Privy Council finds VAT not payable where supplier waived right to payment

In Shophold (Mauritius) Ltd v The Assessment Revenue Committee [2016] UKPC 12 the Privy Council allowed the taxpayer’s appeal against the finding of the Supreme Court of Mauritius that the taxpayer was obliged to pay VAT where it waived the enforcement of a contractual right to be paid for services that it provided and neither issued an invoice nor received payment for those services. The decision looks at the meaning of “consideration” in the context of VAT.

The taxpayer had entered into a management services agreement with a related entity in March 2003. In May 2003 the taxpayer resolved to waive its right to be paid the management fee until such time that the entity was in a sufficient profit making position. The management services agreement was not amended to reflect the waiver and the taxpayer continued to provide management services to the entity, albeit at a reduced level. In December 2007 the taxpayer resolved  that the management fee be reinstated. During the period in which the waiver was in effect, the taxpayer did not issue any invoice in respect of its management services or receive any payment for those services.

The Revenue contended that the taxpayer had made taxable supplies by providing the services, whether or not it had submitted invoices or had been paid for the services.

The Supreme Court agreed with the Revenue. In substance, the Supreme Court held that because the taxpayer had only waived its entitlement to receive the Management Fee and had not agreed a variation of the Agreement, the contractual obligation to pay the Management Fee remained. That contractual obligation was the consideration given for the management services, and as a result the services were taxable supplies subject to VAT. Accordingly, the taxpayer ought to have received payment for the service at the end of each month during the relevant period and was liable to VAT as if it had.

The appeal

The Revenue contended that the fundamental error in the taxpayer’s case was that the assumption that because there had been no payment, no consideration passed from the related entity to the taxpayer. The Revenue contended that the continuing contractual obligation to pay the management fee, even if not enforced by the taxpayer, provided the necessary “consideration” to found a taxable supply.

The Privy Council did not agree, observing that the concept of “consideration” in the VAT legislation is quite different from the contractual concept of consideration. In the law of VAT, “consideration” refers to “reciprocal performance”, referring to the following statement of the Court of Justice in Tolsma v Inspector der Omzetbelasting Leewarden [1994] STC 509 (para 14):

…a supply of services is effected ‘for consideration’ …, and hence is taxable only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

The Privy Council considered that when the Court of Justice was looking at the matter from the perspective of the supplier. This requires that under the legal arrangement the supplier receives or is to receive remuneration for the service that it has performed, either from the recipient of the service or a third party. That is not the same as the meaning of “consideration” in contract law.

Comment

The approach of the Privy Council is similar to the position in Australia. In Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 the majority of the High Court (at [14]) stated that the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a) does not adopt contractual principles, but requires a connection or relationship between supply and consideration. In my view, that connection will likely involve some form of “reciprocal performance”.

It is also interesting to consider this set of facts in light of the decision of the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49. In that case the Court found that an executory contract will generally give rise to at least two supplies, a supply on entry into the contract and a further supply on performance of the contract. In this context, the management services agreement would involve a supply by the taxpayer on its execution and further supplies of the provision of management services. These further supplies would be made “for” the management fee. Accordingly, during the period that the taxpayer had waived the right to recover payment it could be said that the supply of management services were not “supplies for consideration”.

 

UK Supreme Court dismisses taxpayer’s appeal in Airtours

In a 3:2 decision, the UK Supreme Court has dismissed the taxpayer’s appeal in Airtours Holidays Transport Ltd v Revenue & Customs [2016] UKSC 21. The issue in the appeal was whether Airtours was entitled to recover, by way of input tax, VAT charged by PwC in respect for services provided by PwC to various financial institutions which were paid for by Airtours.

The majority reviewed previous domestic and Court of Justice judgments, including Redrow and Loyalty Management. In doing so, the majority agreed with the majority in Loyalty Management that Lord Millet’s observations in Redrow went too far, when he said that the question to be asked was whether the taxpayer obtained “anything- anything at all”. Rather, the question to be asked was as follows (at [50]):

…where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier.

Applying this analysis, Airtours appeal failed for the following reasons:

  • it was not entitled under the contract (expressly or by implication) to receive any services from PwC; and
  • the Contract did reflect economic reality and was not in any way an artificial arrangement.

