A tax tribunal, having determined that UK legislation exempting welfare services from VAT did not accurately reflect European VAT law, has seemingly set the UK on a course which may test HMRC’s assertion that it’s ‘business as usual’ following the EU referendum.
HMRC has advised UK VAT registered businesses that we are, and shall during Article 50 negotiations, remain part of the EU. As such, the EU Principal VAT Directive (PVD) and Union Customs Code (UCC) will still apply until a successful exit has been negotiated.
Consequently, past and ongoing decisions of the European VAT Court would still have continuing application on the UK’s VAT rules.
However, as we highlighted in previous Weekly Tax Briefs, unencumbered and unfettered by the constraints of the PVD, it was questionable whether the UK would be inclined to abide by these decisions.
Consequently we anticipated that VAT ‘tensions’ would potentially focus on whether the UK would apply European VAT Court decisions affording holding companies a recovery of VAT, or giving employers a recovery of VAT on pension funds investment costs.
In a case concerning whether a company’s supplies of welfare services should be exempt from VAT, a VAT tribunal may have inadvertently brought conflict between EU and UK VAT law into more immediate focus.
To qualify for VAT exempt welfare services, UK legislation requires suppliers to be either: a local authority; registered as a charity; or registered under the Care Act (or similar).
The VAT Tribunal has stated however that this is too restrictive an interpretation of EU law, and that ‘for-profit’, non-State registered companies should also benefit from VAT exemption.
By restricting VAT exemption to charities to the detriment of ‘for-profit’, non-State registered companies, whose purpose, structure and activity reflected an operation inherently devoted to social welfare, the Tribunal determined that the UK was in breach of the EU principle of fiscal neutrality. That is, there would be a distortion of competition where a charity can exempt its services from VAT, but its direct competitor has to apply VAT to its supplies.
If we are to have ‘business as usual’, we would expect HMRC to address this anomaly in UK VAT legislation and broaden the VAT exemption to reflect EU VAT law.
But then again, it would also be fair to say that ‘business as usual’ for HMRC means that, having lost a case before one tax tribunal, appeals that case to superior tax courts.