Weekly VAT News

On 30 October, we hosted the fourth global webcast in the series on e-invoicing.

Agenda

• Brief overview of e-invoicing globally
• Setting the scene: e-invoicing developments in Asia-Pacific
• E-invoicing lessons learnt and insights from implementations in Malaysia and India
• Technology considerations
• Summary of key points

The webcast recording is now available by registering here.

Trade Talking Points is our fortnightly newsletter on the latest insights from EY's Trade Strategy team.

In this edition we provide updates on the election of Donald Trump as US President, nominations for the next World Trade Organisation Director-General, China launching WTO dispute proceedings against the EU’s measures on electric vehicles, the United Arab Emirates’ free trade agreements, and the UK-EU Competition Cooperation Agreement.

For further information please contact Marc Bunch, George Riddell or Margarethe Taucher.

Topics – Joint and several liability, proportionality

C-613/23 Herdijk

On 14 November 2024 the Court of Justice of the European Union (CJEU) delivered its judgment in this Dutch referral asking whether the principle of proportionality precludes domestic legislation which, in practice, makes it extremely difficult for a director of an entity that has failed to comply, or has failed to comply properly, with its obligation to notify the tax authorities of its inability to pay, to escape liability for tax debts of that entity, including turnover tax debts. Does the answer depend on whether the director acted in good faith in that he or she acted with the care of a prudent business person, did everything reasonably within his or her power, and his or her involvement in abuse or fraud may be ruled out?

KL, a director and sole shareholder of a holding company, faced assessments from the Dutch Tax Authorities for unpaid payroll and turnover tax assessments of an operating company, which was a subsidiary until 29 March 2019. The taxes were due for periods before this date and the operating company failed to pay them. KL challenged the liability order.

The Court of Appeal ruled that KL should not be held liable for the taxes due for February 2019, as he had resigned before the notification deadline. However, KL was held liable for taxes from November 2018 to January 2019, as the operating company did not notify its inability to pay, implying mismanagement by KL.

The Dutch Supreme Court held that under Article 36 of the Law on recovery, if the entity fails to notify its inability to pay, the director is deemed to have caused the non-payment by manifest mismanagement. This liability can only be rebutted in limited circumstances like illness, accident or reliance on expert opinion. The court questioned whether this almost no-fault liability system aligns with the principle of proportionality under EU law. It concluded that KL had not demonstrated manifest mismanagement as he had acted in good faith, taken all reasonable steps and was not involved in fraud or abuse, suggesting that the liability imposed on KL might be disproportionate.

The CJEU considered that national measures creating no-fault joint and several liability exceed what is necessary to protect the public treasury's rights. Imposing VAT payment responsibility on someone other than the liable person without allowing them to prove non-involvement would be incompatible with proportionality. The CJEU outlined that the power to designate a joint and several debtor must be justified by a factual or legal relationship between the parties, considering legal certainty and proportionality. Good faith, due diligence and lack of fraud should be considered in determining liability.

In this case, the CJEU held it was apparent that the system of joint and several liability has the following characteristics:

1. The person designated as jointly and severally liable must be a director of the taxable establishment which is liable for the unpaid VAT and may therefore be regarded as participating in the decision-making process within that entity, which precludes anyone who is totally uninvolved in the actions of that establishment.
2. If the establishment notifies its inability to pay a tax debt, the director is not liable unless the tax authority proves mismanagement by the director within the past three years.
3. The notification obligation aims to inform the tax authority in time to take measures to prevent tax revenue loss.
4. The notification process should not present any particular difficulties either as regards its form or contents and can be supplemented later at the request of the tax authority.
5. The presumption of liability for manifest mismanagement can be rebutted if the administrator proves that the failure to notify was not their fault. This does not apply to former directors who can rebut the presumption without proving the failure to notify was not their fault if they were no longer in office on the date of expiry of the notification period.

