Court of Justice

Court of Justice

In Apcoa Parking Danmark A/S (C-90/20) the taxpayer was a private company which operated a car park on private land. The taxpayer set out the conditions for using the car park – for example, the permit requirements and maximum parking time. There was a sign at the entrance to the car park stating that if the car park rules were breached, a ‘control fee’ would be levied. The ‘control fee’ could be charged for matters such as the parking ticket or permit not being displayed or parking in prohibited areas such as disabled bays without the required permit. Although the parking fees were subject to VAT the taxpayer disputed the Danish tax authority’s claim that the ‘control fees’ should also be subject to VAT.

Agreeing with the Advocate General that the control fees were subject to VAT as consideration for a supply of services, the Court found that:

• there was reciprocal performance between the parties in that the payment of parking fees and, where required, of the control fees for parking in breach of the regulations constituted consideration for the provision of a parking space; the total amount which the motorists had undertaken to pay as consideration for parking, including the control fees, represented the terms and conditions under which they benefited from a parking space. In other words, control fees could be regarded as forming an integral part of the total amount that the motorists undertook to pay to the taxpayer by deciding to park their vehicle; and
• there was a direct link between the service provided and the control fees; the control fees took into account the higher cost of operating car parks caused by parking that contravened the car park rules. The Court noted that the income received by the taxpayer from the control fees amounted to approximately 35% of its turnover.

The Court distinguished Société thermale d’Eugénie-les-Bains (C 277/05) (in which the Court held that the retention of a deposit on the cancellation of a room reservation was compensation and not consideration) on the grounds that in that case the service of providing a room had not been supplied.

The Court also rejected Apcoa’s argument that:

• the fees were predetermined and had no real economic link with the value of the parking service supplied; it was settled case-law that the amount of the consideration, and whether it is, greater or less than the costs which the taxable person incurred in providing the service, is irrelevant.
• the control fees were classified as a penalty under Danish law; for the purposes of interpreting the provisions of the VAT Directive, the assessment of whether payment of a fee is made as consideration for a supply of services is a question of EU law which needs to be determined independently of the assessment made under national law.

DLA Piper comment:

The fact that the control fees were significantly higher than the cost of normal parking did not deter the Court from deciding that the fees were consideration for a supply and therefore subject to VAT. The Court felt there was no need for there to be a correlation between the costs of providing the parking space and the control fees. This could be seen as not wholly consistent with the UK's new guidance on compensation and early termination of contracts, which says that penalty fees are subject to VAT if they are effectively payments for a permitted extension to the parking period but are outside the scope of VAT where the amounts are “substantial and punitive and designed to deter a breach of the terms and conditions”.

In Grundstucksgemeinschaft Kollaustrabe 136 (C-9/20), both the taxpayer (GK), the lessee, and the lessor had opted to tax the leases and been authorised by the tax authority to use ‘cash accounting’, that is to calculate their tax on the basis of remuneration received rather than supplies when made and received. Some of GK’s rental payments to its lessor were deferred and paid in later years and a portion of rent was released and never paid. GK claimed its input tax on the deferred rental payments in the year in which the rent was paid but the tax authority argued that the input tax deductions should be made in the year to which the rent related; notwithstanding that GK used ‘cash accounting’, GK’s right of deduction arose at the time of supply (ie when the real estate was made available to GK under the lease). The earlier tax years to which the input tax related were time-barred by the time the tax authority issued its notice and consequently, GK was prevented from reclaiming its input tax.

The German court was satisfied that under German law the right to an input tax deduction arose in the earlier years to which the rental payments related but asked the CJEU whether this national rule was precluded by the VAT Directive.

The Court has agreed with the Advocate General that the taxpayer’s right to deduct input tax arose at the time when the rental payment was made. The VAT Directive precluded the German rule which required GK to claim its input tax deduction in the earlier years to which the rental payments related in circumstances where GK’s lessor was authorised to use ‘cash accounting’ and therefore only obliged to account for output tax when the rent was paid.

DLA Piper comment:

This is a sensible decision confirming that the usual time of supply rules are modified in the case of taxpayers using the cash accounting method irrespective of whether or not payments were delayed.

Advocate General opinions:

The Advocate General in GE Aircraft Engine Services v HMRC (Case C-607/20) described this case as having ‘layers’. The first layer was about the meaning of the rule which deems there to be a supply for consideration where a business supplies something free of charge ‘for his private use or for that of his staff, or more generally, for purposes other than those of his business’. The second layer was about tax neutrality and avoiding double taxation.

The taxpayer (and other companies within its group for which this was a lead appeal), operated a staff recognition scheme under which a nominee for an award would be sent a link to a website on which the successful employee could select a retail voucher from a range of listed participating retailers. Once selected, the voucher could only be redeemed at the selected retailer and the retailer would have to account for output VAT on the value of the voucher when it was used.

