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Πέμπτη 26 Σεπτεμβρίου 2013

TOMS wholesale decision

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.