UK: Court of Justice of the European Union - August 5, 2019

Last Updated: 7 August 2019
Article by DLA Piper

In the Chancellor, Masters and Scholars of the University of Cambridge (C-316/18) the CJEU was asked whether the taxpayer should be allowed to recover input tax on costs incurred in connection with investment activities falling outside the scope of the VAT Directive, the income from which had been used to supplement the cost of a range of the University's exempt and taxable activities. In particular, the referring court asked whether any distinction should be made between intervening exempt supplies and nontaxable transactions when deciding whether such input tax had a direct link to the taxpayer's taxable economic activities.

The university taxpayer made exempt supplies of education and certain taxable supplies such as commercial research services, the sale of publications, consultancy services, the letting of facilities and accommodation. The taxpayer had a partial exemption special method to apportion its input tax between its taxable and exempt supplies.

The taxpayer's economic activities were financed partly through donations and endowments that were placed in a fund and invested. The fund was managed by a third party and the taxpayer incurred VAT on the management costs. It was accepted that the fund was passive and not making any taxable supplies. The UK tax authority refused to allow the taxpayer to recover the input tax on the management charges, on the basis that it was attributable to the investment activity, which was not an economic activity within the meaning of the Principal VAT Directive, and which did not have a direct link to the taxpayer's economic activities.

In the view of the CJEU, input tax paid in respect of any costs incurred in connection with the collection of donations and endowments was not deductible, regardless of the reason why those donations and endowments were received. The court said that the investment of donations and endowments and the costs associated with that activity must be treated in the same way as the collection of donations/endowments; investment was merely a direct continuation of the noneconomic activity of collecting donations. Accordingly, input tax on investment management costs was also nondeductible. The court said that there would be an exception to this bar on recovery if it could be shown that the input tax costs were incorporated into the price of a particular output tax transaction. On the facts of this case, there was no such incorporation, not least because the university was a nonprofit organization and the investment profits were used to lower its prices.

DLA Piper comment: This decision restricts the argument that input tax is recoverable where the overriding purpose of incurring the input tax costs is to support an economic activity, but the costs incurred have an immediate link with a nonbusiness activity. However, the CJEU made some odd comments, linking the passive activity of collecting funds to investment of funds. The court failed to clarify whether an intervening exempt supply and intervening noneconomic activities should be regarded the same. It should not, however, affect input tax recovery for those who carry on an economic activity and, for example, raise funds through the issue of shares (CJEU C-465/03, Kretztechnik: the issue of shares is not a supply and hence the taxpayer is entitled to recover the input tax on the related costs to the extent that its general business activities generated taxable supplies). But the distinctions are not clear.

In IO (Case C-420/18), the CJEU deals with the question of whether the activity of a supervisory board member of a foundation is subject to VAT. IO is a member of the supervisory board of a foundation whose main activity is to provide permanent housing for people in need. The supervisory board is appointed for a term of four years. Its main tasks are personnel decisions regarding the management board and its members, monitoring management, and approving the annual financial statements. The members of the supervisory board can only be held liable for negligence and act only for the account and under the responsibility of the supervisory board. The Dutch tax office wanted to impose VAT on IO for its activities. However, due to the abovementioned subordination to the supervisory board, the taxpayer rejected this. 

The court ruled that IO does not exercise any independent activity and thus is not subject to VAT. Even though there is no relationship of subordination between IO and the executive board of the foundation or the supervisory board, IO neither acts in his own name nor for his own account or on his own responsibility. The activity carried out by IO also does not entail any economic risk. However, a person who does not bear such an economic risk cannot be regarded as carrying on an economic activity independently within the meaning of Article 9 of the VAT Directive.

DLA Piper comment: The judgment deals with fundamental EU VAT issues and may have significant implications for taxation practices in many Member States. In Germany, for example, the remuneration of supervisory boards has, so far, generally been subject to VAT. The tax authorities normally assume that the members of the supervisory board are self-employed and a relationship of subordination to the supervisory board is not assumed. It therefore makes sense, in accordance with the CJEU ruling, to examine more closely whether the members of supervisory bodies of EU companies are self-employed. Further, the CJEU ruling leaves scope for structuring depending on the powers and the economic risk of the board member. Thus, a conscious decision can be made for or against VAT.

In Milan Vinš (Case C-275/18), the CJEU was asked whether the right to exemption from VAT on the export of goods (Article 146 of the VAT Directive) could be made subject to the condition that the goods be first placed under a particular customs procedure and whether such national legislation was sufficiently justified as a condition for preventing tax evasion or abuse under Article 131 of the VAT Directive.

Milan Vinš supplied small objects outside the EU for several years. He did not submit a VAT return for those goods, since he took the view that the supplies in question were exempt from VAT as they concerned goods for export. However, the Czech tax authorities levied VAT on the supplies of the goods in question on the grounds that Milan Vinš had not proven that he had placed those goods under the customs export procedure. The tax authorities maintained that this customs procedure for the concerned goods was necessary to prevent tax evasion and would therefore be in line with the VAT Directive as a condition for VAT-free (zero-rated) exports.

The CJEU held that it is first of all for the Member States, pursuant to Article 131 of the VAT Directive, to determine the conditions under which they exempt export transactions in order to ensure correct application of the Directive and to prevent tax evasion and abuse. However, a national measure goes beyond what is necessary where it makes the right to exemption from VAT essentially subject to compliance with formal obligations without taking any account of substantive requirements and, in particular, without any consideration being given as to whether those requirements have been satisfied. The court stresses that transactions should be taxed taking into account their objective characteristics. An exemption from VAT for a supply of goods ought to be available when the goods have actually been exported in accordance with all relevant criteria and the supply therefore complied with the objective criteria for VAT exemption. The Czech customs procedure that prevented the grant of an exemption from VAT in such a case does not observe the principle of proportionality. For this reason, the court answered that a provision of national law will infringe EU law where it makes an exemption from VAT subject to a formal customs export procedure.

DLA Piper comment: The CJEU has confirmed once again that, in its view, formal proofs under VAT law are not an objective in themselves and that their absence is basically not detrimental if the substantive requirements are met. As in the previous case Cartrans Spedition (CJEU of November 8, 2018, C-495/17), the court reiterates that a tax exemption cannot be denied solely on the basis of a lack of formal evidence.

Insofar as the goods have actually been dispatched to a place outside the EU, the absence of evidence under national law does not preclude the exemption. A different approach is to be adopted only if the restrictive national provisions serve to ensure that tax revenue is collected.

Once it has been established that the substantive conditions for exemption have been fulfilled, exemption can therefore be refused in the absence of fulfillment of formal requirements only insofar as there is participation in tax evasion. In the case of exports via EU states with very strict rules of proof, it is now possible on the basis of recent CJEU case law to justify an exemption in the absence of or noncompliance with customs formalities, provided that it has been established that the goods have reached the third country. Having said that, it is not always straightforward to determine what is a formal, and what is a substantive requirement, in all cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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