UK: Weekly Tax Update - Monday 22 October 2012

Last Updated: 29 October 2012
Article by Richard Mannion


1.1. Meetings of HMRC permanent secretaries with external bodies

HMRC has published the latest information on Permanent Secretaries meetings with external organisations, giving details of meetings up to June 2012. The current chief executive and permanent secretary of HMRC, Lin Homer has recently met with a number of external organisations and has commented (amongst other things) on a commitment to the working together initiative, the desire to reinforce HMRC's involvement in the policy making process and on the dividing line between acceptable and unacceptable tax avoidance.

1.2. The tax gap

HMRC has published its latest findings on the 'tax gap', covering the tax years to 2010/11. The overall tax gap in 2010/11 is estimated to be £32 billion which is 6.7 % of tax liabilities. The overall tax gap time series, 2004/05 to 2010/11, has been revised down substantially following significant changes to the VAT gap estimates.

The tax gap is defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC's interpretation of the intention of Parliament in setting law (referred to as the spirit of the law). The tax gap estimate is net of the Department's compliance activities.

An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attacks.

1.3. FSA proposals on unregulated collective investments schemes and the impact on EIS and VCT markets

The FSA has issued a consultation on tightening up the regulation on sales of unregulated collective investment schemes. The proposals are to ban the promotion of unregulated collective investment schemes (UCIS) and close substitutes to ordinary retail investors in the UK. Although not specifically referred to in the consultation document (issued in August 2012 and open for comment until 14 November 2012) it is thought that certain VCT and EIS investments might be caught within UCIS and so will become a class of investment that can only be marketed to:

  • customers certified as sophisticated investors;
  • customers self-certified as sophisticated investors; and
  • customers who meet the criteria to be regarded as high net worth individuals.

It is understood that VCTs, as listed companies, will fall under the non-mainstream pooled investments rules and the FSA's UCIS guidance unless they are investment trusts. VCTs that primarily invest in listed shares will fall outside the rules, while those investing in unlisted shares might be caught, depending on how the VCT is structured. Similarly the underlying investments of an EIS will partly determine whether it is deemed UCIS or not, again how the fund is structured will be an important criterion. If portfolios of EIS investments are structured as collective investments schemes, these will be caught by the UCIS rules.

1.4. Launch of website, initially replacing Business Link and Directgov websites launched 18 October, initially replacing Business Link and Directgov. This is the first step towards making the definitive website for interacting with central government.

In the meantime, HMRC's website is still available as a primary source of online support and it's important to note that there will be no immediate changes to HMRC's online services such as Self Assessment Online and PAYE Online.


2.1. CGT entrepreneurs' relief – sale of business asset or part of a business.

The First-tier Tribunal has recently heard a case concerning a claim to entrepreneurs' relief on the sale of land, farmed in partnership (William S G Russell-TC02299).

Mr Russell and his two brothers each owned an equal share of farmland that had been bequeathed to them by their mother in 1993. In 2008/2009 it was being farmed in partnership by Mr Russell, his brother and his sister-in-law.

The partners disposed of about 35% of the land suitable for cropping (6.72 acres), but continued to farm the remainder. Mr Russell claimed entrepreneurs' relief on his share of the disposal.

The partnership profits in the five years to 05/04/11 were as follows:

  • Year to 5/04/07 £2,796
  • Year to 5/04/08 £2,895
  • Year to 5/04/09 £2,175
  • Year to 5/04/10 £1,902
  • Year to 5/04/11 £1,740

An agricultural contractor worked the land on behalf of the partnership. The only source of income was the sale of barley. The only asset of the farming partnership was the land itself.

Mr Russell gave evidence that the primary reason he and his brothers had retained the land was because of its potential for development. He had been trying for years to get various planning permissions. The land that had been sold had been sold for development.

Mr Russell was explicitly asked whether what the partnership did in connection with the farm business had changed at all after the sale of the land. He said that the only difference was that they had lost a field and as there was less barley the profits went down.

