The
decisions have now been published (they can be accessed through the Press
Release on the ECJ website.
We
have been provided with a more detailed analysis by ETOA’s tax expert, David
Bennett of Saffreys. This is chiefly aimed at businesses based in the UK, though the
ruling has EU-wide impact. It is important to remember that the court’s
decision shows that, in their opinion, the Commission’s interpretation was
wrong, and so were wrong to try to enforce their interpretation on the
respective member states. But everything in these rulings implies that there
will be little room for national tax bodies to do anything other than apply the
ruling to all relevant transactions.
On
the crucial point of “when will this ruling see implementation”, we have no
idea. But it makes reform in this area ever more pressing.
Wholesale supplies
The
Commission’s argument was that eight member states had incorrectly interpreted
the requirements of the Directive in requiring wholesale supplies to be
accounted for within TOMS.
A
wholesale supply is one made to another person for re-sale.
The
Commission argued that wholesale supplies must be excluded from TOMS. The basis for their position was a literal
interpretation of the text of the Directive.
At the risk perhaps of oversimplifying, the problem was the use of the
words “traveller” and “customer” in the text.
The Commission argued that use of “customer” was a mistake; all
references should be to “traveller”.
Such an interpretation would limit TOMS to supplies to persons who use
the service themselves, either natural persons buying for their own use or
legal persons buying for the use of an employee. Of the six original versions of the text, only one (the English
version) uses the word “customer”.
The
Court did not agree. If “customer” was a
mistake, there have been numerous opportunities to correct it, none of which has
been taken. In addition, many of later
versions use “customer”; there is little consistency in approach. A literal interpretation cannot prevail. It is established case law that all versions
of the Directive must be taken into account and, where there is divergence in
meaning between versions, the purpose of the rules in question must be used to
interpret the effect of the provision.
The purposes of TOMS are simplification and fair allocation of revenue
between member states. A wide
application of TOMS (the “customer approach”) is the best way to achieve those
objectives.
Furthermore,
the Court pointed out that a wide meaning of “traveller” is not new. In the First Choice case (on travel agents
discounts), the Court interpreted the term “paid by the traveller” as including
amounts paid by persons other than the traveller: third party consideration
provided by the travel agent should be included.
The
Commission’s argument was dismissed and described as “unfounded”.
So
we have a very clear decision that TOMS must be applied widely. No exclusion for B2B supplies (wholesale and
for business use) should be permitted.
Very
clearly, this is at odds with the position in the UK (and many other states).As you will be aware, HMRC’s position is that
wholesale supplies must not be included in TOMS.A switch to TOMS accounting would for many
mean greater VAT payments than are currently due.For such businesses, the key now is how the
Commission and HMRC react to the decision: will they require the Court’s interpretation
to be adopted?Also, how will taxpayers
currently denied use of TOMS react if they believe TOMS would be of
benefit?Clearly, this still has some
distance to go.Supplies to a business
for its own use are already within TOMS so the status quo is maintained by this
decision.
Nature of the TOMS calculation
This
was an issue only in the Spanish case.Spain permits
taxpayers to calculate the total margin achieved on all TOMS supplies made in a
tax period.VAT is then payable by
reference to that global margin rather than on individual sales made in the
period.
The
Commission argued successfully that this approach is not permitted by the
Directive. The Court interpreted the
Directive to require VAT due to be calculated individually on each sale falling
within TOMS. There is simply no
provision allowing for an “overall determination” of the amount due.
This
could be very important in the UK. Our rules require the calculation to be made
for a period, ie the financial year of the taxpayer. For most, that it is a welcome simplification
but it now seems clear that the Court does not believe such an approach is
permitted. The Court was not asked to
consider the UK rules but
even so the decision is binding on the UK.
Changes to the UK
approach may therefore be needed.
It
may seem crazy that a sensible approach to the task of calculating TOMS VAT
payable is under threat, but that does seem to be the inescapable conclusion
from the decision.
Invoicing
As
above, this too only concerns the case against Spain.
The
Commission’s argument was that Spain’s
invoicing rules were wrong.Spain has allowed suppliers to indicate on
invoices for TOMS supplies an amount of VAT equal to 6% of the total price, but
only where the services actually take place in Spain.
The
Commission succeeded.The Court has
decided that the above practice is not permitted by the Directive.
The
above is of interest really only to Spanish taxpayers.What is much more interesting is the idea of
the issue of a VAT invoice for TOMS supplies which would indicate the VAT due
on the margin (and hence require disclosure to the client of the margin).
To
recap, the AG thought that the rules might be interpreted as requiring the
issue of a VAT invoice in these circumstances.The decision, however, does not address this point directly.There is a suggestion that a client has a
right to recover VAT declared on the margin(which of course must be known by the supplier given the conclusion
above on the nature of the calculation) but no statement by the Court that a
VAT invoice should be given.Nevertheless,
it might be expected that business purchasers of a TOMS supply may use the AG’s
opinion as the basis of a demand that the supplier raises a VAT invoice
(including for past transactions) indicating the VAT due on the margin so that
the client can recover that VAT.
At
least two, and possibly all three, of these decisions will have far-reaching
consequences. There will no doubt now be
discussions with HMRC and the Commission to identify what happens now. The prospect of TOMS reform is still looming and
these decisions will no doubt make taxpayers (and maybe tax administrations
too) more amenable to the prospect of reform and that, quite possibly, is what
the Commission wanted all along.