Transcript ENTER TITLE HERE

VAT – HMRC Attack TMT Sector?
Sabre rattling, a shot across the bows, or going for the jugular?
The issue of Revenue & Customs Brief 58/2009 on 2
October 2009 is the second recent Brief in which
HMRC has announced its intention to “address”
perceived VAT avoidance – the other being R&C Brief
56/2009 dealing with “artificial” yacht and aircraft
leasing structures. It is addressed to suppliers of
telecommunications services, internet providers and
broadcasters and, in no uncertain terms, puts them
on notice that H M Revenue & Customs will scrutinise
any suppliers which have entered into arrangements
which purport to have changed the place of supply
of their services from the UK to a Member State of
the EU “with more favourable VAT rates”.
So why this Brief and why now? As readers know, 1
January 2010 heralds a significant change to the
place of supply of services, one which will extend
the list of services which will be subject to taxation
in the Member State of the customer. These
changes were also to have applied to
telecommunications, internet and broadcast
services, where supplied by businesses to private
consumers, but the effective date of these changes
was put back to 1 January 2015. From that date,
irrespective of where in the EU a supplier of such
services may be established, a supplier will have a
liability to account for VAT in the Member State
where its customers are resident.
standard rate of VAT is to be found in Madeira - 14% and after that (and ignoring the UK’s soon to end 15%
standard rate) the next lowest rate is in Luxembourg,
with a standard rate of 15%. For broadcasters
Luxembourg has an even more attractive lower VAT
rate which applies to pay TV services – 3%. The 14.5%
difference between this and the UK’s standard rate is,
perhaps understandably, a goal many suppliers
consider worth aiming for. This is even more so for
broadcasters which also transmit programmes into
other Member States with even higher standard rates
of VAT.
As to the how, as HMRC’s Brief states, the place of
supply of telecommunications etc services, when
supplied to private individuals in the EU, is where the
supplier has established his business. So, establish a
company in Luxembourg (LuxCo), contract with
customers for the provision of the services from
Luxembourg and, hey presto, Luxembourg VAT applies
to the telecommunications services. Or does it?
How will LuxCo attract and contract with the
customers? How will it actually deliver the services?
What about invoicing and collection of payments?
What exactly are the minimum human and technical
resources needed in Luxembourg to run the
operations? Who will make the strategic decisions?
Who will negotiate with the suppliers which provide
the leased lines or the airtime?
The delay to the implementation date has provided
suppliers with an additional four year window of
opportunity - more for those who have already acted
- to “exploit” lower VAT rates across the EU. But
how can these lower rates be exploited and where
are they? Dealing with the latter first, the lowest
This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining
specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a
result of acting on information in this publication.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO - Belfast, a separate
partnership, operates under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an
independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V.,
incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels,
Belgium, where the International Executive Office is located.
BDO LLP and BDO - Belfast are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
BDO LLP and BDO - Belfast are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a Data
Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please telephone
(Great Britain - 0870 567 5678 or Belfast - 028 9043 9009).
Copyright © July 15 BDO LLP. All rights reserved.
Website: www.bdo.co.uk
“One of the keys to success is proper
implementation.”
More importantly, perhaps, is not the identity of the
“who” nor, necessarily, the “how” but the location
of where those activities are undertaken and the
identity of those undertaking them. Notably, what
if the various infrastructure and support services
suppliers that are needed to deliver the services to
the customer are in the UK? And what if those
persons are connected – perhaps a parent, a
subsidiary or a sister company – to LuxCo?
All of the above – and more – will be the focus of
HMRC’s attention. There have been a number of
well known cases which have gone before the UK
Courts and the European Court of Justice which have
examined place of supply issues and, in particular,
the establishment issue, not least (and in no
particular order): ARO Lease BV v Inspecteur der
Belastingdienst Grote Ondernemingen, Amsterdam
(C-190/95) [1997] STC 1272, [1997] ECR I-4383, 71
TC 455, ECJ; Berkholz v Finanzamt Hamburg-MitteAltstadt (Case 168/84) [1985] ECR 2251, [1985] 3
CMLR 667, ECJ; Customs and Excise Comrs v DFDS
A/S (Case C-260/95) [1997] STC 384, [1997] 1 WLR
1037, [1997] ECR I-1005, [1997] All ER (EC) 342, ECJ;
Customs and Excise Comrs v Chinese Channel (Hong
Kong) Ltd [1998] STC 347; affg (1996) VAT Decision
14003; Faaborg-Gelting Linien A/S v Finanzamt
Flensburg (C-231/94) [1996] STC 774, [1996] ECR I2395, [1996] All ER (EC) 656, [1996] 3 CMLR 535, ECJ
and RAL (Channel Islands) Ltd v Customs and Excise
Comrs (Case C-452/03) [2005] STC 1025, [2005] ECR
I-3947, ECJ.