The primary argument for Mr Russell was that the land that was sold represented a material disposal of a business asset particularly because the fall in profit correlated with the percentage of land sold. The land was the only asset of the business that generated income so therefore the sale had a material impact on the profit earning capacity of the business.

HMRC argued that no entrepreneurs' relief was due because the disposal was a part disposal of an asset used for the purposes of the Appellant's business, it was not a disposal of part of the business.

Both parties relied on the following excerpt from the judgement of Fox J in McGregor v Adcock:

"In my view, there is a clear distinction between the business and the individual assets used in the business. Prima facie, therefore, it seems to me wrong to assert that the mere sale of the farmland is a disposal of part of a farm business. The true position, I think, is that the sale is merely a factor which the court has to consider in deciding whether there has been such a disposal. There are cases in which it may be the determining factor. Thus if a man is farming 200 acres and sells off 190 acres, it may very well be that the nature and extent of the man's activities after the sale would be so wholly different from what they were before the sale that the inevitable conclusion would be that there had been a disposal of part or even the whole of the business".

HMRC referred the Tribunal to Barrett v Powell where Lightman J quoted with approval from the judgement of Peter Gibson J in Atkinson v Dancer, Mannion v Johnston to the following effect:-

"... the fact that a farmer sells some land alone which he has been using for a farming business prima facie will not amount to the sale of his farming business or any part thereof because it is only the sale of a chargeable business asset and not in itself the sale of the business or any part of it, this notwithstanding that it will be virtually inevitable that the sale of land on which the business has been conducted will reduce the activity of the farmer and probably his profits."

The tribunal dismissed the appeal on the basis that there was simply a sale of a business asset and not a sale of part of a business.


3.1. Applications for refunds of National Insurance contributions paid in error

The Social Security (Categorisation of Earners) Regulations 1978 (the Regulations) made provision for treating lecturers, teachers, instructors or those in a similar capacity in traditional educational establishments, such as schools, colleges or universities etc, who were not employed under a contract of service (an employment contract) as employees for NICs purposes.

With effect from 6 April 2012 the relevant provisions of the Regulations were repealed so that the Regulations no longer apply to lecturers, teachers, instructors or those in a similar capacity.

However, prior to repeal, it is possible that earlier published HMRC guidance may have led some training providers particularly in the vocational or recreational sector to incorrectly apply the Regulations to payments made to trainers engaged under self-employment contracts. If the Regulations were incorrectly applied, Class 1 NICs may have been accounted for and paid to HMRC in error. HMRC will now consider claims for the refund of any incorrectly paid contributions. Such claims are limited by statute so that refunds may only be made in respect of the last two tax years or, where a decision was requested/challenged and this remains undetermined, the tax year in which the challenge was made and the preceding tax year.

3.2. Class 1A National Insurance and the making good of benefits in kind

The case of Marcia Willett Ltd considered whether class 1A NIC was due under the provisions of SSCBA92 s10 (and payable by 19 July following the tax year according to SI1992/1004 reg 71) in respect of benefits that had been provided but made good.

The benefits involved were structural improvements made (apparently in the 2002/03 tax year although the case summary does not specify) to a company property occupied by two directors where the company's business was the exploiting of the writing skills of those directors. To remove the income tax charge that arose under the cash equivalent benefit in kind provisions in ITEPAS s203, there was an adjustment to the directors' loan accounts in May 2008, which it was accepted removed the income tax charge which HMRC sought to levy for the 2002/03 to 2006/07 tax years.

ITEPA s203 does not refer to any time limit for an employee to 'make good' the cost of the benefit. However HMRC maintained that there was still a class 1A NIC charge due from the company, as there was no provision in the Social Security legislation confirming that 'making good' removed any class 1A NIC liability.