The referring court was concerned that it was 'extremely difficult' for a director to demonstrate that the failure to comply with the obligation to notify the inability to pay was not their fault. The CJEU held that the principle of proportionality does not prevent national legislation from requiring a director, whose establishment failed to notify its inability to pay a VAT debt, to prove that the failure to notify was not their fault in order to be released from joint and several liability. This is the case as long as the legislation allows the director to rely on any relevant circumstances not just cases of force majeure to demonstrate non-responsibility for the failure to notify.

KL was considered to be a former director of the entity responsible for paying the VAT reminders for the month of February 2019 on the ground that the time limit for notifying the inability of the company to pay the VAT due for that month had not yet expired on the date on which KL's resignation from the post of director had taken effect. Thus, pursuant to Article 36(6) of the Law on recovery, KL was allowed to demonstrate that the failure to pay the debt by way of VAT due for that month was not the consequence of manifest mismanagement attributable to him during the three years preceding the expiry of the period for payment for that month.

However, KL performed the duties of director of the company during the months of November and December 2018 and January 2019 and he was unable to demonstrate that the failure to notify the company’s inability to pay was not attributable to him. Thus, it was not possible to demonstrate that the failure to pay the VAT debt in respect of those months was not the consequence of manifest mismanagement on his part during the three years preceding the expiry of the payment period for those months. KL was therefore held jointly and severally liable for the debts of the company of which he was a director during the months of November and December 2018 and January 2019.

The CJEU held that the obligation to notify the inability to pay as required by Dutch law serves a legitimate purpose of promptly informing the tax authority of that fact and is not particularly difficult to comply with. Therefore, failure to comply must be considered wrongful conduct. Notification must be made within two weeks after the tax due date. While valid for subsequent periods, each tax period remains autonomous in respect of the administrator's joint and several liability. The autonomy of tax periods can limit the director’s liability to the period for which notification was omitted, without affecting subsequent periods where notification was made. This legislation does not therefore exceed what is necessary for correct VAT collection, even if it negatively impacts a director who failed to notify for a certain period but acted in good faith and without abuse or fraud.

In conclusion, the CJEU held that legislation which has the effect that a director of a company that has failed to notify its inability to pay is jointly and severally liable for that sum is permitted, provided that it is limited to periods to which the failure to notify applies, and there are circumstances other than force majeure which permit the director to demonstrate that he or she was not responsible for the failure to notify.

Comments: This case serves as a reminder that joint and several liability rules may be adopted by Member States provided that it is in a way that is proportionate. Whilst we do not have similar joint and several rules relating to directors in the UK, we do have joint and several liability rules in a number of situations such as VAT grouping, and more recently digital platforms. In relation to the latter, it can be difficult for platforms to evidence the place of establishment of its sellers which can affect the VAT treatment of supplies and ultimately could result in platforms being held jointly and severally liable for any VAT not accounted for. It is therefore important for platforms to introduce robust know your customer processes in order to meet the relevant VAT rules.

For further information, please contact Mitchell Moss.

Thursday 21 November

Judgment – C-624/23 SEM Remont

Topics – VAT deduction, no VAT indicated on invoice, subsequent invoice failed to meet tax invoice requirements, Tax Authority impossible or excessively difficult

A Bulgarian referral asking whether Articles 63, 167, 168(a), 178(a), 218, 219, 220, 226 and 228 of the VAT Directive permits domestic legislation which refuses the right to deduct VAT on the provision of a service both for the period in which the service was rendered and also for the period of its declaration in the tax return on the ground that no VAT was indicated on the invoice issued to the recipient and, at a later date (during the tax audit of the service provider), a document was issued that does not meet the requirements of a tax invoice. A ‘memorandum’ was drawn up in which its author was described as both the recipient and provider of the service and VAT was declared, calculated on the basis of the taxable amount indicated therein. Does the practice of the tax authority make the deduction of VAT practically impossible or excessively difficult?

Thursday 28 November

Judgment – C-622/23 rhtb

Topics – Whether VAT due on part-fulfilled contract where cancellation is attributable to customer

An Austrian referral asking whether Article 2(1)(c) of the VAT Directive, read in conjunction with Article 73, must be interpreted as meaning that the amount which a customer owes to a contractor, even where the work has not been (fully) carried out but the contractor was ready to provide the service and, through circumstances attributable to the customer (for example, cancellation of the work) was prevented from doing so, is subject to VAT?

