© 2015 Grant Thornton UK LLP. All rights reserved.

ITU Summary Under the common VAT system,

Member States are obliged to

implement the provisions of the

VAT Directive into their own

national legislation. Where a

Member State fails to do so, the

Commission can bring

proceedings (infraction

proceedings) against that

Member State at the Court of

Justice.

The Commission took the view

that the UK's national law on the

supply and installation of energy

saving products was contrary to

the VAT Directive. The CJEU

agreed.

In due course, the UK's law will

have to be repealed to take

account of this judgment.

09 June 2015

Court of Justice of the European Union (CJEU)

In a judgment issued last week, the CJEU has confirmed that the UK's application of a

reduced rate of VAT to the supply and installation of energy saving products into

residential accommodation is contrary to EU law.

Under the VAT Directives, Member States are allowed to apply reduced rates of VAT

to a limited range of supplies of goods and services. In particular, the Directive allows

reduced rates to apply to the provision, construction, renovation and alteration of

housing as part of a social policy and the renovation of private dwellings (excluding the

supply of any materials which account for a significant part of the value of the services

supplied). Under UK law, the reduced rate applies to the supply of services relating to

the installation of energy saving products in residential accommodation and charitable

buildings and the supply of the materials themselves when supplied by the person

installing them. The European Commission felt that the UK's interpretation of the

Directive was too wide and began proceedings against the UK in 2011.

In essence, the CJEU has agreed with the Commission and has dismissed the UK's

reasons for the application of the reduced rate. According to the Commission, the

UK's policy of promoting the use of energy saving materials in the general housing

stock is aimed at environmental objectives and does not, therefore, constitute a

relevant social policy for the purposes of the application of reduced rates. Accordingly,

the CJEU has ruled that the Commission's case against the UK on this point was well

founded. It is the provision of the housing that must be the social policy in question

and not the environmental objectives. The application of reduced rates to all housing is

therefore contrary to the provisions of the Directive.

The CJEU has also agreed with the Commission on the second point concerning the

supply of energy saving materials by the person installing them. The VAT Directive

only allows the reduced rate to apply on condition that the materials being supplied do

not account for a significant part of the value of the service (of installation) supplied.

UK law makes no reference to this condition and, as such, the CJEU confirmed that

the UK's law is defective.

In the light of its findings, the CJEU has declared that the UK has failed to meet its

obligations under the VAT Directive.

Issu

e 1

7/2

015

UK infracted over reduced rates

Indirect Tax Update

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GRT100456

Upper Tribunal

Avoidance scheme not 'abusive'

In a long running case concerning the establishment of a VAT planning scheme, the Upper Tribunal

has dismissed HMRC's appeal from the First-tier Tribunal. In the case of Paul Newey t/a Ocean

Finance, the First-tier Tribunal concluded that, whilst the VAT scheme was designed to give the

trader a tax advantage, the scheme was not 'abusive' in that the arrangements that were put in place to

give effect to the scheme were not contrary to the purpose of the VAT Directive.

HMRC appealed but, in a 124 page judgment, Justice Warren has agreed with the findings of the

First-tier and has dismissed HMRC's appeal. The case centres around whether a Jersey company

provided financial brokerage services and whether it was the recipient of advertising services. HMRC

contended that in reality, the brokerage services were undertaken by Mr Newey in the UK and that it

was he, rather than the Jersey company, that incurred the advertising costs. Without the scheme, Mr

Newey incurred a large cost in the UK. VAT was chargeable on the advertising services he received.

The arrangements that were put in place were intended to remove that cost.

As an appeal from the First-tier Tribunal, HMRC case could only succeed if the Tribunal had made

an error of law. In Justice Warren's judgment, the First-tier was entitled to make the decision that it

did and there was no such error of law. Accordingly, HMRC's appeal was dismissed.

Comment

It has taken over six

years for this case to

reach this stage. The

Upper Tribunal found

it necessary to refer

questions to the Court

of Justice before it

could make a judgment.

Justice Warren has

confirmed that,

although the scheme

was intended to create

a tax advantage (over

£10 million), the

scheme was not

abusive.

First-tier Tax Tribunal (FTT)

Comment

Had the construction

of phase II being

undertaken with (say)

18 months of the

construction of phase I,

the taxpayer here may

have convinced the

Tribunal to treat the

two phases as a single

construction qualifying

for zero-rating.

Unfortunately, the

seven year gap between

the two phases was too

long and phase II could

only be regarded as an

extension to phase I

York University Property Company

UK VAT law provides that the construction of a building intended for use for a relevant charitable

purpose can be zero-rated. However, the construction of an extension to a building cannot qualify

and is subject to VAT at the standard rate. In this case, (Case number TC04417), the company

constructed a building in two phases. Phase I qualified as the construction of a relevant charitable use

building and was, accordingly, zero-rated. However, as the University did not have sufficient funds at

the time, the second phase – which was intended to double the size of the original phase I building –

was not started for a further seven years. The company argued that the construction of the second

phase should also qualify for zero-rating. However, HMRC contended that, as there had been a seven

year gap between the phases, the construction of phase II could only be regarded as the extension of

the phase I building and could not qualify for zero-rating.

Unfortunately for the University, the First-tier Tribunal agreed with HMRC. Weighing the relevant

factors, the Tribunal found that phase II of the building was an enlargement of or an extension to

phase I rather than a continuation of the original development of the building.

Contact Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683

Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556

Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170