I do not propose to examine each of these cases in
any detail but would simply make the following,
very brief, observations: in Berkholz, and FaaborgGelting the Court found that the taxpayers in
question had only one fixed establishment and that
“facilities” provided on ships were insufficient to
create a fixed establishment; in ARO the Court also
found there was but a single fixed establishment in
the Netherlands and that the use of third party
Belgian intermediaries to put customers in contact
with ARO – and nothing more – did not create an
establishment in Belgium; in Chinese Channel the
taxpayer had an associated company in the UK from
which it procured programming etc and HMRC argued
(unsuccessfully) that the associated company was a
branch or agency thereby creating a fixed
establishment of Chinese Channel in the UK. With
regards to this latter, however, the Commissioners
failed to disturb the decision by the Tribunal (as to
the relevant weight of what was performed by each of
the entities) and their conclusion as to the place of
supply, as a matter of fact. Other cases, however,
(Berkholz, DFDS and RAL) have suggested it is a
question of law, or a mixed question of fact and law.
In DFDS A/S, the Commissioners succeeded in their
argument that the UK subsidiary of DFDS A/S
constituted a fixed establishment of the Danish tour
operator and that it was from this establishment that
the services were supplied; in RAL, which concerned
amusement machines operated by a Channel Island’s
company, the company owning the premises where
the amusement machines were sited, the company
leasing the machines to RAL and the company
servicing those machines were all associated to RAL
and the Advocate General had no hesitation in
concluding that the commercial structure was such
that RAL should be seen to be established in the UK
for the purposes of supplying its services (note that
this was an alternative applicable if the service did
not in any event fall within article 9(2)(c), EC Sixth
VAT Directive).
This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining
specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a
result of acting on information in this publication.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO - Belfast, a separate
partnership, operates under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an
independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V.,
incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels,
Belgium, where the International Executive Office is located.
BDO LLP and BDO - Belfast are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
BDO LLP and BDO - Belfast are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a Data
Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please telephone
(Great Britain - 0870 567 5678 or Belfast - 028 9043 9009).
Copyright © July 15 BDO LLP. All rights reserved.
Website: www.bdo.co.uk
“One of the keys to success is proper
implementation.”
The above is not an alternative to a thorough
investigation of the cases and the nuances each
throws out, especially as these cases provide lessons
which can be learnt and some pointers as to how to
structure (or re-structure) a business so as to give
effect to the desired outcome - namely how to
ensure the place of supply is where you want it to
be - and how not to.
So what should broadcasters, mobile ’phone
operators and others be considering, if they wish to
take advantage of Luxembourg’s “more favourable
VAT rates”? As with any “planning” one of the keys
to success is proper implementation. If there is no
real desire and no conviction to do all that is
necessary to achieve the desired result, then don’t
start. If a business is, from the outset, looking to
take short cuts to ease the pain and discomfort it
will almost certainly not succeed. For existing
businesses the pain will be more acute, not least
because, as seen in RAL, there is a “before and
after” picture where, almost by leger de main, the
supplier in question is one minute in the UK and the
next not and yet, in substance, nothing has really
changed other than the interposition of an offshore
company. (Interestingly, perhaps, the challenge on
Halifax type grounds was not thought necessary to
undo RAL, but nonetheless could be in HMRC’s
armoury.)
Based on what case law tells us, for an existing
business to succeed in effectively relocating itself –
whether to Luxembourg or elsewhere – and to
succeed in changing
the place of supply of its services, it must have no
fixed establishment in the UK. Furthermore, it
would seem necessary for it to sever all links with
the UK, to have nothing performed for it or supplied
to it by associated companies or dependent agents to
avoid being seen to have a fixed establishment
through the branch or agency of such companies. For
a “bricks and mortar” business, this will be a
significant, if not insurmountable, challenge. For a
“virtual” company, which already buys in everything it
needs from third parties, and with little of its own
owned infrastructure, the challenge is less demanding
but still not a cakewalk. For a new entrant into the
market, it has no history, no existing contracts to
disentangle and, potentially, no magnets drawing it to
the UK. It can establish itself, from new, wherever it
chooses.
So, returning to the title of this editorial, is HMRC
simply making a noise, trying to put the wind up those
who have moved operations or are contemplating
doing so, or is it serious? Time, as they say, will tell,
but I personally have little doubt that HMRC is not
making empty threats – and can be counted on to
mount robust challenges, creating substantial
discomfort as they do so. Is it worth a business
considering a move? Possibly – but only after the
implications have been fully evaluated - and assuming
spending four years living in the Grand Duchy of
Luxembourg is an attractive proposition.
Marc Welby
Partner
For & On Behalf of BDO LLP
Contact Number: 020 7893 3580
Email: [email protected]
This article was first published in De Voil Indirect
Tax Intelligence Issue 162, November 2009
This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining
specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a
result of acting on information in this publication.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO - Belfast, a separate
partnership, operates under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an
independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V.,
incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels,
Belgium, where the International Executive Office is located.
BDO LLP and BDO - Belfast are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
BDO LLP and BDO - Belfast are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a Data
Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please telephone
(Great Britain - 0870 567 5678 or Belfast - 028 9043 9009).
Copyright © July 15 BDO LLP. All rights reserved.
Website: www.bdo.co.uk