In KPC Herning (C-71/18), the taxpayer, a property developer and construction company, entered into an arrangement with a low-rent housing body for the creation of social housing units on land belonging to the Port of Odense, Denmark. The taxpayer first purchased the land (on which a fully functioning warehouse stood) from the Port, subject to a condition that it was to enter into a contract with a housing body for the purpose of creating social housing. The taxpayer then sold the land and buildings to a housing body subject to an overall contractual framework under which the housing body was to carry out the partial demolition of the warehouse and the taxpayer was obliged to supply the completed residential building. The question was whether the transfer of the land on which the existing building stood, but which was to be largely demolished and replaced with a new building incorporating elements of the original, amounted to a transfer of building land. The Danish government argued that by virtue of Article 12(3) of the PVD, Member States are entitled to consider a plot of land to be building land in such circumstances, the sale of which is mandatorily standard rated.

The Court said that the factors to be taken into account were, as at the date of the sale of the land, the state of advancement of the demolition or transformation works, the use of the property on that date and undertakings to carry out demolition work to enable future construction. The Court found that neither sale amounted to a sale of building land. Agreeing with the Advocate General, the Court said that the two transactions could not be regarded as forming a single package and had to be assessed separately. The first sale was, in the view of the Court, a distinct and independent transaction in which neither party was responsible for demolition. The second sale was also (subject to verification by the Danish Court) a transaction independent of the contract for the demolition of the warehouse and did not form a single economic service with the demolition. The mere intention to demolish a building was not sufficient to convert each sale of land (with a fully functional building) to a sale of building land.

DLA Piper Comment: This decision aligns with our understanding that building land is mandatorily standard-rated, where it physically meets that definition. Intention is not enough. The Court helpfully sets out the key factors in determining if the supply is of building land.

In Altic SIA (C-329/18) the taxpayer was fraudulently sold rapeseed oil by two fictitious companies. The Latvian tax authority denied the taxpayer input VAT recovery on the basis that the taxpayer would have become suspicious about the fraud of the supplier had it checked the food regulation registry as required under EU food safety law.

The Court said that it was for the tax authority to establish that the taxable person knew or ought to have known that the relevant transaction was connected with fraud. The Court noted that although verification of registration for food regulatory law purposes ensures that the supplier participates legally in the food chain, such registration does not rule out its economic activity being fictitious nor does the absence of such registration establish that the supplier is fictitious. For that reason, the Court agreed with the Advocate General that any breach of the relevant food safety law provisions cannot in itself and automatically justify the refusal to allow the taxable person to recover input tax. Non-compliance with those obligations may, however, constitute one element among others which, taken together and in a consistent manner, tends to show that the taxable person knew or should have known that they were involved in a transaction involving VAT fraud. Where a tax authority finds that a taxpayer has been issued with an invoice by someone involved in fraud and is trying to show that the taxpayer “knew or should have known” about the fraud, it cannot compel the taxpayer to carry out checks which are not their responsibility.

DLA Piper Comment: This case sets out some limits of enquiry which a reasonable purchaser is reasonably expected to take when seeking to justify a claim for input tax. Where the supplier is fraudulent, sensible VAT checks are critical, but a failure to make legal checks, which may be required for regulatory purposes, will not be fatal to the buyer's input tax reclaim.

In Cardpoint (C-42/18), the Court agreed with the Advocate General (see our May alert) that the scope of the exemption for transactions concerning payments and transfers does not extend to services connected with the operation of an ATM (or cashpoint machine). The taxpayer provided services to banks consisting of installing ATMs, equipping them with computer software and hardware and ensuring their smooth running, including by transporting banknotes to replenish the ATMs. When cash was withdrawn, the taxpayer verified bank card data, requested the bank's authorisation, dispensed the cash (if authorised) and registered the withdrawal for the bank. The Court observed that these were only functional services, and did not extend to the approval or otherwise of transactions. Rather, the taxpayer procured that the relevant data be passed, through a chain of intermediaries, between the financial institutions involved. The cash used in the ATM belonged to the relevant bank and not to Cardpoint. To constitute a payment transaction within the meaning of the exemption, the services had to have the effect of transferring funds, and effect legal and financial change. The services in question fell short of this and, therefore, could not qualify for exemption.

DLA Piper Comment: This is another case on the scope of the financial services exemption for payment services. It highlights yet again that technical and administrative services relating to payment transfers are not exempt. To be exempt the service must actually involve a transfer of the funds.

In the joined cases of C GmbH & Co KG (C-573/18) and C-eG (C-574/18), the Court looked at arrangements between fruit and vegetable cooperatives and their farmer members. The cooperatives (or producer organisations) were established under an EU regulation and bought produce from the farmers before selling it on. The cooperatives held ring-fenced funds made up of contributions received from the cooperative members and EU grants. The cooperatives made purchases of capital equipment (on which they were charged VAT) and resold the equipment to the members but only invoiced the members for the proportion of the cost not covered by the operational fund (between 50% and 75%) which effectively subsidised the resale prices. The cooperatives deducted in full the input VAT paid on suppliers' invoices and applied output VAT solely on the amounts invoiced to producers. The German referring court asked whether the consideration for VAT purposes of the on-supply should include the deemed value of the farmer's undertaking to sell its produce via the cooperative and whether the subsidy received from the operational fund should be deemed to be part of the consideration. The Court held that in order for a subsidy to form part of the consideration, the subsidy must be directly linked to the price of the transaction; the subsidy must first be paid specifically to the subsidised operator to enable it to supply the goods or services at a reduced price. This conforms to the principle of fiscal neutrality and meant that on the facts of this case, the subsidy must be regarded as directly linked to the price of the supply to the farmer and therefore formed part of the VATable consideration.

DLA Piper Comment: The grant monies were clearly linked to the supplies of the equipment, as they were calculated by reference to the cost for which the supplier was out of pocket. It is a reminder to be wary when deciding upon the proper consideration for VAT purposes, to take account of all the relevant payments (in cash or in kind) relating to the sale.

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