On June 20, 2013, the ECJ issued its decision in the case C-653/11 (Newey).
Context: Reference for a preliminary ruling – Sixth VAT Directive – Article 2(1) and Article 6(1) – Meaning of ‘supply of services’ – Supply of advertising and loan broking services – Exemptions – Economic and commercial reality of the transactions – Abusive practices – Transactions with the sole aim of obtaining a tax advantage
Article in the EU VAT Directive
Articles 2(1) and 6(1) of the Sixth VAT Directive. (Articles 2(1)(c), 24(1) and 25 of the EU VAT Directive 2006/112/EC)
Article 2
1. The following transactions shall be subject to VAT:
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
Article 24 (Supply of services)
1. ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.
2. ‘Telecommunications services’ shall mean services relating to the transmission, emission or reception of signals, words, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception, with the inclusion of the provision of access to global information networks.
Article 25
A supply of services may consist, inter alia, in one of the following transactions:
(a) the assignment of intangible property, whether or not the subject of a document establishing title;
(b) the obligation to refrain from an act, or to tolerate an act or situation;
(c) the performance of services in pursuance of an order made by or in the name of a public authority or in pursuance of the law.
Facts
- It is apparent from the order for reference that, during the period at issue in the main proceedings, Mr Newey was a loan broker, established in Tamworth (United Kingdom). The broking services supplied in the United Kingdom by Mr Newey were, in accordance with Article 13B(d) of the Sixth Directive, exempt from VAT. By contrast, the advertising services supplied to Mr Newey in the United Kingdom, which were intended to attract potential borrowers, were subject to VAT, with the result that the tax borne by Mr Newey on the advertising costs was not recoverable.
- In order to avoid that non-recoverable tax burden, Mr Newey incorporated the company Alabaster (CI) Ltd (‘Alabaster’), which was established in Jersey, a territory in which the Sixth Directive does not apply, and granted that company the right to use the business name Ocean Finance. Mr Newey was the sole shareholder of that company.
- Alabaster employed at least one person on a full-time basis and had its own management, natural persons resident in Jersey with no direct experience of broking who were suggested or recruited by Mr Newey’s accountants and paid on the basis of the time devoted to Alabaster’s business activities.
- Under Alabaster’s constitution and the law in force in Jersey, those directors were responsible for managing and exercising the powers of that company and Mr Newey played no part in its management.
- The broking contracts were concluded directly between the lenders and Alabaster, with the result that the broking commissions were paid not to Mr Newey, but to that company.
- However, Alabaster did not itself process the loan applications, but used Mr Newey’s services for that purpose, which were provided, under a sub-contract (‘the services agreement’), by his employees carrying on their business activities in Tamworth. That agreement contained a list of services Mr Newey was to provide which essentially covered all the processing tasks for the loan broking business. Under that agreement, Mr Newey also had the power to negotiate the terms of the contracts concluded between Alabaster and the lenders.
- In return for those services, Mr Newey received fees fixed at 50% at the outset, and then at 60%, of the amount of the gross commissions immediately receivable in respect of each loan by Alabaster, plus certain expenses or disbursements.
- In practice, potential borrowers contacted directly Mr Newey’s employees in the United Kingdom who processed each file and sent the applications which satisfied the credit eligibility criteria to Jersey to Alabaster’s directors for authorisation. The approval process generally took around one hour to complete and, in fact, no request for authorisation was refused.
- As advertising aimed at potential borrowers was critical to the loan broking business, it represented a considerable part of the costs borne by Alabaster.
- According to the referring court, the advertising services were provided by Wallace Barnaby & Associates Ltd (‘Wallace Barnaby’), a company which was not connected with Alabaster and was also established in Jersey, under a contract concluded with the latter. Wallace Barnaby itself obtained those advertising services from advertising agencies established in the United Kingdom, in particular from the advertising agency Ekay Advertising. Under the law in force in Jersey, the payments made by Alabaster to Wallace Barnaby for those services were not subject to VAT.
- Mr Newey was not entitled to use the advertising services on behalf of Alabaster and assumed no liability for the payment of the services provided by Wallace Barnaby to that company. However, he had the power to approve the content of the advertisements, regarding which he met with one of Ekay Advertising’s employees working in the United Kingdom. Following those meetings, that employee made recommendations to Wallace Barnaby.
- Wallace Barnaby, in turn, made recommendations to Alabaster’s directors, who met each week after receiving those recommendations to determine the proposed advertising expenditure. In practice, none of those recommendations was rejected.
