this the FTT allowed WAG's appeal concluding that the booking fees were consideration for an exempt supply of payment processing services. This is an unusual case in that this is actually the second decision made by the First-tier Tribunal. Having previously dismissed the College's appeal, the First-tier Tribunal was instructed by the Upper Tribunal (to whom the College had appealed) to consider two pertinent issues that it had failed to consider in the original appeal.

Avon Cosmetics Limited TC03311 Whether the provisions of the UK's 'market-value' derogation are valid.

The First-tier Tribunal (FTT) has released an interesting decision in the case of Avon Cosmetics Limited (Avon). Avon, like many similar businesses, sells its products through a network of unregistered representatives ("Avon reps"), selling to these representatives at a discounted (wholesale) price. The Avon reps then sell the products on to customers (ie at the retail stage) at retail selling price or after a slight discount. In such situations (where the retail sale is through a business that is not VAT registered), it is common for HMRC to impose a requirement (under a Notice of Direction) to account for VAT on the retail selling price – which it did in Avon's case. This power is available to HMRC by virtue of a derogation granted to the UK in 1985.

Avon did not object to the treatment of output VAT under this derogation, but argued that the fact that it did not take account of VAT suffered by the Avon reps offended the neutrality of the VAT system. As a consequence, Avon contended that the tax yield to the Treasury through the one sided operation of the derogation was in excess of the normal tax yield in a fully taxable supply chain. As an example, Avon cited the cost borne by the Avon reps on demonstration products. These products were bought by the reps at virtually a cost price, with Avon accounting for output VAT on the consideration received. However, as the reps were not VAT registered, they were unable to recover any input VAT suffered on the cost of such demonstration products.

Avon argued that, although the UK has applied the derogation in the manner agreed with the EU Council, either: (i) wording should be read into the derogation allowing for an offset of the VAT incurred against the output tax due (the Tribunal's favoured approach); or (ii) by ignoring the input VAT issue, the derogation is, in effect, ultra vires.

In principle, the FTT agrees with Avon. However, the problem encountered by the FTT was how it should remedy the defect. It has, therefore, decided to refer the matter to the Court of Justice (CJEU) to determine whether the suggested wording should be read into the derogation, or whether the derogation is ultra vires and invalid. HMRC has stated that it will appeal the decision to refer the case to the CJEU and, as a result, the FTT has decided to defer a referral until the outcome of that appeal is known.

Comment – Another in a line of cases mirroring previous decisions that 'booking' fees are to be considered as consideration for an exempt supply of payment processing services.

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European Tour Operators Association [2014] UKFTT 213 (TC) Whether membership subscriptions are exempt from VAT.

The First-tier Tribunal (FTT) has issued its decision in the above case. Allowing, for the second time, European Tour Operators Association's (ETOA) appeal, confirming that membership subscriptions paid to ETOA are exempt from VAT. The underlying matter in this case was the correct interpretation of 'primary purpose' as provided by UK VAT law. The appeal was originally heard by the FTT in December 2010 where it was decided that the exemption applied on the basis that ETOA is a non-profit making organisation, the primary purpose of which is to make representations to Government on legislation and other public matters which affect the business or professional interests of its members. On making its decision the FTT concurred with the views of the chairman in the Bookmakers' Protection Association Ltd case, in that when determining the primary purpose of the taxpayer, the test to be adopted is a subjective test and not purely an objective test.

HMRC appealed this decision to the Upper Tribunal (UT) contesting that the primary purpose of ETOA was the provision of networking, bringing buyers and sellers in the travel industry together. The UT corrected the FTT, providing clarification of the appropriate test to be used when examining the primary purpose. Such test should be an objective one to be answered primarily by an examination of the stated objects and the actual activities of the body in question. For this reason, the UT remitted the case back to the FTT for reconsideration, with specific attention to be drawn to the primary purpose argument.

Accordingly, the FTT re-examined and re-evaluated the evidence in light of the UT's comments and concluded that, when applying an objective test, ETOA's predominant purpose was to provide a political lobbying body representing tour operators based in Europe. Although, ETOA has a number of additional objects and carries on a number of other activities, none of those constituted aims were on a par with those lobbying activities. Therefore, once again, the FTT allowed the appeal concluding that membership subscriptions paid to ETOA were consideration for an exempt supply

Secret Hotels2 Limited [2014] UKSC 16 Whether the tour operator acted as agent or principle in the supply of holidays.

The Supreme Court has issued a unanimous judgment in the case involving Secret Hotels2 Ltd (Formerly Med Hotels Ltd) (hereafter Med Hotels). This long running case started in the First-tier Tribunal (FTT) in 2009 and has proceeded through all of the tiers of the UK's judicial system.

The issue – a relatively straightforward matter – was whether Med Hotels acted as an agent or as a principal in the supply of holidays to holidaymakers. According to HMRC, Med Hotels acted as a principal and as a consequence, it should have accounted for VAT under the Tour Operators' Margin Scheme (TOMS). However, Med Hotels asserted throughout the litigation that, in fact, it acted as an agent of the hotelier. As such, it was not required to account for VAT under TOMS. Indeed, according to Med Hotels, as the commission it earned from the hoteliers based outside the UK was only subject to VAT in the hotelier's Member State, no UK VAT was due at all. The FTT found against Med Hotels but this was reversed on appeal to the Upper Tribunal. The Court of Appeal agreed with the FTT and Med Hotels appealed to the Supreme Court.

