The Grattan VAT case is important as it considers the concept of fiscal neutrality, says Andy Spencer
The European Court of Justice (ECJ) has regularly been called upon to decide complex VAT questions in respect of UK retailers and mail order companies, and the amount of VAT that they should account for to HMRC.
The Grattan VAT case is important as it considers the concept of fiscal neutrality, says Andy Spencer
The European Court of Justice (ECJ) has regularly been called upon to decide complex VAT questions in respect of UK retailers and mail order companies, and the amount of VAT that they should account for to HMRC.
This was recognised by the advocate general of the ECJ, Juliane Kokott, in the case of Grattan PLC v HMRC (C-310/11) who in her introduction stated: 'United Kingdom undertakings are inventive. Their ingenuity in relation to complex sales methods has repeatedly occupied the Court with regard to VAT and led to important rulings with evocative names such as “Naturally Yours”, “Elida Gibbs” or, most recently, “Loyalty Management”.'
Grattan, a mail order company that has been operating for over 100 years, is the most recent example of a UK business implementing these so called 'complex sales methods'.
However, the complex sales methods in this case are not new as the case actually involved amounts of VAT that Grattan considered that it had overpaid in the period from 1 April 1973, when VAT was first introduced into the UK, until 1 January 1978.
The 1 January 1978 date is relevant, as it marks the introduction of the European Commission's Sixth VAT Directive, which was implemented from this date. It is important to recognise that unlike the move from the Sixth VAT Directive to the current VAT Directive (2006/112/EC), which codified the provisions of the Sixth VAT Directive without altering the substance of the legislation in force, the introduction of the Sixth VAT Directive did alter the substance of the legislation previously in force. As we will discover, this is key in the determination of this case.
It should be noted that the claim for these periods formed part of a much larger claim which covered the period from April 1973 to December 1996. The majority of this claim has been paid, as HMRC accepted that the claim had been validly made for all periods after the introduction of the Sixth VAT Directive. However, HRMC refused to make payment for the earlier period, so Grattan appealed the matter to the First Tier Tribunal (FTT). The FTT concluded that it could not fully decide the matter itself as it was a matter of interpretation of European law so decided to refer a question to the ECJ.
Precedent
It might seem strange that a dispute about VAT that was paid over 35 years ago can only be resolved now but it is clear that this is the result of Grattan having made claims following the House of Lords judgments in January 2008 in the cases of Fleming and Condé Nast [Fleming (t/a Bodycraft) and Condé Nast Publications Limited (Respondents) v HMRC (Appellants) [2008] UKHL 2].
These cases concerned the way that the three-year time limit on making claims had been introduced and gave an opportunity for businesses to make retrospective claims going back to 1973 for VAT which they consider had been overpaid.
Third-party purchases
The 'complex sales methods' operated by Grattan involved the use of 'agents' who received a commission of 10% in relation to their own purchases of goods from the mail order catalogue and also in relation to purchases made by third parties through them (third-party purchases).
Once they had earned commission, the agents could claim the amounts as a cheque payment, offset those amounts against their outstanding debts to the mail order companies or use it in full or part payment for further goods.
Grattan accounted for VAT on the full catalogue price of the goods it sold which included the amount of the commission paid to the agents. It submitted a claim so that the amount of VAT due was based on the full catalogue price less the amount of the agent's commission.
This claim was paid by HMRC with the exception of the commission paid to agents in respect of the third-party purchases.
The question, therefore, was whether the payment of this commission on third-party purchases reduced the value of the supply made by Grattan and therefore the amount of VAT that was payable under Article 8 of the Second Directive.
Judgment
The Court found that the Second VAT Directive determined the taxable amount at the time of supply as the amount of consideration paid at that time and this amount could not be altered. This is different from the rules in the current VAT Directive, which is derived from the Sixth Directive, which provides a mechanism for reducing the taxable amount retrospectively. However, this provision was not available under the Second Directive.
As a result, the Court found that, as the agents received their commission at a date after the date of the supply of goods, it therefore followed that for periods when the Second Directive applied, the consideration could not be reduced retrospectively.
Grattan also argued that, under the principle of fiscal neutrality, any attempt to distinguish the position before and after 1 January 1978 when the Sixth VAT Directive was introduced is misconceived as the distinction fails to account for the continuity of the VAT system. The Court noted the degree of harmonisation under the Second and Sixth Directives is not compatible. While the Sixth VAT Directive and the current VAT Directive allows for retrospective adjustment of the consideration where part of it is not received, there was no equivalent provision in the Second Directive.
The ECJ took the view that the principle of fiscal neutrality could not introduce a provision into the Second VAT Directive that was not there with the result that fiscal neutrality could not extend the provisions of a VAT directive. In addition, fiscal neutrality required taxing authorities to collect exactly the amount of VAT declared on an invoice and paid by the final consumer to the taxable person. In Grattan's case, the third-party purchaser paid the full purchase price to Grattan, which paid commission to its agent rather than to the final consumer, so tax was due on the full purchase price.
The matter will now be referred back to the FTT which, in light of the judgment of the ECJ, can be expected to find against Grattan.
It is unusual for cases to be heard in respect of legislation that was replaced over 35 years ago and it is therefore unlikely that there will be many similar cases that will be affected by the decision. However, the case is important as it considers the concept of fiscal neutrality and clarifies how it can apply in practice.
Compound interest
The next big issue for mail order companies, and many other companies that have overpaid VAT in the past, will be the question of compound interest and whether it should be paid by HMRC on repayments made in respect of overpaid VAT.
This matter is now before the High Court after the ECJ determined in the case of Littlewoods Retail Ltd and Others C591/10 it was a matter for the national court to decide taking into account that the principle of effectiveness requires the interest paid must give the taxpayer 'adequate indemnity for the loss occasioned'.
This issue is set to run for a considerable time yet, as the amounts involved run into the billions of pounds, so any decision of the High Court will undoubtedly be appealed.
Andy Spencer, head of consulting at VAT specialists, Accordance