- The Commissioners submit that, for VAT purposes, first, the advertising services concerned were supplied to Mr Newey in the United Kingdom and are therefore taxable in the United Kingdom and, secondly, the loan broking services were supplied in the United Kingdom by Mr Newey.
- In the alternative, they submit that, if Alabaster has to be regarded as being, in Jersey, the recipient of the advertising services as well as the supplier of the loan broking services, the arrangements entered into for the purpose of bringing about this result are contrary to the principle of prohibition of the abuse of rights as stated by the Court in Case C‑255/02 Halifax and Others [2006] ECR I‑1609 and must be recharacterised.
- Accordingly, on 27 September 2005, the Commissioners issued a VAT assessment to Mr Newey for the period 1 July 2002 to 31 December 2004 in the sum of 10 707 075 pounds sterling (GBP) in order to recover from him the VAT on the advertising services supplied to him during that period.
- Mr Newey maintains that the loan broking services at issue in the main proceedings were supplied from Jersey by Alabaster and that Alabaster was the recipient of the advertising services. He adds that the principle of prohibition of the abuse of rights is not applicable if the services are supplied by a person established outside of the European Union to another person established outside of the European Union.
- Consequently, Mr Newey appealed against that assessment before the First Tier Tribunal (Tax Chamber) which allowed that appeal by a judgment of 23 April 2010.
- That court held that the loan broking business was carried on by Alabaster, by means of services provided by Mr Newey under the services agreement. Alabaster could not therefore be categorised as a ‘brass plate’ company.
- The First Tier Tribunal (Tax Chamber) also held that Alabaster had supplied the loan broking services concerned to the lenders and that it was the recipient of the advertising services. There was no direct transaction for consideration between Mr Newey and the lenders or between Mr Newey and Wallace Barnaby. Although the essential aim of Alabaster was to obtain a tax advantage, there was, according to that court, no abuse since the arrangement involving Alabaster was not contrary to the purpose of the Sixth Directive.
- The Commissioners appealed to the Upper Tribunal (Tax and Chancery Chamber) against that decision.
Questions
(1) In circumstances such as those in the present case, what weight should a national court give to contracts in determining the question of which person made a supply of services for the purposes of VAT? In particular, is the contractual position decisive in determining the VAT supply position?
(2) In circumstances such as those in the present case, if the contractual position is not decisive, in what circumstances should a national court depart from the contractual position?
(3) In circumstances such as those in the present case, in particular, to what extent is it relevant:
(a) Whether the person who makes the supply as a matter of contract is under the overall control of another person?
(b) Whether the business knowledge, commercial relationship and experience rests with a person other than that which enters into the contract?
(c) Whether all or most of the decisive elements in the supply are performed by a person other than that which enters into the contract?
(d) Whether the commercial risk of financial and reputational loss arising from the supply rests with someone other than that which enters into the contracts?
(e) Whether the person making the supply, as a matter of contract, sub-contracts decisive elements necessary for such supply to a person controlling that first person and such sub‑contracting arrangements lack certain commercial features?
(4) In circumstances such as those in the present case, should the national court depart from the contractual analysis?
(5) If the answer to question 4 is “no”, is the tax result of arrangements such as those in this case a tax advantage the grant of which would be contrary to the purpose of the Sixth Directive within the meaning of paragraphs 74 to 86 of [Halifax and Others]?
(6) If the answer to question 5 is yes, how should arrangements such as those in the present case be recharacterised?
AG Opinion
None
Decision
Contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a ‘supply of services’ within the meaning of Articles 2(1) and 6(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2000/65/EC of 17 October 2000. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine.
Summary
Paul Newey is a credit intermediary based in Tamworth (UK). He trades under the trade name Ocean Finance. A VAT exemption applies to credit intermediation services. To attract potential borrowers, Newey uses advertising services provided for him in the United Kingdom. Because he cannot deduct the VAT charged by the advertisers, Newey sets up a construction via Jersey. The UK tax authorities argue that for the purposes of VAT, the advertising services were provided to Newey in the United Kingdom and are therefore taxable there, and that the credit intermediation services were provided by Newey in the UK. The British court has referred questions in this case for a preliminary ruling.
The European Court of Justice (CJEU) has ruled that the contractual provisions are not decisive in determining who is the provider and recipient of a “service”. The CJEU notes, however, that the contractual provisions are a factor to be taken into account. According to the CJEU, the contractual provisions can be disregarded in particular if it turns out that they do not reflect economic and commercial reality, but constitute a purely artificial construction unrelated to economic reality and intended only to obtain a tax advantage. The British court must assess whether this is the case.
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