The Tribunal disagreed, highlighting the following points:

  • S10 SSCBA and s203 ITEPA are interdependent so that a class 1A NIC charge can only arise when there is an income tax charge.
  • On a plain reading of ITEPA s203(2) a 'making good' payment extinguishes an income tax charge ab initio and therefore there are no general earnings or income tax charge to which s10 SSCBA can apply.
  • A principle of UK law is that subordinate law cannot go beyond the scope of the primary legislation to which it is subordinate and in cases of doubt, subordinate legislation should be construed in the light of the enabling Act (in this case SSCBA, as SI1992/1004 (and reg 71) is made pursuant to SSCBA s175).
  • It cannot be legitimate to apply a purposive approach to the interaction of primary and secondary legislation which results in class 1A NIC payments being set in stone at the date when the payment becomes due, particularly where the taxpayers would otherwise ultimately be charged on a benefit which he has not in fact received.

The Tribunal noted that s10ZC SSCBA did give a regulation making power to allow class 1A contributions to be amended as a result of retrospective changes of law to ITEPA s203 reflecting the general principle that there should be no NIC charge where there is no ITEPA s203 charge. There was also a comment in respect of para 52(9) (concerning a return of contributions paid in error, defining error as an error made at the time of payment and relating to a past or present matter) of SI1992/1004 indicating it was an ineffective deference against 'retrospective changes of fact or law which could impact NIC payments'. It would seem difficult to envisage when facts would change, so this is presumably a reference to a 'reinterpretation' or 're-finding' of facts.


4.1. Capital allowances and environmentally beneficial allowances

SI 2012/2602 has been issued to introduce updated 'Water Technology Criteria' and 'Water Technology Product' lists published on 10 October 2012, and to amend SI 2003/2076 (last amended by SI 2012/1838 in July 2012). The order takes effect from 7 November 2012

4.2. Financial transactions tax

The following is taken from a Written Ministerial Statement by the Chancellor of the Exchequer issued by HM Treasury on 16 October 2012.

"On 9 October Ministers discussed the following items:

Financial Transactions Tax

Ministers were updated on developments since this was discussed at ECOFIN in June. The June European Council had suggested adoption of the enhanced cooperation proposal by the end of the year, and the Presidency suggested it would be helpful if those Member States willing to participate would indicate their intentions and for the Commission to set out a timeline for next steps. Eleven Member States indicated their willingness to participate: formal representations in writing are required, after which the European Commission will assess the request.

I intervened to confirm that the UK would not be joining. I stressed that the UK is not against taxation of the sector and already has a bank levy. We would not seek to stand in the way of enhanced cooperation: however this must be done in the context of a clear proposal and in line with the Treaty. Currently there remains uncertainty over the likely scope and the purpose for which the revenues would be used. I pointed out that the Commission's own original assessment had foreseen a GDP reduction of between 0.5% and 3.5% for the European economy: the impact on all twenty-seven Member States must be considered and therefore we want to see a specific proposal."

4.3. Consultation on implementing Employee Owner status

The Government has issued the consultation paper on its proposal to create a new employment status which will give businesses greater choice about the contracts they can offer to individuals. The Executive Summary is set out below:

  1. The UK has one of the most lightly regulated labour markets in the developed world, and is performing well. The Government is mindful, however, that businesses – particularly smaller businesses – need flexibility and freedom to allow them to grow and take on staff. In particular, the Government wants to remove the perceived barriers around the fear of being taken to employment tribunal which are deterring businesses from hiring.
  2. Businesses are currently free to choose the best arrangement for their particular circumstances in relation to the type of contracts they offer. They can choose to use full-time, part-time or fixed-term employees, workers (including agency workers) or self-employed individuals. Their decision when establishing which of these categories is right for them will be a trade-off between flexibility, control and obligation (between the employer and the individual engaged).
  3. The Government believes that there is merit in creating a new employment status which will give businesses greater choice about the contracts they can offer to individuals, and ensure appropriate levels of protection are maintained. Under this new status, employee owners will receive shares between £2,000 and £50,000 which will be exempt from capital gains tax. Employee owners will have the same rights as current employees excluding unfair dismissal (except where this is automatically unfair or relates to anti-discrimination law), certain rights to request flexible working and training, and statutory redundancy pay. Individuals will also need to give longer notice to return from maternity leave or adoption leave.
  4. Employers can choose to operate this new employment status. The Government intends that all types of shares will be eligible for use under this arrangement. These shares may carry rights to dividends, voting rights, or rights to a share in the company's assets if it is wound-up. The Government expect that this will take effect as part of a contractual arrangement between employer and the employee owner.
  5. Companies of any size will be able to use this new status, but it is principally intended for fast-growing companies that want to benefit from the flexibilities available through the new status.
  6. This consultation seeks views on how the Government will implement the employee owner status in practical terms. Through this consultation we would also like to understand the implications for employers, individuals, and the labour market in general. In particular we wish to ensure there are no unintended consequences.
  7. The Government intends to bring forward legislation through the Growth and Infrastructure Bill to effect this measure. The associated capital gains tax exemption will be legislated as part of the Finance Bill 2013.

