Do you want to access the full text of articles?

Please see our digital edition archive for the full text of articles.

Alternatively:

If you are a Chartered Accountants Ireland member, please visit the RIS service where Accountancy Ireland is available free of charge via the EBSCO databases.

If you are an Accountancy Ireland subscriber (i.e. you pay each year to receive your copy of Accountancy Ireland) please contact our Subscriptions Department quoting your subscription number and include details of the article you want.

All other users should enquire from their local public or college library about accessing full text Accountancy Ireland articles.

Home / ...

Everybody knows about declaring VAT on goods that they bring in from abroad, but not many people know they have to declare VAT on imported services.

Did you know that when you import services for your business you have to account for Irish VAT on them?

Let’s say you get (import) advice from a solicitor in Enniskillen for your business in Letterkenny. You have to account for Irish VAT on the solicitor’s fee.

The Cadbury Ireland Pension Trust Limited judgment in High Court earlier this year sounds an alarm bell for all businesses that are buying services from abroad. If your business is importing any services it is time to check whether there is a lurking VAT liability lying there, and about to bite you.

You should decide now whether you need to check that your businesses – or your clients’ businesses, if you are in practice – are correctly managing VAT on their imported services. If you organise your affairs prudently VAT liabilities on services bought in from abroad may be reduced or eliminated.

Don’t bother reading this article any further unless you are interested in the detail of the Cadbury case. Instead spend your time checking for lurking liabilities to VAT on imported services for yourself and your clients.

The Cadbury case I will now turn to consider the case in detail for those who are interested in a more in-depth analysis. You can get a copy of the judgment by going to www.bailii.org and entering the words, Cadbury Ireland Pension, in the search box.

Cadbury Ireland Pension Trust Limited, and CMF Trustees Limited, look after the pension funds for Cadbury Ireland plc. In the usual way of these things Cadbury, and its employees, make contributions to these two companies, and in turn the two companies look after investing the money, paying out pensions, and so on. The two companies bought investment management services from a UK company, BG.

The Inspector of Taxes said that the two companies should have paid Irish VAT on importing these investment management services from the UK. The services they imported were what are known in VAT language as, ‘Fourth Schedule Services’.

Businesses who import Fourth Schedule services have to pay Irish VAT on them. The trustee companies accepted that the services that they had imported were Fourth Schedule services. However they contended that they did not have to pay Irish VAT on them because they were not for the purpose of any business carried on by them.

And that’s what the whole case was about; did the companies import the investment management services from the UK for the purposes of any business carried on by them? If they did, they had to pay Irish VAT on them. And if they did not import the investment management services for the purposes of any business carried on by them, they did not have to pay Irish VAT on them.

The decision Both the Appeal Commissioner and the High Court held, for different reasons mind you, that the companies had imported the services for the purpose of a business carried on by them. It followed from that they had to pay Irish VAT on the imported investment management services.

The Facts Each of the appellants (Cadbury Ireland Pension Trust Limited, and CMF Trustees Limited) is a trustee of a pension fund established by Cadbury plc, one for employees, and the other for executives. Here’s what the trustee companies do: - they purchase investments, - they sell investments, - they hold investments, - they receive contributions from approximately 500 members and from Cadbury, - they receive income, - they pay benefits to approximately 900 pensioners, - they pay expenses, - they carry out of secretarial, administrative and accounting work - they operate a payroll system, - they keep bank records, - they prepare accounts, - they do actuarial reports, - they do tax returns, - they hold regular meetings - they prepare reports.

Each of the trustee companies engaged Baillie Gilford Overseas Limited (BG), an investment management company, established in Scotland, and it provided the investment management services to the two Irish companies from the United Kingdom.

You Must Pay Irish VAT on Imported Services A person who imports a service from abroad has to pay Irish VAT when both of the following conditions are satisfied: - When the service is one that is listed in the Fourth Schedule to the VAT Act and - When the service is received for the purposes of any business carried on by him.

The Inspector contended that the services that the two companies imported from the UK met both these conditions, and he sought VAT from them. The pension companies accepted that the services were on the list in the Fourth Schedule. They did not accept that they had received them for the purposes of any business carried on by them. They contended that they were involved in ‘mere administration of pension schemes’, an activity they suggested was akin to the activity of a private investor, which is not a business for VAT purposes.

The core issue in the case was: did the companies receive the investment management services for the purposes of a business carried on by them?

Wellcome Trust Limited v. Commissioners ofCustoms & Excise1

The authority primarily relied on by the Revenue, and the authority which informed the decision of the Appeal Commissioner, was the decision of the European Court of Justice in Wellcome Trust Limited v Commissioners of Customs & Excise. The Revenue contended, and the Appeal Commissioner agreed, that that case supported the view that the companies were carrying on business.

The companies contended that the Wellcome decision supported their view that they were not carrying on business.

Wellcome Trust Limited had argued at the European Court that its activities in relation to acquiring and disposing of shares were carried out on such a large scale that they constituted an ‘economic activity’ within the meaning of Article 4(2) of the Sixth Directive.

The ECJ held that the company’s activity could not be regarded as an economic activity, and could not be distinguished from that of a private investor.

