Finance Act 2017 was signed into law on 25 December 2017. Revenue eBrief 02/18, published on the Revenue website on 4 January 2018, contains notes for guidance on the VAT measures included in the Act.
The VAT related measures in the Finance Bill (as initiated) were summarised in the December 2017 edition of “VAT Matters”, and there were no changes to those measures in the enacted legislation. To briefly recap, these measures included an increase in the VAT rate applying to sunbed services from 13.5% to 23%, which took effect on 1 January 2018. The wording of the VAT exemption for educational and vocational training services was also updated to clarify the circumstances in which those types of services qualify for VAT exemption.
In December 2017, the Council of the European Union (EU) adopted new legislation that will principally affect the VAT treatment of transactions in the digital economy. Some of the agreed measures will take effect on 1 January 2019, and the remaining (and more significant) measures will take effect on 1 January 2021.
The changes taking effect on 1 January 2019 will impact on the current VAT regime for cross-border supplies of telecommunication, broadcasting and electronically-supplied services to EU-based consumers and non-business recipients. These changes aim to reduce VAT compliance costs for smaller businesses involved in the supply of such services. Currently, a supplier of such services to consumers and non-business entities in EU member states must generally charge VAT on those services at the rate applying in the EU member state where the customer resides, regardless of the value of those supplies. The new measures will introduce an annual €10,000 threshold for cross-border supplies of such services within the EU.
Where this threshold is not exceeded, the “place of supply” of the services for VAT purposes will be the supplier’s country of establishment rather than the customer’s country of residence (unless the supplier elects otherwise). This means that, in those circumstances, the supplier can apply the VAT rules in their own jurisdiction rather than having to charge foreign VAT on those supplies. In addition, where a supplier’s total value of cross-border supplies of such services to consumers and non-business recipients in other EU member states is less than €100,000 per year, the supplier will have simplified record keeping requirements.
With effect from 1 January 2021, the current VAT regime for distance sales of goods (i.e. cross-border sales of goods to consumers and non-business entities within the EU, such as online sales) will be significantly changed. Currently, a supplier must register for VAT and charge local VAT on their distance sales into another EU member state if they exceed the relevant domestic threshold in that country. The current domestic thresholds in each member state will be abolished and will be replaced by a single annual threshold of €10,000 per year for all distance sales, as well as certain services, within the EU. Where the €10,000 threshold is exceeded, VAT will be due on such sales to the relevant tax authority at the rate applying in the member state where the customer is located.
In conjunction with the above change, the EU-wide VAT filing simplification known as the mini one-stop-shop (MOSS) – which currently only applies to telecommunication, broadcasting and electronically-supplied services – will be extended to distance sales of goods in the EU in 2021. This will allow an Irish supplier, for example, to remit VAT on their distance sales to multiple tax authorities across the EU using a single return filed through the Irish Revenue’s website. Furthermore, the current VAT exemption for low value consignments imported from outside the EU (i.e. currently €22) will be removed in 2021. VAT will therefore apply to all imports into the EU regardless of their value. In addition, online platforms which facilitate the online sale of goods by other parties on their platform will be liable to account for VAT on sales made through their platform in certain circumstances.
These changes will create challenges for businesses, and system updates are likely to be required. While the most significant changes are not due to commence until 2021, it is important to allow sufficient lead in time to adapt to the changes. More detailed regulations on the application of the rules are likely to follow before 2021.
The Court of Justice of the EU (“CJEU”) judgment in Cussens and Others (C-251/16) – a referral from the Irish Supreme Court – relates to the application of the “abuse of law” principle to VAT. An abuse of law, in relation to VAT, arises where a taxpayer enters into a transaction (or transactions) with the essential aim of securing a VAT advantage and the transaction(s) give rise to an outcome which is contrary to the intended purposes of EU VAT Directive.
This decision concerns the scope of the application of the “abuse of law” principle to the VAT treatment of certain Irish property transactions which took place in 2002. The taxpayers entered into long and short lease transactions of newly built properties with a connected company. The leases were collapsed a month or so later, following which the properties were sold to third parties. The referral to the CJEU indicated that there was no commercial substance to these leases. While VAT arose on the long leases granted to the connected company, the subsequent sale of the properties was not subject to VAT under the Irish VAT on property rules in place at the time. This resulted in a VAT saving compared to a situation where the properties were sold without the lease transactions having taken place.
The CJEU found in favour of the Irish Revenue’s position: the abuse of law principle could apply to the relevant transactions, even though there is no domestic Irish VAT provision concerning abuse of law and the transactions pre-dated an earlier CJEU judgment which first applied the abuse of law principle to VAT. It will be a matter for the Irish Supreme Court to now conclude if the transactions in question were in fact an abuse of law.
The Irish VAT on property rules which applied to the transactions in question in 2002, are no longer in effect. However, the judgment confirms a tax authority’s right to challenge transactions under the abuse of law principle where certain conditions are met. This is a complex area and further case law on the topic can be expected in the future.
The CJEU judgment in Boehringer Pharma GmbH (C-246/16) confirmed that Boehringer, a German pharmaceutical company, is allowed to reduce its VAT liability on sales of pharmaceutical products as a result of rebates given to health insurance companies in relation to those products. Boehringer supplied the products to wholesalers or pharmacies which in turn supplied them to consumers, who were reimbursed by the health insurer. Boehringer had a statutory obligation to pay a rebate to the health insurer.
In a previous judgment, Elida Gibbs (C-317/94), the CJEU had confirmed that where a manufacturer gives a rebate to the final consumer of goods, the manufacturer is allowed to reduce its VAT liability on its sales of goods. However, the German tax authorities sought to deny Boehringer’s right to a reduction of its VAT liability in these circumstances, as the health insurance companies were not the actual consumers of the goods.
The CJEU ruled that Boehringer was entitled to reduce its VAT liability as there was a direct link between the sale of product and the rebate given, and also because the rebate was compulsory.
If you would like to discuss this further, please contact David Duffy or any member of the KPMG’s VAT team.
This article originally appeared in the January 2018 edition of Accountancy Ireland and is reproduced here with their kind permission.