The dissenting judgements considered that the “narrow legalistic approach” of the majority was too narrow, was inappropriate in the circumstances, and gave too little attention to the legal relationship between PwC and Airtours and to the economic realities of that relationship.

The decision illustrates the difficulties that can arise in the context of VAT/GST and “tripartite agreements”. The decision also illustrates how minds may readily differ on the characterisation of a transaction for the purposes of VAT/GST, with strong dissenting judgments in both the Supreme Court and the Court of Appeal.

My analysis of the decision can be accessed here. A more detailed analysis of the issue of tripartite agreements can be found in a paper that I presented earlier this year at the Television Education Network GST Symposium in Brisbane – my paper can be accessed here and also under the “My Articles” menu.

Federal Court dismisses taxpayer’s appeal in Crown Estates decision

In Crown Estates (Sales) Pty Ltd v Commissioner of Taxation [2016] FCA 335 the Federal Court dismissed the taxpayer’s appeal of the decision of the Tribunal in Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 94. The Tribunal found that the taxpayer was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the taxpayer was acting as the agent of those owner-clients. My post on that decision can be accessed here.

The Court upheld the Commissioner’s objection to the appeal on the ground that the notice of appeal did not specify any question of law. The Court noted that an appeal can be made from a decision of the Tribunal only on a question of law and that the question of law must be specified in the notice of appeal.

The decision illustrates the difficulties in properly framing an appeal from a decision of the Tribunal.

The amended questions of law were stated to be as follows:

(1) Whether the Tribunal erred in properly construing and applying s 11.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) in concluding that the Applicants did not make creditable acquisitions in the course of their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.
(2) Whether the Tribunal erred in construing and applying the law of agency in determining that the Applicants acted as agents in the course of all their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.

The Court considered that the questions of law did nothing more than solicit a broad and hypothetical enquiry as to the construction and operation of statutory provisions. They did not identify a question of law.

The Court observed that an additional reason why the Commissioner submitted that question 2 (expressly) and also 1 (by necessary implication) in the notice of appeal raised no question of law was that a conclusion that the taxpayer was an agent of the property owners was one of fact. The Court considered that questions as to the existence of agency are usually questions of fact and that those questions of fact emerge from settled legal principles. However, the Court considered that it was not impossible to conceive of a case where a question of law might be found in posing as a question that, having found particular facts, was the Tribunal obliged in law to conclude that an agency relationship existed? The Court noted that neither question of law was pleaded in this way.

The Court also observed that another way putting such a proposition would be to pose as a question whether, on the facts found, the Tribunal was obliged in law to conclude that it was the taxpayer which had made the creditable acquisition? Once again, that is not the way in which either question was pleaded.

The Court nevertheless addressed the issue raised in the appeal, which was whether the taxpayer had made “creditable acquisitions” for the purposes of the GST Act – i.e., whether the taxpayer was acting as a principal that acquired goods and services from third parties which it resupplied to its owner-clients, or was it dealing with the contractors et al. as the agent of the owners in each case.

The Court observed that the taxpayer chose not to give detailed evidence as to the circumstances appertaining to each and every creditable acquisition for each and every period in question to establish that the taxpayer was the entity that made the acquisition. Further, the Tribunal was not shown any evidence that suggested that the finding of agency was wrong – for example invoices or other documents evidencing or describing transactions in a way that suggested the third party and the taxpayer intended that goods or services would be supplied to the taxpayer as principal, rather than to a property-owning client.

The Court concluded that the relationship of principal and agent between the taxpayer and its client was the correct conclusion in law.

 

 

 

 

New South Wales Supreme Court orders Contract of Sale to be rectified to make the price “plus GST”

In SAMM Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2016] NSWSC 362 the Supreme Court found that a Contract of Sale should be rectified to reflect the common intention of the parties that the purchase price was to be exclusive of GST.

The decision is another example of the difficulties that can arise where real estate is sold and there is confusion as to whether the price is exclusive or inclusive of GST. The amounts at issue can be significant, in this case it was $325,000 (10% of the purchase price of $3.25m). Similar disputes arose in the NSW Supreme Court in Gallinar Holdings Pty Ltd v Riedel [2014] NSWSC 476Ashton v Monteleone [2010] NSWSC 258 and Tam v Mannall [2010] NSWSC 250. The issue is discussed in more detail in my paper “GST and Real Estate Contracts – when things go wrong“.

