Baillie Gifford & Company
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 June 2019 |
| Date | 25 June 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 410 (TC)
Judge Heidi Poon
Andrew Hitchmough QC and Emma Pearce, Counsel, instructed by KPMG LLP, appeared for the appellant
Elisabeth Roxburgh, Advocate, instructed by the Office of Advocate General, appeared for the respondents
Value added tax – VAT grouping legislation – art. 11 of the VAT Directive – VATA 1994, s. 43A – Body corporate as an eligibility criterion – Partnership not eligible for participation – ECJ decision in Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham; Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (Joined Cases C-108/14 and C-109/14) [2015] BVC 33 – Breach of EU principle of fiscal neutrality – Relevant EU provision has no direct effect – Whether conforming construction possible to go with the grain of the legislation – Whether distinction to be drawn for a Scottish partnership – Appeal allowed.
The FTT allowed an appeal by Scottish partnership which applied to form a VAT group with its wholly owned subsidiaries. HMRC refused the initial application because under s. 43A of VATA 1994 VAT grouping is only available for a body corporate. The FTT concluded that, following the Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham; Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (Joined Cases C-108/14 and C-109/14) [2015] BVC 33 ECJ decision, this was a breach of fiscal neutrality and the partnership should be able to join the VAT group.
Baillie Gifford & Co (“BG”) is a Scottish partnership which has three subsidiaries, as a group these entities run an investment management business. An application was made to form a VAT group including all four entities in order to avoid irrecoverable VAT being incurred on intra-entity supplies.
HMRC rejected BG's application to join a VAT group because it is not a “body corporate” and under s. 43A VATA 1994 VAT grouping is only available to a body corporate.
The ECJ has considered VAT group eligibility in two combined German cases, referred to as Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham; Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (Joined Cases C-108/14 and C-109/14) [2015] BVC 33). As summarised at para. 92, the ECJs' ruling in this case were that 1) requiring VAT group members to have a legal personality was a breach of the EU principle of fiscal neutrality and 2) the relevant provisions in the VAT directive do not have direct effect.
The FTT concluded that, although the VAT Directive does not have direct effect (and therefore national governments have discretion regarding their national VAT legislation), it was required to apply a conforming interpretation of UK law, i.e to interpret UK law such that it is in conformity with EU law (para. 108) and in order to do so it should permit BG to form a VAT group with the subsidiary companies which it 100% owned and controlled (para. 151).
BG had also argued that this conforming interpretation should be limited to Scottish partnerships. This argument was rejected, the FTT determined that allowing Scottish but not English partnerships to join VAT groups would be a further breach of fiscal neutrality (para. 152).
The practical impact of this decision is likely to be limited because legislation to expand the VAT group membership criteria to include (subject to conditions) partnerships was included in the 2019 Finance Act. The amended s. 43A and new s43AZA for VATA 1994 will come into force on a day to be appointed by Treasury Order, we await an announcement as to when this might be.
The case contains an interesting review and analysis of the relationship between EU and UK Law which will be of interest to others considering whether aspects of UK VAT law are in conformity with the VAT Directive.
[1] The appellant, Baillie Gifford & Co (“BG&Co”) appeals against the decision dated 21 February 2014 as upheld in a further decision of the respondents (“HMRC”) on review dated 29 August 2014, which refused the appellant's application to form a VAT group with it as the representative member under s 43 of the Value Added Tax Act 1994 (“VATA”).
[2] The principal reason for the refusal is that the appellant, as a Scottish partnership, is not a “body corporate” for the purposes of s 43A of VATA. Consequently, it fails to meet the statutory eligibility criterion to form a VAT group.
[3] The issue in this appeal is whether conforming construction can be applied to the existing domestic legislation on VAT grouping following the judgment of the Court of Justice of the European Union (“ECJ”) in Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham; Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (Joined Cases C-108/14 and C-109/14) [2015] BVC 33 as referenced in the Annex.
[4] The relevant EU legislation is contained in the EC Council Directive 2006/112/EC (“the VAT Directive” also “the 2006 Directive”) of 28 November 2006 under Title III for “Taxable Persons”. Excerpts of the relevant articles material to this appeal are the following:
1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purposes or results of that activity.
…
The condition in article 9(1) that the economic activity be conducted “independently” shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.
After consulting the advisory committee on value added tax (hereafter, the “VAT Committee”), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.
A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.
[5] Article 11 of the VAT Directive is the successor to what was contained in article 4(4) of the Sixth Council Directive 77/388/EEC (“the Sixth Directive”) of 17 May 1977. (The Sixth Directive was repealed by the VAT Directive with effect from 1 January 2007). Instances of case law being referred to in this decision concern the interpretation of article 4 of the Sixth Directive, of which the relevant provisions are the following:
(1) “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
[…]
(4) The use of the word “independently” in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and employer's liability. [first sub-para]
Subject to the consultations provided for in article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links. [second sub-para]
A Member State, exercising the option provided for in the second subparagraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision …1 [third sub-para]
[6] The ECA 1972 provides for the Community (now Union) Treaties to be incorporated into domestic law. In so far as the European Treaties have been subsequently modified, the ECA 1972 has been amended to incorporate the modifications under the Single European Act, and the Masstricht, Amsterdam, Nice and Lisbon Treaties.
[7] Section 2 of the ECA 1972 provides for the implementation and application of EU law arising from the Treaties, secondary legislation and the case law of the Court of Justice in the British courts, and sub-section 2(1) states as follows:
(1) All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures from time to time provided for by or under the Treaties, as in accordance with the Treaties are without further enactment to be given legal effect or used in the United Kingdom shall be recognised and available in law, and be enforced, allowed and followed accordingly; and the expression “enforceable EU right” and similar expressions shall be read as referring to one to which this subsection applies.
[8] The UK has exercised the option contained in article 11 of the VAT Directive to allow VAT grouping by the enactment of ss 43 and 44 of VATA, of which sub-s 43(1) provides as follows:
(1) Where under sections 43A to 43D any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and–
- any supply of goods or services by a member of the group to another member of the group shall be disregarded; and
- any supply which is a supply to which paragraph (a) above does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member; and
- any VAT paid or payable by a member of the group on the acquisition of goods from another member State or on the importation of goods from a place outside the member State shall be treated as paid or payable by the representative member …
[…]
(9) Schedule...
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