Following on from her Opinion in the case of Luxembourg (C-274/15), Advocate General Kokott has given two further Opinions in the cases of Aviva (C-605/15) and DNB Banka (C-326/15). This note discusses the implications of these for charities.
The first question is whether these Opinions are important. Although Opinions of the Advocate General can assume importance if the Court of Justice decides that they are correct, they have no importance until that is confirmed. None of these Opinions has yet been confirmed by the Court. If they are, the Opinions become important because they always contain more analysis, and the Court commonly appears simply to endorse the AG’s rationale.
The second question is what relevance these particular cases have to the use of the Cost Sharing Exemption (CSE) by charities. In this case, DNB Banka is significant, but Aviva less so.
The key point for our purposes is whether the UK’s insistence on a separate ‘VAT entity’ to make the CSE services is required under the VAT Directive. The AG had already said it was in the Luxembourg Opinion, and simply reasserts that in DNB Banka. We therefore need to hope that the Court disagrees with her, when, at length, it decides the point.
The other points are either irrelevant or less relevant to our sector. They are whether a fixed mark-up added to costs falls within the definition of ‘mere reimbursement of costs; whether the CSE can apply to finance sector exemptions as distinct from the ‘social exemptions’; and whether CSE exemption applies on cross-border groups, thereby removing the reverse charge for imported services.
On the fixed mark up, the AG opined that this was incompatible with the exemption’s requirement for ‘mere reimbursement’. Unhelpful as that is, it is scarcely surprising, and we must expect the Court to agree.
On the limitation to social exemptions, the AG surprisingly said that it was limited to these and did not extend to cost sharing between finance businesses such as insurance. Surprising as that may be, charities are almost solely engaged in the social exemptions (though this cannot be assumed ipso facto to be the case) so this is not going to present a problem to most charities.
On the international aspect, the AG opined that the exemption cannot flow across national borders and thus the reverse charge does apply and snuffs out the exemption. It is unlikely that this would be a problem for charities, unless they have established their CSG off-shore (perhaps for labour cost efficiencies), or operate a sharing arrangement internationally. Charities which are in that position will be anxious to learn of the Court’s final decision.
The conclusion is therefore one of ‘wait and see’. AG Opinions are not followed as often as they used to be, and some of the comments by the AG are not very convincing.
Graham Elliott is CTG’s Tax Advisor