The Court of Justice (CJEU) of the European Union brings an end to Credit Lyonnais’ 25 year battle in a case involving a method of calculating the ‘deductible proportion’ under a partial exemption formula. The First-tier Tax Tribunal (FTT) also issues its decision in the TLLC ‘VAT on share sales’ case. A resounding defeat for the taxpayer but, in the circumstances, a further appeal seems likely.
Credit Lyonnais (case C-388/11)
Quite why it should take almost a quarter of a century to resolve what is, in essence, a fairly simple matter is puzzling! This case relates to the tax year 1988 and concerns the formula to be used by the French bank in order to determine the deductible proportion of its ‘residual’ input tax. (In other words, a partial exemption method). Credit Lyonnais contended that it should be able to include turnover generated by bank branches situated in other Member States of the European Union (EU) and by branches situated outside the EU. The rationale for this contention was that, as branches, they are part and parcel of a single taxable person.
Unfortunately, the Court of Justice has said that, even though the principal establishment and the branches should be regarded as a single taxable person, they are each subject to the rules laid down in each location. Indeed, the Court stated that a taxpayer is subject, in addition to the system which applies in the State of its principal establishment, to as many national systems of deduction as there are Member States in which it has fixed establishments.
Comment – a disappointing outcome for Credit Lyonnais. The actual numbers at stake are not known but the prospect of success must have been very worthwhile to the bank for it to pursue its case all the way to the CJEU over so many years.
The FTT has issued its voluminous decision (50 pages) in this case which concerned whether the VAT incurred on professional fees relating to the sale of shares held in a number of subsidiaries could be reclaimed. The FTT’s conclusion was that the sales of shares formed part of an economic activity and that, as such, the sales constituted exempt supplies. Consequently, the input supplies (the professional services) were directly and immediately linked to the exempt sale of the shares. The input VAT was, therefore, not recoverable.
Comment – Given the amount of VAT at stake in this case, an appeal to the Upper Tribunal (and beyond if necessary) cannot be ruled out. It seems that HMRC managed to persuade the FTT that the holding of the shares by the holding company was something more than a mere passive investment. As such, the sale of the shares was regarded as an economic activity and not outside the scope of VAT.