UK: Deloitte Weekly VAT News - Week ended 23 June 2006

Retailers – higher VAT costs for loyalty card schemes?

The High Court has decided that Loyalty Management UK Ltd (the operators of the Nectar loyalty card) cannot reclaim the VAT on reward goods and services. The decision overturns the conclusion reached by the Tribunal and means that operators of loyalty cards will be facing higher VAT costs, making the loyalty card schemes more expensive to operate.

There could be an opportunity for businesses with operations in Italy to claim refunds of tax incurred on cars and car maintenance (and, perhaps, some other purchases) if the ECJ decides that the Italian restrictions on VAT recovery contravene EU law. Earlier this year, the ECJ heard the case of Stradasfalti concerning the Italian restriction on recovering VAT on the purchase and maintenance of cars. The Advocate-General in the case has now issued her opinion, suggesting that the Italian rules which prevent the recovery of VAT on cars and car maintenance are contrary to EU law. If the ECJ follows this opinion, the case might also have wider implications in relation to mobile phone, hotel, bar and restaurant costs where Italy operates rules similar to those being challenged in the Stradasfalti case.

An attempt by HMRC to prevent a company intended for use in a joint venture project from being included in a VAT group has been roundly rejected by the Tribunal. In the case of Prudential Assurance Company Limited, the Tribunal decided that HMRC "could not reasonably have been satisfied that there were grounds for refusing the application, and therefore the refusal of grouping was irrational."

The Court of Appeal has referred questions to the ECJ about the entitlement of businesses to reclaim VAT overpaid in error and to receive compound interest on any repayments to which they are entitled. The issue arises in the BT case, where an accounting error led to an overpayment of VAT that BT is seeking to recover from HMRC.

Some businesses that incur VAT in Switzerland but do not make any supplies subject to VAT there may be able to reclaim some or all of the VAT incurred. Switzerland operates a refund procedure similar to the EU’s Eighth and Thirteenth Directive processes that allows foreign businesses that are registered for VAT in their home country to reclaim Swiss VAT through a locally appointed VAT representative.

We hear that HMRC are taking longer to process applications for VAT registrations. According to reports, only 65% of applications filed in March and April were dealt with within the 21 day target period. The delays are being blamed on attempts to identify fraudulent applications to register.

This Bulletin is prepared by Deloitte & Touche LLP, a limited liability partnership. Weekly VAT News is designed to keep readers abreast of current developments, but it is a general guide only and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains, or for any errors or omissions.

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