The UK tax authority argued that the transfer of the vouchers represented a gift of awards which, for VAT purposes, fell within the scope of a provision deeming “the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business” to be a supply of services for a consideration. The taxpayer argued that the gift of the vouchers to employees was made for business purposes, (to incentivise employees) and that the deeming provision did not therefore apply.

‘Non-business purpose’

The Advocate General observed that the reason for the deeming provision was to prevent a taxable person from deriving an advantage from the private use of goods or services of its business over an ordinary consumer who would bear the burden of VAT; the rule treats the consumer as a final consumer for VAT purposes.

The Advocate General said that the principle to be derived from the relevant case-law was that a purpose was a business purpose where the service provided was necessary in the light of the requirements of that particular taxable person’s business. ‘Necessity’ was to be judged objectively by reference to the existence of: (i) a link between the free service and the business’ economic activity; and (ii) control over the use of the service to ensure that it is used in furtherance of the business’ taxable activity. Examples were free transport to a hard-to-reach worksite of a construction business or free lunches in business meetings. A general increase in efficiency resulting from greater employee satisfaction was not sufficient to demonstrate a business purpose in this context.

The Advocate General therefore concluded that the rewards programme, in principle, resulted in the provision of free services for employees that required the taxpayer to account for output VAT pursuant to the deeming provision since the vouchers could not be regarded as having been provided for a business purpose.

Double taxation

The Advocate General went on to say however that, if the operation of the deeming rule would result in output tax being payable twice by reference to the value of the same vouchers (once on the transfer to the employee and again when it was redeemed), the principle of fiscal neutrality may be infringed.

Referring to the 2016 rules on vouchers (not in force at the time of this case) which distinguish between multi-purpose vouchers (not chargeable to VAT as the underlying supply is unknown) and single purpose vouchers, the Advocate General opined that if the vouchers awarded by the taxpayer represented a right to a future unidentified supply (which was a matter for the domestic court to determine), their transfer from the employer to an employee would merely be a preliminary transaction and not give rise to a chargeable event for VAT purposes. In that way, VAT would only be charged once.

DLA Piper comment:

This case was before the change in law affecting vouchers (single and multi purpose) and the Opinion makes out that use of multi purpose vouchers would eliminate the risk of double taxation. The A G has made some interesting comments on "business purpose" here, which could also have implications for input VAT recovery.

The Advocate General in DuoDecad Kft. (C-596/20) observed that this preliminary-ruling “demonstrates the limits of harmonisation of law in the EU”. This is because both the Portuguese Republic and Hungary considered the place of supply of the relevant services to be in their jurisdiction despite applying the principles of the Principal VAT Directive.

In DuoDecad there was a licence agreement between a Portuguese company, Lalib, and a Hungarian one, WML. The taxpayer, DuoDecad, also a Hungarian company, provided electronically supplied services to Lalib. For B2B transactions of electronically supplied services, the place of supply for VAT purposes is the country whether the customer is based, initially suggesting that the place of supply should be Portugal. However, the Hungarian tax authorities argued that the actual recipient of the services provided by DuoDecad was WML, rather than Lalib on the basis that the licence agreement between WML and Lalib was abusive. The Hungarian tax authorities argued that, therefore, the place of supply was Hungary and so Hungarian VAT was due. The Portuguese tax authorities were also seeking to tax the taxpayer on the basis that the recipient really was the Portuguese company.

The Advocate General opined that the question of whether abusive arrangements exist is not closely linked to the question of who the recipient of a supply is for VAT purposes. The natural consequence of conflating these questions and holding that the supplies should be subject to Hungarian VAT is that all of the supplies Lalib receives should be taxed in Hungary. The Advocate General opined that the fact that the Hungarian tax authorities consider that Lalib either does not exist or is to be equated to WML is not a sufficient basis for such treatment. The Advocate General compared this situation to one where a thief pays for the cleaning of a stolen car. He explained that the thief’s unlawfulness would not change the place of supply of the car cleaning service. He also noted that the place of supply was based on factors knowable to the supplier. The supplier could not be expected to know the potentially abusive arrangements between its customer and a third party.

The Advocate General noted that the outcome could be different if the entire legal structure between Lalib, WML and DuoDecad was regarded as a single significantly abusive arrangement. In such a case, the transactions could be redefined so as to reflect the situation which would have prevailed if the abusive arrangements did not exist. If the referring court determines that the arrangements are a single abusive arrangement, the Advocate General’s view is that the national court should ask the Court of Justice for the solution.

DLA Piper comment:

The Advocate General's opinion is pragmatic. Of course the place of supply and the true recipient of the supply can be subject to abuse and avoidance, and the Off shore loop rules are evidence of tax authorities countering this. Furthermore the "use and enjoyment" rules, where they apply, can displace the usual B2B rules. But it is surely correct that in tripartite situations, you need to consider each supply on its merits, so there is not an unrealistic compliance burden on the parties, in the absence of abuse.