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The old issue of “is it planning or is it avoidance?” comes up regularly in VAT. Cross border transactions within the EC where different member states have different interpretations of the EC rules often cause concern to HMRC.
HMRC has recently published the latest edition of “Spotlights” which summarises certain transactions or arrangements which they believe to be tax avoidance. It includes a VAT leasing structure which exploits differences of interpretation by EU Member States of a lease with an option to purchase.
They describe the scheme concerned as follows:
“The scheme user acquires a new pleasure craft which purportedly has ‘VAT paid status’ while, in reality, paying little or no VAT. The user provides the funds, directly or indirectly, that are used to purchase the asset.”
They also state that they “will challenge examples of this scheme falling within our jurisdiction and recoup the tax that has been avoided.”
EC VAT Rules and twenty-five Versions
This particular kind of VAT planning takes advantage of different applications of the VAT rules in different member states to minimise the overall VAT cost of the asset concerned. And it just shows how difficult it is to ensure that twenty-five different countries apply the rules in the same way.
One of the fundamental principles of the EC is that each member is supposed to implement the EC system of VAT in a uniform manner to ensure equality of competition for businesses in all member states. But that’s easier said than done.
There are a number of different things that can affect the way in which different countries within the EC apply the rules. Once you’ve taken account of differences in interpretation between the several official languages of the EC, you then have to take into account differences in the applications of the laws and local business practices.
Many of you will be aware that at the moment, the UK and various other member states are in the course of making changes to their national “place of supply of services” rules (see the forum articles here http://tinyurl.com/y92ujqv). But I thought that a simpler example might be good to start.
Taxable Person or Entrepreneur?
You’d think that the lawwriters would ensure that national law accurately represents the Directives, especially the basic concepts. This includes the meaning of “taxable person” in UK law. This is one of the most fundamental VAT issues for UK businesses. It also became the subject of one of the first important UK VAT Tribunal cases involving the difference of interpretation between EC and UK law. And that is particularly important as EC law supersedes UK law if EC law is more advantageous to the taxpayer.
Most of us are familiar with the concept of “taxable person”. It’s the term used in the legislation to define a person who makes or intends to make taxable supplies in the course or furtherance of a business and is liable to be registered for VAT in the UK and pay VAT to HMRC on his supplies.
The term “taxable person” is the English language version of the term in the original EC French version of the Directive of “entrepreneur”, which is defined in the Directive as any person who carries out an economic activity.
Now this distinction is important because there is a fundamental difference in meaning. As the UK term “taxable person” refers to a person who is making (or intends to make) taxable supplies, the emphasis is on making taxable supplies. The EC term “entrepreneur” is broader and can apply to a person who incurs expenditure as well as a person who makes supplies.
The issue was considered in the case of Merseyside Cablevision Limited (1987) where the company had incurred significant set up costs but was unable to demonstrate to Customs’ satisfaction that it intended to make taxable supplies in the foreseeable future. As a result HMCE would not allow the company to register and recover VAT on its pre-trading costs. The company was able to rely on the EC law and argue that it was clearly an entrepreneur engaged in an economic activity and won its appeal against Customs’ original decision.
Those Yachts!
The arrangements mentioned in “Spotlight” also make use of differences in interpretation by different EC countries. If it’s possible for the British and the French interpretation of a basic and fundamental VAT term to be so significant, imagine how twenty-five separate national laws and practice deal with something like an option to purchase and a “VAT paid” leasing structure. Is it a supply of goods or services? What is the place of supply? What is the value and the time of the supply?
One of the anomolies arises as a result of the zero-rating that applies to certain supplies of passenger transport in the UK. I suspect that the arrangements referred to by HMRC involve situations where a business registers for VAT in an EC country (other than the UK) and purchases a yacht under a lease purchase arrangement which includes an option to purchase but treats the transaction as a lease rather than purchase. This would presumably mean that VAT is only due on the initial payment in the country concerned, hence it becomes “VAT paid” within the EC. The yacht is then sailed to the UK and because under UK law the supply of passenger transport is zero-rated, the yacht could be made available for hire at the zero rate.
This is a very simplified example and a lot of care has to be taken to ensure that the transactions fit within the rules of the countries concerned. But it demonstrates how it is possible to significantly minimise the VAT costs of such vessels within the EC because of the different applications of VAT in different EC countries.
And of course anything to do with “pleasure craft”, yachts or planes, gets HMRC wound up as they take the view that such expenditure is the domain of the rich who can afford to pay for accountants and tax consultants to devise clever VAT avoidance schemes. We all know that there is at least some element of truth in this viewpoint and there are a lot of very wealthy individuals who are more than willing to pay for expensive advice to minimise the VAT cost of their latest new toy. It’s only really the international accountancy firms who have the resources to put in place such arrangements as you need experts in each member state to both identify and implement the local rules.
But this is a bit of a narrow perspective. HMRC seems to forget that these very wealthy individuals will simply source their boats or planes from suppliers other countries – particularly the Channel Islands – thus taking the business outside of the UK to get round potential VAT costs. And these businesses keep a lot of people employed around the UK and I’d rather keep the business in the UK and support our national industries.
Is it worth the effort?
I know that HMRC have challenged such arrangements in the past but to my knowledge there has yet to be a test case where they’ve managed to “recoup the tax that has been avoided”, so I’ll be waiting with interest to see how they try to assess for UK VAT in such situations. As a taxpayer I also wonder if it’s the best use of limited resources trying to find ways to assess for VAT on such transactions when there are many much more obvious sources of underdeclared VAT in the UK economy.
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