Thursday 5 December

Judgment – C-680/23 Modexel

Topics – Following period definition in terms of calendar year, deduction of excess VAT

A Portuguese referral asking whether the expression “the following period” in Article 183 of the VAT Directive must be interpreted as referring literally to the period which immediately follows in the calendar year? If the answer to question 1 is in the negative, where an undertaking ceases its activity and subsequently recommences that activity, with a period of 15 months having elapsed between those two points in time, is that undertaking entitled to deduct the amount of the excess which it carried forward when it ceased its activity in the first assessment that it files after recommencing its activity?

Thursday 12 December

Judgment – C-527/23 Weatherford Atlas Gip

Topics – Refusal of the right to deduct if services are not used for taxable transactions

A Romanian referral asking whether Article 168 of the VAT Directive, read in the light of the principle of fiscal neutrality, must be interpreted as precluding the tax authority from refusing a taxable person the right to deduct the VAT paid in respect of administrative services acquired, where it is established that all the costs recorded for the services purchased have been included in the taxable person’s general costs and that the taxable person carries out only taxable transactions, that the supply of services is expressly confirmed by the tax authority and that the tax treatment applied is that of the reverse charge procedure (which precludes a loss to the Treasury)? For the purposes of interpreting the provisions of Articles 2 and 168 may the services of management and administration (namely assistance and consultancy in various fields, financial and legal advice) provided between intra-group companies for the benefit of different members of the group be regarded by each member in part as being used for the purposes of taxable transactions, that is to say, acquired for its own purposes? For the purposes of interpreting Article 2 where it is established that intra-group services are not supplied to a member of the group, may a company which is part of the group but is deemed not to have benefited from such services be regarded as a taxable person acting as such?

Thursday 19 December

Opinion – C-427/23 Határ Diszkont

Topics – VAT refunds to foreign travellers – a separate supply of services?

A Hungarian referral asking whether the administration of VAT refunds to foreign travellers is a separate supply of services distinct from the tax-exempt supply of goods, on which VAT must be charged and paid in accordance with the general rules pursuant to Articles 1(2), 1)(c), 78 and 146(1)(e) of the VAT Directive where the administration fee, which is a percentage of the VAT to be refunded, is received and invoiced simultaneously with the VAT refund, at a time different from the supply and invoicing of the goods and after the customer has paid the consideration for the goods and those goods have exited for a third country?

Opinion – C-794/23 Finanzamt Österreich (TVA facturée par erreur à des consommateurs finals II)

Topics – Requirement to pay VAT that was overcharged mostly to “end consumers”

An Austrian referral asking whether Article 203 of the VAT Directive is to be interpreted as meaning that a taxable person who has supplied a service and recorded in his invoice a VAT amount calculated on the basis of an incorrect tax rate is not liable, under that provision, for the part of the VAT invoiced incorrectly if the service was supplied to a non-taxable person, even if the taxable person has supplied similar services to other taxable persons? Is ‘final consumer who does not have a right to deduct input VAT’, within the meaning of the judgment C-378/21, to be understood as referring only to a non-taxable person or also to a taxable person using the specific service only for private purposes (or for other purposes not conferring the right to deduct input VAT) and therefore lacking the right to deduct input VAT? In the event of simplified invoicing in accordance with Article 238 of the VAT Directive, what criteria is to be used to assess (possibly by way of an estimate) for which invoices the taxable person is not liable for the incorrectly invoiced amount because there is no risk of loss of tax revenue?

