• Service: Tax, Global Indirect Tax, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 7/22/2013

United Kingdom - Identifying recipient of VAT-able supply, CJEU judgment 

July 22: The Court of Justice of the European Union (CJEU) concluded that economic and commercial realities are fundamental factors in applying a common system of value added tax (VAT), and that a substance-over-form approach may be more decisive than the actual “contractual terms” in identifying the recipient of a supply of services. HM Revenue & Customs v. Newey, C-653/11 (20 July 2013)

Read the CJEU judgment.


A loan broker in the United Kingdom supplied VAT-exempt broking services (i.e., thus not entitled to any input VAT recovery right) within the UK, but also received advertising services for business promotion that were subject to VAT in the UK.

The VAT paid on the advertising services was not recoverable.

To address the non-recoverable VAT burden, the taxpayer incorporated an offshore broking company based and managed in Jersey. With this, the broking agreements were concluded between borrowers and the Jersey entity, and the broking commissions were paid directly to Jersey (and not to the taxpayer in the UK).

The Jersey entity purchased advertising services, which were provided by a UK-based agency to a Jersey-based agency which in turn provided the advertising services. The taxpayer was in no contractual relationship with the Jersey-based agency, but was entitled to discuss the content of the advertisements with the UK-based agency. Consequently, no VAT was charged on the advertising services received by the Jersey entity.

The UK tax authorities challenged this structure arguing that the taxpayer had avoided paying VAT on taxable advertising services by going offshore.

CJEU judgment

The CJEU found that preventing possible tax evasion, avoidance, and abuse is an objective recognized and encouraged by the Sixth Directive (i.e., wholly artificial arrangements that do not reflect economic reality and are set up with the sole aim of obtaining a tax advantage).

As a consequence, contractual terms may be disregarded in certain cases, in particular, when it becomes apparent that they do not reflect the economic and commercial reality, but constitute a wholly artificial arrangement that does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

The CJEU left it to the referring court to determine whether the contracts reflected the economic reality.

KPMG observation

The judgment reinforces the position of the tax authorities in addressing tax fraud and abusive practice.

For businesses, the judgment can be viewed as emphasizing the importance of having well structured documentation reflecting the economic reality, and as cautioning again against the temptation to use commercial agreements to artificially decrease the VAT impact.

Read a July 2013 report [PDF 88 KB] prepared by the KPMG member firm in Luxembourg: Ocean Finance (C-653/11): Economic reality prevails artificial contractual terms

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