It appears that the shares will be liable to income tax on issue to the employees and will not qualify for EIS or for any approved scheme which suggests that this proposal may turn out to be a damp squib.

4.4. Update on IMA's discussions with HMRC on the tax consequences of share class conversions

The Investment Management Association (IMA) is in discussion with HMRC on the tax consequences of share class conversions and has published the following note:

In July 2012 HMRC issued draft regulations containing a rewrite of the Capital Gains Tax rules on exchanges, mergers and reconstructions for funds (see circular 244-12).

Whilst these are relevant to RDR conversions, they apply more widely than to conversions of units in UK funds. For example, the rules apply to exchanges of units in offshore funds, where a mechanism for processing conversions in line with COLL may not exist.

In circular 151-12 IMA highlighted the distinction between share class conversions, which are transformations of shares on the fund register, and switches, which are combinations of redemption and subscription orders. The effect of a switch is that an investor's group 1 units are exchanged for new group 2 units.

IMA has discussed with HMRC the tax impact of the two different mechanisms for exchanging units and agreed the following:

  1. Regardless of whether the mechanism for an exchange of units is a conversion or a switch, the exchange is capable of meeting the conditions of the draft section 103F, provided that investors see this as a single transaction. This will normally be the case where an investor receives only other units in exchange for existing units.

    The condition in section 103F(1)(b) – that the rights of the participants to share in the capital and income in relation to the property are the same immediately before and after the event – can be met even where an investor exchanges group 1 units for group 2 units.

    In order to get CGT roll-over treatment, the other conditions of section 103F need to be met in relation to an exchange. Broadly these are that the scheme property should be the same before and after the exchange (see comment below) and investors receive only other units of substantially the same value in the exchange.
  2. New wording will be introduced into the draft regulations to the effect that where the regulations apply, no part of the subsequent distribution should be treated as a return of capital (except where it would have been treated as such anyway).

    This has the effect that where as a consequence of a switch an investor receives a distribution which has an element of equalisation, that equalisation is not treated as a return of capital.
  3. Fund managers and distributors should consider whether investors have adequate information on the tax consequences of an exchange.

    In particular they need to be careful not to provide wrong tax information if an investor receives equalisation as part of a distribution following an exchange as highlighted in (2) above, where the units previously held were group 1.

Interpretation of the tests in section 103F

We have also discussed with HMRC how they expect to apply the conditions of section 103F. As an example COLL 3.5.5 permits differences between the rights attached to different share classes specifically as follows:

  1. the accumulation of income by way of periodical credit to capital rather than distribution; or
  2. charges and expenses that may be taken out of the scheme property or payable by the unitholders; or
  3. the currency in which prices or values are expressed or payments made; or
  4. the use of derivatives and forward transactions entered into for the purpose of reducing the effect of fluctuations in the rate of exchange between the currency of a class of units and either the base currency of the scheme or any currency in which all or part of the scheme property is denominated or valued (in this section referred to as a "class hedging transaction").

Whilst this will be directly relevant only to UK authorised funds HMRC have agreed that exchanges between share classes differentiated as outlined in (a), (b) and (c) in COLL 3.5.5 would benefit from CGT roll-over treatment, while (d) would not.