• C-639/24 Flo Veneer – A Croatian referral regarding the lawfulness of a tax assessment denying VAT exemption in relation to certain intra-Community supplies of goods. The referral asks whether Article 138(1) of the VAT Directive, which concerns exemptions from VAT on intra-Community supplies of goods, and Article 45a of Implementing Regulation No 282/2011, which concerns evidence that goods have been dispatched or transported from a Member State to a destination outside its territory but within the Community, should be interpreted as meaning that a supplier should be denied an exemption from VAT if it has failed to provide evidence that the conditions outlined in Article 45a have been met, or is the tax authority obliged – in the event that the supplier is not in possession of sufficient evidence for the presumption referred to in Article 45a to be made, but is in possession of evidence proving the physical movement of the goods from one Member State to the other – to examine the evidence presented and determine the facts and circumstances that are relevant to the exemption provided for in Article 138, namely whether the goods were dispatched or transported from the Member State to a destination outside its territory but within the Community?
• C-602/24 W. sp. z o.o. – A Polish referral asking whether Article 146(1)(b) of the VAT Directive should be interpreted to mean that a supply of goods declared by the taxable person (supplier) as an intra-Community supply of goods should be regarded as a supply for export in the event that the person acquiring the goods has exported them outside the European Union rather than to another Member State?

The Upper Tribunal forthcoming hearings and register contains information about cases which have been appealed to the Upper Tribunal. Some cases of note in the more recent updates include:

• H Ripley & Co Ltd – in which the First-tier Tribunal (FTT) held that insufficient evidence of export was held to substantiate the zero-rating of supplies. A date for the hearing is yet to be set.
• Lycamobile UK Ltd – in which the FTT considered mobile phone plan bundles and vouchers. A date for the hearing is yet to be set.
• DuelFuel Nutrition Ltd – in which the FTT found that the products do not contain ‘typical cake ingredients’, are not typically eaten on occasions normally associated with cake consumption and are marketed as ‘nutritional products’ for consumers engaging in exercise, all of which indicates to the ordinary person that they are not cakes and should be ‘deemed’ standard rated confectionery. The Upper Tribunal has confirmed that this case is stayed pending the Court of Appeal judgment in Innovative Bites, which is due to be heard in March.
• Walkers Snack Foods Ltd – in which the FTT found against Walkers, holding that Sensations Poppadoms should be standard rated for VAT purposes. Agreeing with HMRC, the FTT held that, due to its ingredient profile and marketing strategy, the product is similar to potato crisps, and therefore whilst 'food for human consumption', is excepted from zero-rating. The FTT also held that there is no breach of fiscal neutrality in treating the product as standard rated. This case is listed for hearing from 27 to 29 January 2025.

On 14 November 2024, the Penalties for Failure to Pay Tax (Schedule 26 to the Finance Act 2021) (Assessments) Regulations 2024 were made. From 4 December 2024, HMRC's power to impose a late payment penalty under Schedule 26 to FA 2021 has been enhanced.

Previously, the legislation only allowed HMRC to assess the second late payment penalty once the amount of outstanding tax is paid in full, subject to a two-year assessment time limit. These regulations allow HMRC to assess the second penalty for late payment under the new model for late payments of tax before the tax is paid, in cases where (broadly) all or part of it remains unpaid less than seven days before the two-year deadline for assessing that penalty.

The final regulations are largely the same as those published for consultation in May, however a time to pay arrangement being in place no longer prevents HMRC exercising this new power to issue the second penalty before the tax is paid.

For further information, please contact Mitchell Moss.

The Finance Bill 2024-25 was published on 8 November 2024. The Second Reading will take place on Wednesday, 27 November. The Bill is available here and the explanatory notes can be found here.

It is not yet possible to say when the Bill will be enacted.

The Aggregates Tax and Devolved Taxes Administration (Scotland) Act 2024 has been enacted. It creates an aggregates tax, administered by Revenue Scotland, and also makes changes to the Revenue Scotland and Tax Powers Act 2014.

It explains what type of aggregate should be taxed, who should pay the tax and exemptions from the tax. The Act also explains how the tax should be calculated and gives the Scottish Ministers the power to set the rate of tax. There are also several penalties, including a penalty for anyone who does not pay the tax when they are required to do so.