Adding further irony to the contention by both sides that Wellcome supported their arguments, Miss Justice Laffoy of the High Court was of the view that the ECJ decision in the Wellcome Trust case did not present an answer for either side in this case. She said:

‘On my reading of the Wellcome Trust case it does not present such an obvious answer to the net issue in this case … as was argued by the counsel for the respondent and as the Commissioner considered it constituted…The activities of the appellants require more in-depth analysis than merely assuming by reference to the Wellcome Trust case that they are involved in economic activity.’

That was an end to Wellcome Trust; an end to the Revenue’s contention that it supported their case; an end to the taxpayers’ contention that it supported theirs; an end to the Appeal Commissioner’s view that it gave him a basis for his decision.

Railways Board and Linotype Cases Counsel for the trustee companies also submitted two UK VAT cases dealing with pension schemes, as authority for the proposition that the companies were not engaged in business or economic activity: - Customs & Excise Commissioners v British Railways Board. 2 - Linotype & Machinery Limited.

Miss Justice Laffoy was no more impressed with the relevance of these cases than she was with the decision in Wellcome Trust.

Of the first – British Railways Board – she said: ‘The decision in my view is of no assistance in resolving the issue in this case.’

As regards the decision in the Linotype case she said: ‘Nothing in that decision advances the applicants case.

Absence of Consideration The two companies argued that they weren’t paid anything for what they did, and they contended that there can’t be a business activity if no payment is received.

They quoted the following cases to support this contention – - Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association 4 - Customs and Excise Commissioners v Royal Exchange Theatre Trust5 - Institute of Chartered Accountants in England Wales v Customs and Excise Commissioners 6 - Staatssecretaris van Financien v Hong Kong Trade Development Council7 - Customs and Excise Commissioners v Yarborough Children’s Trust8 - National Coal Board v Customs and Excise Commissioners9

Miss Justice Laffoy did not find guidance on the issue before her in these cases except in the Morrison’s Boarding Houses Association case. She said: ‘I consider it appropriate to adopt the approach which Lord Cameron adopted in the Morrison Academy case and to look at the entirety of the activity which each is involved in and to ask whether that activity, leaving aside the question of tax liability, can be properly described as business or economic activity.’

In any event she did not accept that the companies were not paid for the performance of their functions in the management and administration of the pension schemes. As she put it: ‘they did not provide them gratis.’

Another Argument ByThe Companies The companies also sought support for their contention that they were not involved in business from the judgments of the ECJ in Polysar 10 and Harnas and Helm11. In those cases the court held that the mere acquisition and holding of investments was not a business/ economic activity for VAT purposes. Miss Justice Laffoy stated that the companies’ reliance on these cases was ‘fundamentally flawed because it ignores the essential facts.’

Revenue Reference to Competition Law Case The Revenue cited a competition law judgment of the European Court – Pavel Pavlov12 – in support of their contention that the companies were carrying on a business.

Miss Justice Laffoy did not see that case as relevant to the case being considered by her. She said:

‘…the fund which was the subject of that case was different in substance from the private occupational pension fund that was managed and administered by appellants.’

The Lord Fisher Case The case that most impressed Miss Justice Laffoy as giving guidance in deciding this case was the judgment of the UK High Court in Customs and Excise Commissioners v Lord Fisher. 13

Lord Fisher lived at Kilverstone Hall. His main hobby was pheasant shooting on his 3,000 acre estate. He invited friends and relations to join the shoot. The friends and relations who were invited were not charged, but they are asked to make contributions towards the cost of the shoot. Lord Fisher neither sought nor made any profit from the contributions. He himself made at least an equal contribution from his own pocket. UK Customs contended that he was carrying on a business. The Court held that ‘the sharing of the costs of a sporting or other pleasure activity did not by itself turn such an activity into a business.’

In the Lord Fisher case the court set down six indicia as a test as to whether an activity was a business.

The test as to whether an activity was a business was whether it was: - a ‘serious undertaking earnestly pursued’; - pursued with reasonable continuity; - substantial in amount; - conducted regularly on sound and recognised business principles; - predominantly concerned with the making of taxable supplies to customers for a consideration; and - such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them.

It was these six tests that Miss Justice Laffoy applied to the two companies in determining whether or not they carried on ‘business’ within the meaning of section 1 of the VATA, and ‘economic activity’ within the meaning of the Sixth Directive. Based on these six indicia Miss Justice Laffoy held that the investment management services imported by the two companies were for the purposes of business. It followed from that that the companies owed VAT to the Revenue on these imported services. I understand that the decision is not being appealed to the Supreme Court.

Conclusions - Everyone who is importing services from abroad should check whether they are correctly accounting for VAT on them. - This case has now set down the criterion – the six indicia – which determine under Irish VAT law whether or not a person is carrying on a business for VAT purposes. - Business is one of the fundamental concepts in VAT. While the Court has given us six indicia to use in deciding difficult cases I won’t be surprised if there will be more appeals to the Courts all about that simple eight letter word ‘business.’

Notes 1 Google c 155/94 2 1976 S.T.C. 359 3 Manchester VAT Tribunal 594 9th June 1978 4 1978 S.T.C.1 5 1979 S.T.C. 728 6 1999 S.T.C. 398 7 Google Staatssecretaris c 89/9 8 2002 S.T.C. 2007 9 1982 S.T.C. 863 10 Google Polysar c 60/90 11 Google Harnas and Helm c 80/95 12 Google Pavel Pavlov c 180/98 13 1981 S.T.C. 238

Fergus Gannon, FCA, FITI, is a Director with Deloitte in Dublin.

How do we treat the VAT input tax on imported service