4.5. Contractual schemes for collective investment

On 30 July 2012 HM Treasury issued revised draft regulations on contractual schemes ( commenting:

"HM Treasury has issued a revised set of draft regulations for technical comment following the consultation on contractual schemes for collective investment that was issued in January 2012.

The revisions build on comments received during the consultation, and further discussions with stakeholders including the Financial Services Authority and expert advisory bodies. They should ensure that the proposed schemes can be commercially attractive.

HM Treasury now invites written technical comments on these regulations until 3rd September. The Government will then take these comments into account in its formal response to the Consultation exercise and will also be reflected in the final regulations to be laid in Parliament.

Revisions to these regulations will continue in response to comments received from industry experts. The ongoing reviews will, in particular, focus on the provisions in relation to insolvency set out in the schedules of the revised regulations.

In conjunction with this, HMRC are now issuing three sets of draft tax regulations for technical comment. The Regulations aim to implement the tax policy as set out in Chapter 4 of the consultation document after taking into account responses received to the consultation."

HMRC's draft regulations can be found at

CGT and Corporation Tax:

These draft regulations make provision in relation to the capital gains tax treatment of investors ("participants") in collective investment schemes. The provisions made in the draft instrument fall into 3 categories-

  • provisions in relation to tax transparent funds (regulations 3 to 7 and 15);
  • provisions in relation to exchanges, mergers and schemes of reconstruction of collective investment schemes (regulations 8 to 13); and
  • consequential amendments to secondary legislation (regulation 14).

Stamp Duty Reserve Tax:

These draft regulations amend the stamp duty and stamp duty reserve tax legislation to provide exemptions for certain transactions relating to certain collective investment schemes (authorised contractual schemes).


These draft regulations amend the VAT exemption in VATA Sch9 group 5 to include authorised contractual schemes.

4.6. Cross border loss relief

In October 2011 M&S succeeded at the Court of Appeal (EWCA Civ 1156) on four of the five issues subject to appeal on the availability and quantification of cross border group loss relief in respect of losses incurred by M&S plc's subsidiaries in Germany and Belgium. Based on that decision:

  • The time at which the 'no possibilities' test should be applied to determine whether it would be unlawful to preclude cross border loss relief is at the date of the claim (as M&S contended), not the end of the accounting period in which the loss crystallised (as HMRC contended).
  • Sequential and cumulative claims can be made by the same company for the same losses of the same surrendering company of the same accounting period.
  • If a company has some losses which it can utilise and others which it cannot, the no possibilities test does not preclude the transfer of that proportion of the losses which it has no possibility of using.
  • The principle of effectiveness does not permit M&S to make fresh pay & file claims, when at the time M&S made those claims there was no means of knowing or foreseeing the test established by the ECJ.
  • The method for computing the losses is to:

    1. Identify the taxable losses under the foreign country rules.
    2. Identify those losses available to be used against any subsequently earned profits in the foreign country on a 'first in first out' basis.
    3. Identify the figure to which UK law can be applied by removing any adjustments to the foreign losses required by the foreign country rules in arriving at the taxable loss in (i).
    4. Apply the UK rules to the result at (iii) to arrive at an equivalent UK loss.
    5. Reduce the amount at (iv) by the losses identified at (ii) to determine the amount available for group relief in the UK.

Earlier in 2005 the M&S decision at the ECJ (Case C-446/03, decided before twelve judges at the Grand Chamber) considered that:

  • To give companies the option to have their losses taken into account in the Member state in which they are established, or in another Member state, would significantly jeopardise the balanced allocation of the power to impose taxes between Member states.
  • Member states must be able to prevent the danger that losses can be used twice (i.e. once in the parent company's state and once in the subsidiary member's state).

It decided the restriction on cross border loss relief in the UK rules did not meet these rules where:

  • The non-resident subsidiary has exhausted the possibilities available for using the losses for the current and previous accounting periods in its Member state of residence; and
  • There is no possibility for the foreign subsidiary's losses to be taken into account in the State of residence for future periods either by the subsidiary itself or by a third party.