The Act also makes changes to the Revenue Scotland and Tax Powers Act 2014. These changes include:

• How Revenue Scotland can communicate with taxpayers
• Powers to let Revenue Scotland automate some of its work (this could include work being done by devices such as computers)
• What Revenue Scotland can do in situations where a person is owed money from Revenue Scotland but also owes money to Revenue Scotland

See further background on the Scottish Parliament website – Aggregates Tax and Devolved Taxes Administration (Scotland) Bill.

HM Treasury and HMRC have published new ‘Areas of Research Interest’ papers asking for evidence, analysis and research from academics and other policy experts on key strategic issues. HM Treasury’s questions on tax provide a useful insight into the Government’s thinking on future UK tax policy including sustainability and public health taxes, as well as headline rates and reliefs. HMRC’s Areas of Interest focus on improving customer service, closing the tax gap, modernisation and reform (specifically channel use (digitalisation), timely payments and data use).

HMRC has updated its Guidance – Climate Change Levy rates. The rates from 1 April 2026 have been added and the rates for 1 April 2021 have been removed.

This Notice provides details regarding excise duty drawback, which is a refund of UK excise duty. Section 7.4 has been updated with information about supporting evidence for drawback duty refund claims. Supporting evidence can now exceptionally include detail from the New Computerised Transit System (NCTS) where a business has exported duty paid excise goods under transit arrangements but Customs Handling of Import and Export Freight (CHIEF) or Customs Declaration service information is not available to show the goods have left the UK.

For further information regarding excise duty please contact Craig Clark.

VAT in the Digital Age (ViDA) package

The aim of the ViDA package is to modernise and improve the VAT system in the EU to be better aligned with the digital economy and to prevent tax fraud. On 5 November, unanimous agreement was reached on the ViDA package and our alert provides more detailed information about the measures. The new ViDA rules can be divided into three pillars: e-invoicing and Digital Reporting Requirements (DRR), platform economy and single VAT registration. Businesses operating in the EU will need to consider the implications of the changes.

United States

The US election outcome means that tariffs are now at the forefront of economic discussions around the world. The US plays a pivotal role in shaping international trade dynamics and the outcome of this election is set to have a significant impact on trade policies, global partnerships, tariff structures and the overall economic landscape, both domestically and abroad. Businesses may wish to consider the immediate actions required.

United Arab Emirates

UAE’s Ministry of Finance has launched an e-invoicing portal covering general information on e-invoicing including an FAQ section and an overview of the "UAE eInvoicing Programme." The anticipated timeline for the go-live of Phase 1 e-invoicing rollout is July 2026. E-invoicing will be implemented in phases with further details to be confirmed. Businesses may wish to review the information in the e-invoicing portal and the related updates to the laws to prepare for the implementation of e-invoicing in the UAE.

Global Tax Policy and Controversy Watch

The November 2024 edition contains updates on the US election, UK budget, the UK responding to the CBAM consultation and much more.

New Zealand

New Zealand has adopted the OECD Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy. Platform operators based in New Zealand must report to the Inland Revenue required information on sellers that receive consideration from relevant services through digital platforms, for the year ended 31 December 2024. This must be done by 7 February 2025.

From 1 January 2025, the special VAT regime (the SME scheme) will go live. Any small enterprise with a total annual turnover of no more than EUR 100 000 (or the equivalent in national currency) in all Member States for the current and previous calendar year is eligible for VAT exemption in its Member State of establishment and/or in other Member State(s) under the cross-border SME scheme. The SME scheme is optional.

The web portal with more information on the SME scheme is now live and can be accessed through the page VAT rules for small enterprises.

The OECD’s new Tax Administration 2024 report contains information from 58 jurisdictions (including the UK) and is intended to be used to understand the design and administration of tax systems in other jurisdictions and to draw cross-border comparisons. This includes how tax gaps are estimated, performance-related data and operational practices including digitalisation. Finally, it contains a special feature which explores how tax administrations are estimating tax gaps. The underlying data for this report comes from the International Survey on Revenue Administration, and in certain areas it also uses information from the Inventory of Tax Technology Initiatives.