Drink and drive

Drink and drive

Adrian Ogley reviews Britain's relations with Europe over VAT.

The last major initiative from indirect taxation and customs duties (DG XXI) of the European Commission was the publication in July 1996 of a technical note that outlined its proposals for a common VAT system. These proposals were overshadowed in the UK by the turbulence within the domestic political environment.

Their technical nature made sure that interest in them was confined to VAT practitioners. However, developments show the Commission is trying to adhere to the action plan outlined in these proposals.

VAT committee

Last year, the Commission introduced a proposal to change the status of the VAT Committee from an essentially administrative and advisory body to a regulatory one. This was one of the recommendations of the Commission’s technical note on the common VAT system. For a long time, tax practitioners have argued the secrecy surrounding the deliberations of the VAT Committee was inappropriate.

The Commission has consistently rebuffed these criticisms. The problems of harmonising the approaches of the various member states to the implementation of VAT stem, to a large extent, from differences in both commercial practices and the administration of the tax.

It should begin by publishing the agenda and minutes of the discussions of the VAT Committee (it would be a simple matter to edit out discussions relating to the prevention of fraud and the protection of the revenue authorities). This information could be posted on the Commission’s Web site.

In the absence of proper democratic controls, it would be inappropriate to give regulatory authority to an essentially secretive body. Accordingly, it is a matter of some surprise that the Commission should have brought forward these proposals.

Fiscalis project

In its report, the Commission appreciated the need for improvement in the co-ordination of administrative practices among the revenue authorities of member states, as a precondition to the introduction of a common VAT system in Europe. Co-ordination of administrative practices would also help co-operation amongst revenue authorities.

The Commission, with the Fiscalis project, is undertaking a pan-European review of the way in which VAT is administered within member states with a view to improving co-ordination and co-operation among administrations.

Company cars

Some years ago, the Commission put forward proposals to harmonise the right to recover input VAT. This was contained in proposals for a 12th Directive. Because member states’ practices differ so significantly, it was not possible to make progress with the proposals. However, the Commission’s paper of July 1996 reiterated the importance of harmonisation in this area.

The matter has now been referred to the European Court of Justice (ECJ) in a series of landmark cases involving Allied Domecq, Royscot Leasing and another car leasing company. The advocate general has issued his opinion on these, which were taken to the ECJ by UK taxpayers.

Until recently, the UK denied the right to deduct input tax in respect of expenditure on company cars, regardless of who owned the car or the use to which it was put. The justification for this was that cars are often provided to employees as a ‘perk’ and therefore represent final consumption.

The denial of the right to deduct not only raises additional revenue but saves taxpayers and the administration the compliance costs associated with apportioning business and private use of the car. The decision of the ECJ in the case of Lennartz v Finanzamt Munchen III threw a spotlight on this treatment.

As a result, a large number of taxpayers have sought to challenge the UK’s right to ‘block’ the recovery of input VAT (the number of VAT appeals rose from an average of 4,500 to 8,500 in the year in question).

They are also seeking to recover ‘overpaid’ tax. As the UK had no time limit for the recovery of overpaid VAT, the amount of revenue at risk from an adverse decision of the court was enormous. In response to this risk, the government introduced a three-year time limit for the recovery of overpaid VAT.

Revised 12th Directive

The threat faced by the UK as a result of the above cases reminded member states of the potential risk to their revenue arising from their failure to agree on a common European framework. The Commission has undertaken to bring forward new proposals.

In any event, a harmonisation of the right to deduct is a precondition to the introduction of a common VAT system.

Revised 8th Directive

The Commission has probably grown weary of initiating infraction proceedings against certain member states that fail to fulfil their obligations to refund VAT to registered traders from other member states which do not have an establishment within the member state concerned.

The Commission is proposing to put forward radical proposals to allow traders to recover such VAT from their domestic VAT authorities.

Electronic invoicing

A number of multinationals wish to operate pan-European electronic invoicing systems. This would involve issuing invoices electronically from one European administrative centre. Current domestic VAT legislation of a number of member states presents problems.

Certain member states require VAT invoices to be in paper form in order to confer a right to deduct. Where a permanent representative is employed in Belgium, there is a requirement that invoices should be issued locally.


UK Customs & Excise is known to be unhappy at the decisions of the ECJ in the cases of Elida Gibbs and Argos, which dealt with money-back and gift vouchers respectively.

The French and German tax authorities are understood to share Customs’ concerns. The UK may use its presidency of the Council of Ministers to initiate a review of this aspect of the operation of the 6th Directive.

The decision of the European Court held that VAT was only payable on the net consideration, as reduced by any discount, regardless of whether the discount took the form of a redeemable voucher.

Excise duty

UK brewer Shepherd Neame has failed at the first stage in its challenge to the government’s right to increase the rate of excise duty in respect of beer. The UK has one of the highest rates of excise duty in Europe.

There is a significant distortion of trade as personal shoppers buy dutiable goods in France (where the rates of duty are substantially lower) and ‘import’ them into the UK.

Where the goods are for personal consumption, no additional duty is due.

This ‘personal shopping’ shelters a substantial problem of duty evasion through smuggling. This undermines the commercial viability of legitimate retailers, especially those in the South-East near the Channel ports.

The UK Court has rejected Shepherd Neame’s request for the matter to be referred to the ECJ. Although no agreement has been reached in Europe for the approximation of rates of excise duty, Shepherd Neame argued the government was under an overriding obligation not to exacerbate existing distortions within the single market by increasing rates of duty.

Reduced rates

To alleviate the high levels of unemployment in Europe, member states are being permitted to introduce a reduced rate of VAT for a limited range of labour-intensive service activities that are unlikely to lead to distortions of trade within the single market. This measure is being introduced for an initial three-year period.

However, member states are being exhorted to monitor the operation of the regime for distortions of trade but the continental concern at possible distortions of trade is not shared by the UK Treasury. The UK is likely to come under pressure to reduce its current VAT threshold and bring it into line with thresholds in other member states in the near future.

VAT and telecoms

Despite the confused way in which the changes were introduced to the VAT treatment of telecoms, there have been few complaints at the operation of the system. Perhaps the VAT officials are still trying to understand the implications of the changes.

Adrian Ogley is co-founder of Interfisc Consulting.

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