There have been several recent developments concerning this case which are worthy of note.

The Court of Appeal decision mentioned above is to be appealed at the Supreme Court, with the hearing scheduled for 10-12 June 2013. The questions to be considered are:

  • When should the no possibilities test be applied – the date of claim or the day after the end of the accounting period of loss?
  • Is it possible to re-issue claims for CTSA years (i.e. to withdraw and replace a group relief claim)? HMRC contend it is not possible to do this in respect of foreign losses, whereas M&S contend it should be, as it is possible to do this in a purely domestic situation.
  • What is 'a possibility' of using a loss?
  • Is a taxpayer entitled under EU law to reissue claims where conditions for making the claims were not known until after the time period expired for the accounting periods concerned?
  • How should the losses available for group relief be computed?

The basis on which the no possibilities test was developed by the ECJ in M&S has been called into question in the case of Philips (case C-18/11) and in the Advocate General's opinion in the case of A Oy (case C-123/11).

In the Philips case (heard in front of four judges at the fourth chamber of CJEU) it was held that the potential double use of losses (losses of a UK permanent establishment could be used by consortium relief against profits of a UK resident company, and also used by the company with the loss making UK branch against its profits generated in the Netherlands) should not affect a member state's power to impose taxes on economic activity in its territory. This was because whether the UK permanent establishment losses could be utilised in the Netherlands or not, did not affect the UK's ability to tax profits that might arise in that permanent establishment. However this case concerned the claim to use losses arising in the UK against profits arising in the UK.

The opinion in the case of A Oy commented that the basis of the M&S decision was only relevant in the context of a national measure where the prevention of the double use of losses is recognised as an independent justification. It also commented that if the justification for a tax measure is based on the allocation of taxing powers among the Member States alone, the development of EU case-law means the M&S exception can no longer be applied. The case concerned the availability of loss relief for a Finnish company as a result of a merger with its loss making Swedish subsidiary (i.e. the use of a foreign loss in the parent company's home jurisdiction). The interim conclusion of the Advocate General was that the restrictive Finnish measure (not permitting the use of the Swedish loss in this situation) was justified. The full judgment in the A Oy case has yet to be published.

We will have to wait to see whether the comments in relation to the M&S case by Advocate General Kokott in both the Philips and A Oy cases have any wider application (potentially influencing the UK Supreme Court's further deliberations). However it would seem surprising if the CJEU changed its view at this stage, particularly bearing in mind that on 27 September 2012 the EU announced it had referred the UK to the EU Court of Justice for failing to properly implement the ECJ's 2005 "Marks & Spencer" ruling.

4.7. Group loss relief and the US/UK double tax treaty

The Court of Appeal has confirmed the decision given at the Upper Tier Tribunal that group relief was available in 1994 to UK subsidiaries of a US parent through the use of the UK/US double tax treaty. As at the Upper Tribunal, the Court of Appeal rejected HMRC's arguments based around comments made in the case of Boake Allen ([2007] UKHL 25).

Since 2000 group relief has been available between two UK resident subsidiaries of a common parent even if the parent is resident in the USA. Previously it was not possible to establish the group relationship for group relief purposes through an overseas parent.

4.8. Tax treatment of financing costs and income

HMRC has issued draft statutory instruments for comment by 16 November 2012 concerning the tax treatment of financing costs and income (debt cap rules).

One instrument sets out circumstances excluded from the anti-avoidance provisions of chapter six of TIOPA part 7. The excluded schemes are:

Regarding manipulation of the gateway rules in chapter 2:

  • repayment of relevant liability;
  • release of relevant liability;
  • transfer to group treasury company;
  • liability owed to UK group treasury company.

Regarding manipulation of the rules in chapters 3 & 4 (disallowance of deductions and exemption of financing income):

  • repayment of finance arrangement;
  • release from finance arrangement;
  • transfer to group treasury company;
  • liability owed to UK group treasury company;
  • transfer to companies with net financing deduction or net financing income that is small.

