TaxCorporate TaxECJ deals blow for businesses trying to reclaim VAT

ECJ deals blow for businesses trying to reclaim VAT

Grant Thornton says ECJ decision creates uncertainty for other businesses involved in multi-party transactions

The European Court of Justice has dealt a severe blow to UK businesses after
blocking two UK companies from reclaiming VAT.

Loyalty Management UK Ltd, which operated a ‘Nectar’ promotion scheme, and
Baxi, the boiler and heating business, are not entitled to reclaim VAT incurred
on the purchase of goods or services provided to another party under a customer
reward scheme, ruled the ECJ.

Grant Thornton (GT) said the decision created uncertainty for other
businesses involved in multi-party transactions by failing to clarify the
validity of the ‘Redrow principle’ established in the UK courts.

In the Redrow principle, the House of Lords ruled that where goods or
services are provided to one party but are paid for by someone else, the party
making the payment may be entitled to reclaim the VAT.

However, the principle has not been widely applied in the UK, with the taxman
insisting that it can only be used in limited circumstances.

Lorraine Parkin, VAT partner at GT, said: “In a complex judgment, the ECJ has
confirmed that HMRC’s position on VAT recovery is correct. This is bad news for
businesses operating a customer loyalty scheme as the amount of VAT that can be
claimed will now be restricted.”

Manufacturers and retailers operating such schemes will need to review these
schemes to see if they can be structured more effectively, or factor the
additional irrecoverable VAT into their operating costs, the firm added.

The case is likely to go back to the House of Lords, now referred to as the
Supreme Court, for further clarity on the VAT position, said Deloitte.

“Ultimately, it will impact upon many businesses in the UK which operate
loyalty schemes,” said Deloitte tax dispute resolution director Giles Salmond.

The case may also be significant in determining whether businesses can
recover VAT when they make payments for services rendered both to that business
and to third parties. This can occur with the payment of professional services
provided in the context of M&A activity, Salmond added.

Further reading:

EMI
VAT win opens up promo goods refunds for all businesses

Related Articles

Watch out when winding up

Corporate Tax Watch out when winding up

1m Emma Rawson, ATT Technical Officer
How might Brexit affect UK tax policy?

Brexit & Economy How might Brexit affect UK tax policy?

1m Santhie Goundar
Corporation tax losses – your newly flexible friends

Corporate Tax Corporation tax losses – your newly flexible friends

4m Emma Rawson, ATT Technical Officer
HMRC large business tax enquiry duration rises to 3 years

Corporate Tax HMRC large business tax enquiry duration rises to 3 years

4m Emma Smith, Managing Editor
SMEs paying higher rate of corporation tax than big businesses

Corporate Tax SMEs paying higher rate of corporation tax than big businesses

4m Alia Shoaib, Reporter
Big names, little tax: Airbnb, Facebook, Kellogg’s, eBay

Corporate Tax Big names, little tax: Airbnb, Facebook, Kellogg’s, eBay

7m Alia Shoaib, Reporter
New trading allowance: simplicity, but not as we know it

Administration New trading allowance: simplicity, but not as we know it

8m Emma Rawson, ATT Technical Officer
EU divided over radical tax reforms targeting tech giants

Corporate Tax EU divided over radical tax reforms targeting tech giants

8m Alia Shoaib, Reporter