In this case, the Contract of Sale clearly provided that the price was inclusive of GST – in contrast to other cases where the proper construction of the contract was at issue. The vendor contended that despite the form of contract executed, the “clear and common intention” of the parties was that the price was “plus GST” and the contract should be rectified accordingly.

The Court observed that rectification was available where there is “clear and convincing proof” that by reason of the common mistake of the parties, the document they signed did not “embody the final intention of the parties”. The evidentiary burden placed on the party seeking rectification is high and the relief is not easily obtained.

The difficulty faced by the Court (and the applicant) in the case was that there was a sharp divide in the evidence given on behalf of the parties. At the end of the day, the evidence that appeared to sway the Court was that of the auctioneer, who recalled telling the crowd at the auction that the bids were to be exclusive of GST and that GST would be in addition to the knockdown price. Critically, the auctioneer sent an email shortly after the auction confirming his recollection of events. The evidence of the auctioneer was consistent with a “Reserve Price Letter” given by the vendor to the agent before the auction stating that the reserve price was “$3,500,000 + GST”.

The email was seen by the Court as decisive, being described as an almost contemporaneous note by the auctioneer of what he said at the auction. Given the disparity in oral evidence of what was actually said at the auction, the email provided the Court with a piece of documentary evidence upon which it could base its finding. This can be compared with the decision in Tam v Mannall where the auctioneer gave evidence that he informed the bidders that the price was to be increased for GST but, given the disparity in the oral evidence given at trial about what was actually said at the auction, the Court found that the vendor could not establish that the purchasers had heard those words and the parties held a common intention that the price was to be plus GST.

 

 

 

 

 

UK Upper Tax Tribunal finds management company did not make taxable supplies to subsidiaries

In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.

Comment

The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.

 

 

Treasury introduces bill on GST and cross-border supplies including digital downloads

On 10 February 2016 the Treasurer introduced Tax and Superannuation Laws Amendment (2016 Measures No.1) Bill 2016 into Parliament. The Explanatory Memorandum to the Bill can be accessed here. The Bill contains measures initially flagged in the Budget. The measures have been the subject of a detailed consultation process and two forms of Exposure Draft have been published for comment.

In summary, the amendments have the following aims:

  • to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to goods and services tax in a similar way to equivalent supplies made by Australian entities; and
  • to better target the way Australia’s goods and services tax rules apply to cross-border supplies that involve non-resident entities.

A brief outline of the amendments are set out below. The measures are to take effect for tax periods starting on or after 1 July 2017.

Extending GST to imported digital products and other services

Expansion of the concept of “connected with Australia”

Under the existing law, for a supply to fall within the GST net and potentially be a taxable supply it must be “connected with the indirect tax zone” (i.e., connected with Australia) pursuant to s 9-25 of the GST Act. The amendments expand this concept considerably.

Section 9-25 contains the following categories of supplies that may be connected with Australia:

  • supplies of goods wholly within Australia – sub-section (1);
  • supplies of goods from Australia – sub-section (2);
  • supplies of goods to Australia – sub-section (3);
  • supplies of real property – sub-section (4); and
  • supplies of anything else – sub-section (5).

Section (5) currently makes a supply of “anything else” connected with Australia where one of the following applies:

  • the thing is done in Australia;
  • the supplier makes the supply through an enterprise carried on in Australia; or
  • the supply is a right or option to the supply of a thing that would be connected with Australia.

The amendments expand subsection (5) to provide that a supply of anything other than goods or real property is connected with Australia if “the *recipient is an *Australian consumer“.

An “Australian consumer” is essentially an entity that is an Australian resident who is not registered for GST, or if it is registered, the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise carried on by the entity.