However schemes cannot be excluded schemes if the, or a, main purpose for entering into them is to secure a tax advantage, or the scheme is a 'notifiable' arrangement.

The other instrument sets out circumstances when there is a change in the way in which the 'available amount' is calculated where there is a mismatch in the amount of a liability disclosed in the worldwide group financial statements and the way the liability is disclosed in the accounts of the UK group member. It will apply to accounting periods commencing on or after 1 January 2012 and concerns the following situations:

  • Where a member of a worldwide group is a member of a partnership which has made a loan to a member of the group or receives income in relation to finances leases or debt factoring relating to a member of the group;
  • Where there are mismatches in respect of finance charges arising in relation to certain finance arrangements in connection with a contribution paid by an employer under a registered pension scheme in respect of which the employer is entitled to relief under Chapter 4 of Part 4 of the Finance Act 2004.

5. VAT

5.1. VAT and the single market

HMRC has updated Notice 725 VAT and the single market. This has been updated, amongst other things, for the parts in section 4 referring to checking an EC customer's VAT registration number. Extracts from the updated note provide the following:

4.1 Article 28C(A) of the EC Sixth Directive (77/388/EEC) [this is now article 138(1) of the VAT Directive 2006/112] states that Member States shall exempt certain supplies subject to conditions laid down for the purpose of ensuring the correct and straightforward application of such exemptions (zero-rating) and preventing any evasion, avoidance or abuse. The UK uses the term 'zero-rating' rather than 'exemption' used in EC law to avoid confusion with the use of exemption elsewhere in UK law.

4.2 The UK VAT law relating to the zero-rating of removals of goods for VAT purposes can be found in the Value Added Tax Act 1994 sections 30(8), 30(10) and regulation 134 of the Value Added Tax Regulations 1995.

4.3 A supply from the UK to a customer in another EC Member State is liable to the zero rate where:

  • you obtain and show on your VAT sales invoice your customer's EC VAT registration number, including the 2-letter country prefix code; and
  • the goods are sent or transported out of the UK to a destination in another EC Member State; and
  • you obtain and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out at paragraph 4.4.

However a recent CJEU case [case C-587/10, Vogtländische Straßen-, Tief- und Rohrleitungsbau GmbH Rodewisch (VSTR) considered the application of these rules by Germany which has similar requirements.∂=1&cid=517986

In this case there was a supply by a German company (VSTR) to a US company (Atlantic) who on-sold the goods (prior to transport of the goods) to a Finnish company. The US company directed VSTR to send the goods directly to the Finnish company and gave the VAT registration number of the Finnish company as evidence that the ultimate customer was registered for VAT in the EU. The German authorities asked for guidance on the following points:

  1. Does [the Sixth Directive] allow the Member States to accept an intra-Community supply as tax-exempt only where the taxable person provides evidence in the accounts of the VAT identification number of the person acquiring the goods?
  2. Is it relevant to the answer to that question:

    • that the person acquiring the goods was a trader with its seat in a third State, which, although it dispatched the object of the supply in the course of a chain transaction from one Member State to another Member State, is not registered for VAT purposes in any Member State; and
    • whether the taxable person has proved that the person acquiring the goods submitted a tax return concerning the intra-Community acquisition?'

The CJEU concluded that the relevant provisions of the VAT Directive should be interpreted so " not precluding the tax authority of a Member State from making the exemption from VAT of an intra-Community supply subject to the provision by the supplier of the VAT identification number of the person acquiring the goods, with the proviso that the grant of that exemption should not be refused on the sole ground that that requirement was not fulfilled where the supplier, acting in good faith and having taken all the measures which can reasonably be required of him, is unable to provide that identification number but provides other information which is such as to demonstrate sufficiently that the person acquiring the goods is a taxable person acting as such in the transaction at issue."

It therefore seems there are circumstances where a movement of goods within the EU via a third party can qualify for "zero rating" where the third party has no VAT number. This CJEU decision seems to indicate that VAT notice 725 will have to be further updated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Richard Mannion
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Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.