Wellcome Trust Limited[1]. At first sight, utter madness.  What next, individuals having to reverse charge VAT if they watch a pay per view channel like HBO[2]?   Letter to the Telegraph from Disgusted of Tunbridge Wells.

Welcome (no pun intended) to the bizarre and crazy world of the non-taxable legal person[3].  Should be an easy case; says they are non-taxable, not acting as such either (been there before – Case C-155/94).  But no.    To understand the answer, you need to understand the history,

The Historical Problem

1          The non-taxable legal person was a fudge to smooth over the old reverse charge mechanism and the member states’ inconsistency of treatment as to who was a taxable person, which in turn falls to the question of non-business activity, which in EU VAT speak is an activity which does not constitute an economic activity[4].

2          For an example of the problem, the UK gives local authorities VAT numbers.  Not many other member states do – indeed s.33 to 33E VATA are not providing any input VAT recovery in accordance with the VAT Directive.  They are simply a mechanism of reimbursement which allows the Treasury to give funding for VAT included in costs borne by s.33 bodies.  IT IS NOT VAT.  The Commission, HMRC and many others agree.  It might use VAT methodology, it might use a VAT return, but the amount refunded to section 33 bodies is not recovery of input tax, except where taxable supplies are actually made, e.g. sales from the BBC Gift Shop.  However, the UK still gives them a VAT number.

3          Now if member state B, treats a non taxable legal person as a taxable person, but member state F does not, then without a reverse charge, VAT could go missing.  Not so much a single market but a single colander.

4          If you have a VAT number then you can prima facie buy goods and services from another member state VAT free and only pay VAT in your own country on an acquisition or by reverse charge on a service.   So, if an English local authority wanted some graphic design work done, then if it went to a local supplier it would suffer UK VAT, but if it went to an Irish supplier, it has a VAT number and pays no Irish VAT and could then, not reverse charge it, as per Wellcome Trust’s argument

5          In short, there is a significant inconsistency across the EU on

  • Business vs non-business / economic activity vs non-economic activity
  • The effect this has on the allocation of input tax to business / non-business
  • The effect this has on the residual input tax to be apportioned in a partial exemption method / pro rata
  • Whether these rules on economic activity apply only to the issue of whether a person is a taxable person or whether they apply to other provisions in the PVD[5], e.g. the place of supply rules.

6          The problem in this case was that Wellcome bought in services from outside the EU, which were used for its non-business activity.   It did not charge VAT on its non-business activity, because it was non-business (see Wellcome Trust plc v HMRC Case C-155/94).

7          Accordingly, when it bought those supplies from outside the EU and applied the reverse charge, which is a deemed supply by Wellcome Trust of the same services, then that must also be non-business, first, because of Case C -155/94, and second, because in buying in those supplies “it was [not] acting as [such i.e. a taxable person].

8          And to an English lawyer, this all makes perfect sense.  A non-taxable legal person is the same as an individual, as was said by way of analogy by the ECJ in Case C- 155/94.

The history, the whole history, and nothing but the history

9          The failure to achieve any degree of consistency in the matters I referred to above has led to many cases, especially in the UK where the understanding of business / non-business took some time to develop.

10        Simplistically, if you get something for nothing because it is funded by the state or a charity, then that is non-business activity.  For example, education for under 19s, the NHS, bin collections etc.   If you pay for it, then chances are it is a business activity, even if subsidised, for example, access to leisure centres.   Although there are exceptions, for example, passport fees, planning application fees etc., and where the payment is a tax, like the BBC licence fee.

11        Stephen Oliver QC’s judgement in the Halifax[6] case took “non-business activity” to an absurd level, an analysis which was finally rejected by the CJEU in paragraphs 46 to 52 of its judgment[7]

12        A similar issue arose under the capital goods scheme rules.  These initially stated that even if there was non-business use, input tax on a capital item could be recovered in the initial period ignoring non-business use.   This obviously gave such businesses a cashflow advantage over ten or twenty years.  This was confirmed in the case of Lennartz[8], pointing out that Article 20(2) of what was then the Sixth VAT Directive, provided for the VAT to be clawed back over the  five, ten or twenty year period where the use was not a taxable use.  This was reversed at both EU level and UK level[9].

13        As I said, it took a while for taxpayers and tax authorities to catch up.

How to solve the confusion

14        What do you do with the tax liability of a supply when the status of the person you are supplying, and the use to which your supply is put, is unclear and inconsistent with your national practice?

15        If you were billing an individual, it would be clearer and in respect of a service supplied to an individual in the EU but in another member state, then you would charge your local VAT.

