The Court of Justice of the European Union’s recent decision in SC Arcomet Towercranes SRL (“Arcomet”) considers the VAT treatment of charges from its Belgian parent company (“Arcomet Belgium”). This support was documented in a contract which provided for a variable charge which increased or reduced Arcomet’s profit to an arm’s length level under the transactional net margin method in the OECD transfer pricing guidelines.

In practice, this meant that interim invoices raised through the year were subsequently adjusted up or down to hit a pre-defined profit margin range.

Despite these measures Arcomet was assessed for over-recovered VAT by the Romanian tax authority on the grounds that VAT accounted for on the service was not recoverable. The tax authority claimed Arcomet had not demonstrated that the year-end adjustments related to services that were linked to the recipient company’s supplies.

The court applied two tests to determine whether Arcomet had received a taxable service. Firstly, whether there is a contract requiring reciprocal performance. Secondly, whether the contract creates a link between the service provided and the payment received, and if the service is within the scope of VAT, does that particular service have a link to Arcomet’s income for recovery purposes.

In considering the second question, it is worth noting that the value of the services wasn’t linked to the value contributed by Arcomet Belgium. Arcomet Belgium might provide considerable support but receive no payment for its services. Nonetheless, the court found that the contract was sufficiently detailed, and the payment terms were specific enough to constitute reciprocal performance. The agreed charges were therefore within the scope of VAT. Furthermore, the services described were found to be key to Arcomet’s service in Romania, so any VAT accounted for on the service was recoverable. Critically, the court found that a tax authority could demand evidence beyond the invoice to prove the right to recovery, which we think most authorities will require.

This decision raises interesting questions regarding HMRC policy on contingent consideration. A UK holding company must evidence that is has economic activity to reclaim VAT. However, HMRC’s interpretation of UK case law is that contingent consideration does not create such activity. Nevertheless, in this case, the court’s decision implies that provided “remuneration is neither voluntary nor uncertain”, it does create an economic activity.

There are two key takeaways from this. Taxpayers must be able to evidence the detail of intra-group charges. This evidence should include a contract identifying specific services for a clearly defined fee. Additionally, HMRC policy concerning holding company VAT recovery might be seen as too restrictive.

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