This means that all supplies of intangibles (e.g., digital downloads, professional services etc) to a private consumer, or a registered consumer who acquires it not for the purpose of an enterprise (e.g., in a private capacity), from an overseas entity will be “connected with Australia” and will be potentially subject to GST in the same way as supplies from entities in Australia – i.e., if the other requirements in s 9-5 are satisfied. This also means that overseas suppliers will be required to register for GST if they exceed the GST turnover threshold. The stated aim is for there to be a “level-playing field” where all intangibles acquired by consumers have the same GST treatment, regardless of where the supplier is.

Safeguards for overseas suppliers

The Explanatory Memorandum recognises that in may cases foreign suppliers will have only a limited capacity to investigate the residency and GST registration status of the recipient. The amendments provide a safeguard for supplies, to the effect that the offshore supplier will only be liable for GST in relation to a supply if:

  • the supplier takes reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer; and
  • having taken these steps, reasonably believes that the recipient is not an Australian consumer.

Interestingly, the safeguards do not extend to the reverse situation, where the overseas supplier wrong treats the recipient as a consumer and over-pays GST. The Explanatory Memorandum states that in such case Division 142 of the GST Act would apply and the supplier should generally be required to reimburse the Australian consumer for the GST before being able to claim a refund.

Shift of GST liability to electronic distribution platforms

The amendments shift the liability for GST from the overseas supplier to the operator of an “electronic distribution platform”. This is a platform operating over the internet, but not a physical store or one operated by mail.

The rationale for shifting liability is that the platform operator has most of the information about the recipients of the supplies and is generally larger and better resourced than most of the entities making supplies through the platform.

The parties can agree to shift the liability for GST to the supplier if the parties agree in writing and the recipient is given a document identifying the supply as having been made by the supplier.

GST-free and input taxed supplies

Divisions 38 and 40 are to be amended to allow Legislative Determinations to be made that a specific class of supplies that fall within the amendments to be GST-free or input taxed.

The Explanatory Memorandum states that this power will only be exercised where the current treatment of the supply or class of supply is contrary to Australia’s international trade law obligations and the Treasurer is satisfied that a supply made by a comparable Australian resident entity would receive the same treatment.

Tax invoices

The Amendments provide that the supplier is not obliged to provide a tax invoice or adjustment note at the request of the recipient. The rationale for this is that unlike most other types of taxable supplies, offshore supplies falling within the amendments by definition cannot be made to an entity that is entitled to an ITC in relation to the acquisition of the supply.

The margin scheme in Division 75 operates in the same way. As the purchaser is not entitled to input tax credits where the margin scheme is used, there is no need for a tax invoice to be provided.

GST treatment of B2B cross border transactions

These Amendments are not aimed at altering the tax base. Rather, they are aimed at streamlining the way the GST applies to cross-border supplies between businesses by relieving non-resident suppliers of the obligation to account for GST on certain supplies.

The amendments do this by ensuring that certain supplies made by non-residents are not connected with Australia – those supplies are treated as being “disconnected”. For these supplies, the recipient will be responsible for for determining if they have a GST liability under the reverse charge rules in Division 84 of the GST Act – that liability will arise to the extent that the acquisition is not creditable. If the acquisition is fully creditable in the hands of the recipient, Division 84 does not apply – there is no need to collect the GST revenue where that is fully offset by the claim for input tax credits.

ECJ finds VAT payable on unused flights

In a decision handed down just before Christmas, the European Court of Justice in Air France – KLM [2015] EUECJ C-250/14 found that Air France was liable to VAT on unused air transport tickets – also described as “no-shows”. The same issue was considered in Australia in 2012 where the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 found that GST was payable.

The Court approached the question on the basis a supply of services, such as air passenger transport, is subject to VAT where:

  • first, the sum paid by a passenger to an airline company, in the context of the legal relationship constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration; and
  • secondly, that service is performed.

In respect of the first dot-point, the Court observed that it had previously found that the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract.

In respect of the second dot-point, the Court observed that it was  possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased.

Nevertheless, the Court found that the consideration for the ticket consisted of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfilled the service by enabling the passenger to benefit from those services.

The finding of the Court is similar to that of the majority of the High Court in Qantas, where the taxable supply was identified as being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”, with the fare being consideration for that supply. In the context of both decisions it did not matter whether the flight was actually taken by the passenger.