16        If you supply an EU VAT registered business, then you would not charge VAT.

17        But what do you do if you supply a taxable person who is behaving like an individual (as Wellcome was)?

18        The simplest thing to do is not to require the supplier to send a VAT questionnaire to all of its customers and ask.  It is simpler to shove the liability to account for VAT to the customer, who, one would hope, does know what its VAT status is.   Hence, an EU invoice would tell the customer that you are the one responsible for accounting for VAT pursuant to Article 44 PVD.

19        Wellcome Trust would then reverse charge itself VAT, there would be no failure in the VAT system overall where VAT was not accounted for, the recovery would be blocked as non-business input tax, Wellcome Trust bears the cost, and all is well in the VAT World.

20        BUT, the invoices in question here were from OUTSIDE the EU.  Outside the EU, is different.  Except that it is not.   If you allow services to be supplied into the EU without a VAT charge, then you are disadvantaging EU suppliers.   Where consumers are importing services, this led to the development of MOSS (Mini One Stop Shop[10]).    But for B2B supplies both within, and into, the EU, the issue was resolved by the creation of the non-taxable legal person (who is taxable-ish)[11].

It’s economics, stupid[12]

21        If Wellcome Trust had hired a UK supplier to provide the services in question, there would be UK VAT.

22        If Wellcome Trust had hired a non-UK EU supplier to provide the services in question, there should be VAT, but whose?  And for the reasons set out above, it has to be the customer’s member state – so there would be UK VAT.

23        So, if Wellcome Trust buys those services from outside the EU, and they are not online services where there would be UK VAT charged by the non-EU supplier, then there should be, and there is, UK VAT, and if it is attributable to a non-economic activity, then that VAT is not recoverable.

24        As the Advocate General said, Wellcome Trust’s claim “fails to take account of the particular context in which the words occur and the objective pursued by the rules of which they form part[13], and that context includes Article 43 which states

For the purpose of applying the rules concerning the place of supply of services: 

  • a taxable person who also carries out activities or transactions that are not considered to be taxable supplies of goods or services in accordance with Article 2(1) shall be regarded as a taxable person in respect of all services rendered to him;
  • a non-taxable legal person who is identified for VAT purposes shall be regarded as a taxable person

25        Article 43 sets the context by in effect deeming a non-taxable legal person to be a taxable person for the purposes of the place of supply rules where that person has a VAT identifier (VAT number to you and me).

26        Wellcome Trust also argued fiscal neutrality of the Rank[14] kind, that is that similar transactions should be treated in the same way.  But as you will gather from paragraphs 23, 24 and 25 above, the Advocate General’s answer restores fiscal neutrality, rather than breaches it.

27        And should the court require any further comfort then it should be able to find this in the Fourth Recital of the PVD[15].

28        But who knows?  The Court might disagree.


[1] HMRC v Wellcome Trust Limited, Opinion of Advocate General Hogan Case C-459/19

[2] No, HBO will do that under the regime for online traders.

[3] Has anyone ever met anyone who said that they work for a “non-taxable legal person”?   Perhaps at a VAT Conference.

[4] Generally, I will use English English, followed by the EU English.  UK readers will be familiar with English English, EU readers with EU English, e.g. business = economic activity, partial exemption = pro rata etc.

[5] Council Directive 2001/112 EC, on the Common System of VAT

[6] Halifax Plc; Country Wide Property Investments Limited; Leeds Permanent Development Services Limited v HMRC Trib 17214

[7] Ibid [2006] STC 919 CJEU

[8] Lennartz v Finanzamt München III Case C-97/90 [1995] STC 514

[9] Value Added Tax Regulations Part 15A

[10] I swear that all bureaucrats, whether in the UK, the EU or elsewhere, refuse to launch an idea or paper until a snappy acronym has been found.

[11] Please note that all VAT terminology is back to front.  Being exempt from the tax is bad, being taxable is good; those who bear the tax do not pay it, and those that pay it do not bear it; you collect cash in on your outputs, and pay it out on your inputs; except when dealing with HMRC where you pay cash out to them on your outputs and receive cash in from them on your inputs; it is almost as complicated as the rules of cricket where the batsman goes out when he is in, and in when he is out.

[12] With apologies to the Bill Clinton campaign team of 1992 and their catchphrase,  “The economy , stupid”

[13] Para 56

[14] Rank Group plc v Revenue and Customs Commissioners (Joined Cases C-259/10 and C-260/10) CJEU [2012] STC 23

[15] (4)     The attainment of the objective of establishing an internal market presupposes the application in Member States of legislation on turnover taxes that does not distort conditions of competition or hinder the free movement of goods and services. It is therefore necessary to achieve such harmonisation of legislation on turnover taxes by means of a system of value added tax (VAT), such as will eliminate, as far as possible, factors which may distort conditions of competition, whether at national or Community level.

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