Recent developments in Value Added Tax
In the past few weeks there have been several important developments that could impact on the financial services sector, businesses raising capital and businesses in general. We summarise the key events and their likely effect within Ireland.
High Court upholds taxpayer’s right to deduct
Taxpayers who have been denied recovery of VAT on costs attributable to an intended VATable activity but where those VATable activities are never carried out may now be entitled to deduct that VAT.
In a recent decision in the High Court, in which Deloitte acted for the taxpayer, Clarke J. confirmed that where there is a bona fide intention to engage in VATable activities, such a genuinely held intention would confer taxable status on the taxpayer and thus an entitlement to both register for VAT and deduct the VAT on related costs. The fact that the taxpayer never engages in those VATable activities does not prevent the deduction of the VAT on related costs. The Judgment also calls in to question the particular criteria that Revenue require certain businesses to satisfy before they would permit a VAT registration, in certain situations.
Deloitte can evaluate the circumstances in which VAT recovery was denied to determine whether a VAT refund is now due together with interest.
Restricted VAT on lease assignments: Retrospective recovery
Since March 1997 VAT has been payable on a reverse charge basis by assignees taking assignments of certain leases and because of limited or no VAT recovery this is a considerable cost. If you have suffered irrecoverable VAT on your premises within the last four years we believe that you may be entitled to a refund of that VAT.
If you have taken a lease assignment, Deloitte can assess whether you are entitled to a refund of any irrecoverable VAT plus interest.
Head office to branch: Some good news?
In the case of FCE Bank PLC, the Advocate General to the European Court of Justice has recommended to the full Court that transactions between establishments of the same legal entity are not within the scope of VAT and thus can be ignored. If this view is endorsed by the full Court there would no longer be an Irish reverse charge VAT liability on certain payments made from an Irish establishment to an overseas head office or branch.
However, given the terms of reference, two key issues will not be addressed by the Court and those issues may require further clarification, if not litigation. Firstly, neither establishment in the FCE case is a member of a VAT group but most Irish businesses that have concerns in this area will probably be members of VAT groups or the overseas establishment may be within a local VAT group. For this reason, the Revenue may seek to limit the practical application of any judgment to transactions between separately VAT registered establishments of the same legal entity but distinguish that judgment where a VAT group is involved. That said, we do not believe that the character of a transaction changes merely because of the membership of a VAT group. If the Court endorses the Advocate-General’s Opinion, we believe there should be grounds for arguing that the underlying principles of FCE apply equally to transactions between establishments included within VAT groups as they should do to separately VAT registered establishments.
Secondly, in circumstances where intra-establishment transactions can be ignored, the recovery of the Irish VAT on related costs incurred by the supplier establishment will need to be discussed and agreed with the Revenue.
Deloitte can assist businesses with structuring cross-border charges to minimise the potential VAT cost both in the supplier and recipient countries where VAT groups are involved. Deloitte also has expertise in structuring VAT recovery methods that both minmise the reverse charge VAT cost and maximise the recovery of such VAT.
Insurance outsourcing update
The Revenue has not yet outlined how they intend to implement the judgment of the ECJ in the case of Arthur Andersen & Co, in which the Court held that sub-contracted “back office” services are not covered by the VAT exemption available for insurance related services. Initial reactions are that such services will become liable to VAT in the supplier’s country, which is good news for Irish insurers where the outsource provider is outside the EU, but bad news where the outsource provider is based elsewhere in the EU or in Ireland. The Revenue have indicated a reluctance to introduce grandfathering provisions to protect existing contracts. The implementation date is unlikely to be before March 2006.
Deloitte can assist insurers, brokers, and outsource providers to determine the likely impact of such services becoming taxable in the outsource provider’s country. We can also advise on the potential solutions that exist to minimise any foreign or Irish VAT.
Costs of raising capital: VAT recovery
In the case of Kretztechnik AG, the ECJ held that while share issues do not constitute either a supply of goods or services, they are issued for the purposes of the company’s economic activities and thus the VAT on associated costs are deductible in accordance with the issuer’s VAT recovery status. The Revenue’s view had traditionally been that the VAT on share issue costs was never deductible.
Not only are businesses that engaged in share issues within the past four years now eligible to a VAT refund in accordance with their then VATable status, but following discussions with the Revenue, Deloitte believes that the Revenue are likely to agree that this decision extends to other methods of raising capital such as bond, note and rights issues.
Deloitte believe that Irish companies that have issued shares, bonds, notes and similar capital raising instruments in the past four years have a strong argument to recover some if not all of the VAT on associated costs. Deloitte can assist with quantifying the potential recoverable VAT, reviewing and maximising the applicable VAT recovery rates, and assisting with the submission of the VAT refund claims. We can also consider whether circumstances are such that the refund claim might be eligible for interest payable by the Revenue.
Pension funds: UK investment managers to split fees?
In recent months HM Revenue & Customs has been reviewing the manner in which UK pension fund investment managers split their services in respect of UK funds between the administration and management services to the employer, and the investment advice provided to the fund. HMRC believe that the traditional fixed percentage split is outdated and that modern technology means that the time spent in providing the various services can be more accurately measured and costed.
Irish pension funds will be aware that UK based investment managers have traditionally resisted pleas to split their fees between the VATable reverse charge elements (administration and management) and the VAT exempt elements (shares and securities dealings), citing the fear that co-operating in the reduction of an Irish pension fund’s reverse charge VAT costs could jeopardise their own UK VAT recovery position. However, given HMRC’s initiative this may be the ideal opportunity for Irish pension funds to ask their UK investment managers to review the component elements of the investment management services, particularly the dealing in shares and securities, and to separately identify and cost those services on the invoice to the Irish pension fund.
Deloitte has acted in the past for Irish pension funds in discussions with UK investment managers. This HMRC initiative might provide the best opportunity to revive those discussions and to seek to persuade the UK investment managers to reconsider their service delivery and invoicing arrangements in a more (Irish) VAT efficient manner.
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