In summary, the Supreme Court has allowed Med Hotel's appeal. The question of whether Med Hotels is an intermediary to which the TOMS scheme applies is a matter of EU law but the question of whether it acted as an agent or principal is a matter of UK law. The starting point for the analysis is the contractual relationship between the parties. In this case, there was never any suggestion that the contracts between the parties were a sham such that they required rectification. On the contrary, the contracts were very clear. The contract between Med Hotels and the hotelier clearly identified Med Hotels as the 'agent' and the hotelier as the 'principal'. Lord Neuberger was satisfied that under the express terms of the contract, 'the hotel room is provided by the hotelier to the customer through the agency of Med Hotels'. As a consequence Med Hotels was not obliged to account for VAT under the TOMS scheme.

Comment - This should be quite interesting! In the event that the matter is referred to the CJEU, and the Court agrees with the FTT, businesses operating similar business models under a Notice of Direction may be entitled to a VAT refund.

Comment – A case highlighting the importance of adopting an objective approach when determining the primary purpose of an entity. The subjective views of the officers and members are irrelevant. The case will be of interest to similar organisations

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ATP Pension Service A/S (Case C-464/12) Whether certain services qualify as management of special investment funds and thus exempt from VAT.

The Court of Justice (CJEU) has issued its judgment in the above case concerning the definition of the term 'special investment fund' and whether the supply of various services by ATP Pension Service A/S (ATP) to a pension fund qualify as the 'management' of such a fund and are thus exempt from VAT.

The CJEU has agreed with the Advocate General's opinion which was published in December 2013. In simple terms, the CJEU has confirmed that the essential characteristic of a 'special investment fund' is the pooling of assets of several beneficiaries, enabling the risk borne by those beneficiaries to be spread over a range of securities. The fund to which ATP supplied its services was, on the face of it, such a fund. The pension schemes in question are funded by the persons to whom the retirement benefit is to be paid and the sums funded in this way are invested on a risk-spreading principle. The investment risk is also borne by the pension customer. These factor were sufficient for the CJEU to accept that the funds in question should be regarded as 'special investment funds'

On the question of 'management' services and whether they should be exempt from VAT, the CJEU left it to the Danish national court to decide whether the services provided by ATP qualified. However, in doing so, the CJEU confirmed that, for management services to qualify for exemption they must, viewed broadly, form a distinct whole and be specific to and essential for the management of the fund. In the present case, ATP's services included, accounting services, the processing of account data, notification of missing payments and the issue of pension statements etc. On the face of it, these services are specific to and essential for the management of the fund. As such the services are covered by the term 'management of special investment funds' even though the services were provided by a third party supplier.

Klinikum Dortmund GmbH (Case C-366/12) Whether the supply of drugs to out-patients is a closely related supply and thus exempt for VAT purposes.

The Court of Justice (CJEU) has issued its judgment in this case which relates to whether the supply of drugs by a hospital pharmacy to patients of independent doctors working at the hospital, but in their own account, could benefit from VAT exemption. The taxpayer argued that the supply of drugs were closely related to a supply of medical care and should be exempt from VAT under the provisions of Article 13A of the sixth Directive.

In this case, patients suffering from cancer were seen and examined by doctors acting independently of the hospital albeit that the doctors provided their medical care services on the hospital premises. In most cases, the doctors prescribed cytostatic drugs which, in turn were dispensed by the hospital's pharmacy. It was accepted that the doctor's services were exempt from VAT under Article 13A(1)(c) of the sixth Directive. The taxpayer argued that its supply of drugs to the patient should be regarded as a supply which is closely related to that supply of medical care. However, crucially, there is no such 'closely related' provision contained in Article 13A(1)(c). There is such a provision within Article 13A(1)(b) which exempts the supply of 'hospital and medical care and closely related activities by hospitals and similar establishments', but, in this case, the medical care was not being provided by the hospital.

Unfortunately for the taxpayer, the CJEU has agreed with the views expressed by the Advocate General in her earlier opinion. In the circumstances, according to the Advocate General, as the patient clearly receives separate supplies from the doctor (medical care) and the hospital (drugs), the supplies of drugs by the pharmacy are physically and economically dissociable from the supply of medical care provided by the independent doctors. As such, adopting a strict interpretation of the sixth Directive, the supplies of the drugs cannot be exempt from VAT. However, the CJEU left the determination of that point to the national court but confirmed that the supply of drugs could only qualify for exemption if the referring court found that the supplies were, in fact, indissociable.

Comment – This has been a topsy-turvy battle over the last five years but, finally, the Supreme Court has settled the issue with a sensible and pragmatic judgment. This will come as a blow to both HMRC - who has pursued the issue with vigour and to HM Treasury. The tax at stake in this case was in excess of £5 million with even greater sums riding on the outcome in a number of similar cases.

Comment – the essential difference between this case and the earlier 'Wheels' case is that the investment risk is actually borne by the individual pensioner whereas, in 'Wheels', a guaranteed pension was payable irrespective of the investment returns. Defined contribution schemes which meet the essential characteristic test should therefore be entitled to benefit from VAT exemption in relation to their management. Where VAT has previously been charged, pension schemes should seek a VAT refund either directly from the fund managers or, where that is not possible, directly from HMRC.

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For further information in relation to any of the issues highlighted in this Casebook please contact:

London/South East Karen Robb karen.robb@uk.gt.com Lorraine Parkin lorraine.parkin@uk.gt.com Andrea Sofield andrea.sofield@uk.gt.com

The Regions Stuart Brodie stuart.brodie@uk.gt.com

The Midlands Mike Sheppard mike.sheppard@uk.gt.com

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Comment – There is a flicker of hope here for the taxpayer. If the referring court considers that the separate supplies are indissociable, it is likely to find for the taxpayer. However, in the circumstances. given the independence of the doctors and the hospital, it seems unlikely.

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