Tribunal finds taxpayer acting as agent and not entitled to input tax credits

In Crown Estates (Sales) Pty Ltd and Commissioner of Taxation [2015] AATA 949 the Tribunal found that the applicant was not entitled to claim input tax credits in respect of acquisitions made in providing property management services to owner-clients because the applicant was acting as the agent of those owner-clients.

The applicant contended that there were two aspects to the relationship with owner-clients:

  • finding and securing clients and collecting rents that were paid into a trust account; and
  • managing the property, including its physical state of repair. This included acquiring goods and services from tradespeople.

In respect of the second aspect of the relationship, the applicant contended that while those goods and services were acquired for use in properties owned by the owner-clients, it was acting as a principal when engaging the contractors and that the applicant was liable to the contractors, with the costs then passed-on to the owner-clients (some of whom refused to pay).

The Tribunal was not persuaded that the applicant was acting as a principal. In doing so, the Tribunal made some general observations about the  interaction between the GST and the law of agency:

  • you cannot receive an input tax credit in respect of a creditable acquisition made by another – the issue here was whether the applicant acquired anything, or whether the acquisition was made by the property owners;
  • an agent is able to create and affect a legally enforceable relationship between the principal and a third party – at least where the agency is disclosed or it is clear from the the terms of the agreement that the agent is acting in that capacity and does not intend to be personally bound;
  • where the agent does not disclose the existence of the principal and appears on the face of the relationship to be contracting with the third party in his or her own right, the undisclosed principal will still be liable and may enforce the agreement with the third party – in that event, the (undisclosed) relationship as between principal and agent suggests the acquisition of goods or services from the third party will still amount to a supply of goods or services by the third party to the undisclosed principal, albeit that the agent may also be liable to the third party.

A final comment of the Tribunal was that if the applicant was entitled to input tax credits on the acquisitions from the contractors, any input tax credit that could be claimed would be offset by the GST payable when those costs were passed on to the property-owners.

UK Tribunal undertakes journey into VAT and tripartite agreements

The recent decision of the First Tier Tribunal in  Adecco Uk Ltd v Revenue & Customs [2015] UKFTT 600 illustrates the difficulties with tripartite agreements (both here and in the UK).

The Tribunal had to decide whether the applicant was liable to pay VAT on the full charge paid by its clients for the services of non-employed temps provided to those clients or only on the element of the charge retained by it (i.e. the commission or gross profit element).

As observed by the Tribunal (at [8]), the question for the Tribunal was simple in essence. What did Adecco supply to its clients?

  • A supply of introductory services – the consideration being the commission?; or
  • A supply of the temps – the consideration being the entire fee?

The answer was not so easy.

The Tribunal ultimately found that Adecco was liable to pay VAT on the whole charge, but doing so required a decision running to some 314 paragraphs, taking the reader on a detailed journey through the minefield that is the world of tripartite supplies and a consideration of the various decisions of the UK courts and the ECJ that have considered the issue, including RedrowLoyalty ManagementBaxi Group, WHA and Airtours.

In an additional twist that only adds to the confusion surrounding VAT/GST and tripartite agreements, in coming to its conclusion the Tribunal found that it could not follow a decision of the First Tier Tribunal in 2011 that came to the contrary view on the same issue and almost identical facts.

No doubt there will be an appeal – indeed, the Tribunal effectively invited an appeal to allow a higher authority to clarify the VAT issues.

My analysis of the decision can be accessed here.

UK Tribunal finds that the taxpayer providing distance learning made a single zero rated supply of books

In Metropolitan International Schools v Revenue and Customs [2015] UKFTT 517 the Tribunal considered the often difficult question of whether a transaction was to be properly characterised as a single supply – and if so, a single supply of what?

The taxpayer provided distance learning courses and, while both parties agreed that there was a single supply, the taxpayer contended that there was a single supply of manuals (books are zero rated or GST-free) and the Revenue contended that there was a single supply of education (taxable, not being within the exempt education provisions).

In coming to the view that there was a single supply of books, the Tribunal conducted a detailed review of the case law and the principles involved in determining the characterisation of a transaction. While caution must be had when having regard to overseas authorities, the approach of the Tribunal and the principles adopted do provide assistance on how similar issues may be resolved in Australia.

My analysis of the decision can be accessed here.