3 November 2014

The issue in the first tier tribunal decision in Lok’n’Store is the apportionment of input tax where the taxable supplies are of self-storage and the exempt supplies are of insurance for the stored goods. The insurance is profitable but does not consume much cost. HMRC took the view that a values-based method is more fair and reasonable than a floor space method, but lost at the tribunal.

HMRC has now announced that no further appeal will be made in the Lok’n’Store case, but that they are not changing their policy. HMRC will continue to take the view that floor space methods do not generally give a fair and reasonable result in terms of input tax recovery.

EU – Fixed Establishment by Virtue of Associate’s Resources
The Court of Justice of the European Union (CJEU) has ruled in Welmory sp.z.o.o. Case C-605/12 that a fixed establishment for VAT purposes does not need to have the permanent presence of its own human and technical resources that has been assumed. This extends the principle arising from the earlier case of DFDS A/S where the subsidiary created a fixed establishment of the parent, but only because it was acting as an “auxiliary organ” of that parent.
The facts in this case are that a Cypriot company supplied services to customers in Poland, and used the resources of its associate in Poland to do so. The Polish associate charged the Cypriot company for those services, but the charge was seen as subject to Polish VAT as it was received by a fixed establishment of the Cypriot company in Poland.
It is a fine dividing line that now has to be applied, and it is possible the Cypriot tax authorities will seek to apply Cypriot VAT on a reverse charge basis if they do not recognise the Polish fixed establishment. In terms of planning, the judgment might be of assistance, particularly if it can be used to include a company in a VAT group – and subject to the tax authorities’ reaction to the judgment in Skandia America Corporation covered last month.