© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
A1. Nature of VAT
VAT as a tax on consumption
VAT is a territorial tax
- No supply where government, acting in common interest, compensated farmer for ceasing milk production because no benefit/consumption
"[20] In a case such as the present one, there is no consumption as envisaged in the Community VAT system.
[21] As the Advocate General notes at point 27 of his Opinion, by compensating farmers who undertake to cease their milk production, the Community does not acquire goods or services for its own use but acts in the common interest of promoting the proper functioning of the Community milk market.
[22] In those circumstances, the undertaking given by a farmer that he will discontinue his milk production does not entail either for the Community or for the competent national authorities any benefit which would enable them to be considered consumers of a service. The undertaking in question does not therefore constitute a supply of services within the meaning of Article 6(1) of the Directive." (Mohr C-215/94)
- General objective is for VAT to be paid in the Member State of final consumption
"[26] First of all, it should be noted that under Directive 91/680, intended to achieve the elimination of fiscal barriers between Member States, the Community legislature definitively abolished the imposition of tax on imports and the remission of tax on exports in trade between Member States with effect from 1 January 1993 (second and third recitals in the preamble to that directive).
[27] However, the Community legislature stated that conditions could not be brought about by that date that would permit the principle of the taxation in the Member State of origin of goods and services supplied to be implemented without prejudicing, as regards Community trade between taxable persons, the principle that tax revenue from the imposition of tax at the final consumption stage should accrue to the benefit of the Member State in which the final consumption takes place. It therefore introduced, under Title XVIa of the Sixth Directive, transitional arrangements for the taxation of trade between Member States, based on a new chargeable event, namely the intra-Community acquisition of goods (seventh to tenth recitals in the preamble to Directive 91/680)." (EMAG C-245/04)
"[22]...(1) VAT is a territorial tax, which requires the PVD to provide a clear demarcation of sovereignty of the member states which ensures that supplies are taxed where final consumption occurs (EMAG Handel Eder OHG v Finanzlandesdirektion fiir Karnten C-245/04 (EMAG) paragraph 32)." (Procurement International Limited v. HMRC [2024] UKFTT 949 (TC), Judge Brown KC)
- VAT indirectly contributes to EU resources
"[32] First, that tax is collected by the taxable persons and only subsequently paid by them to the Member States. Second, in accordance with Article 1 of Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax (OJ 1989 L 155, p. 9), the European Union’s own resources based on VAT are not made up of simply of a percentage of the revenue from that tax actually collected, but result from the application of a uniform rate to the VAT assessment base of the Member States, itself calculated in accordance with Article 3 of that regulation and subject to various adjustments laid down in the provisions of that regulation." (Napfény-Toll C-615/21)
Suppliers act as tax collectors
"[21] In this respect, it must be noted that, in the field of VAT, suppliers act as tax collectors for the State and in the interest of the public exchequer (see Case C-10/92 Balocchi [1993] ECR I-5105, paragraph 25). Those suppliers are liable to payment of VAT even though VAT, as a tax on consumption, is ultimately borne by the final consumer (see Case C-475/03 Banca popolare di Cremona [2006] ECR I-9373, paragraphs 22 and 28)." (Netto Supermarket C-271/06)
- Sharing of risk between supplier and tax authorities must be consistent with proportionality
"[22] This is why the objective of preventing tax evasion referred to in Article 15 of the Sixth Directive sometimes justifies stringent requirements as regards suppliers’ obligations. However, any sharing of the risk between the supplier and the tax authorities, following fraud committed by a third party, must be compatible with the principle of proportionality (Teleos and Others, paragraph 58)." (Netto Supermarket C-271/06)
Comparison to customs law
- Interest free loan from HMRC
"[58] The obligation on a trader is to submit payment no later than the statutory due date. There is a public interest in the timely payment of taxes. The scheme of collection of VAT involves a trader having received the amount of tax which s/he must subsequently pay over to HMRC. In C & E Comrs v Salevon Ltd; C & E Comrs v Harris & Anor [1989] STC 907, Nolan J said this (in the context of the Finance Act 1985):
"...There is nothing in law to prevent him from mixing this money with the rest of the funds of his business and using it for normal business expenses (including the payment of input tax), and no doubt he has every commercial incentive to do so...But by using it in his business he puts it at risk. If by doing so he loses it, and so cannot hand it over to the commissioners when the date of payment arrives, he will normally be hard put to invoke s 19(6)(b)."
[59] We are satisfied that the tax which is collected by a trader represents something similar to an interest-free loan from HMRC." (Lonsdale Property Development Ltd v. HMRC [2025] UKFTT 1397 (TC), Judge Manyarara)
- Innocent supplier may be protected from consequences of fraud where customs trader would not
"[28] Moreover, it must be added that, contrary to what has been submitted by the German Government, the case-law of the Court in the field of customs law – according to which an operator who cannot provide evidence that the conditions necessary for the grant of remission from export or import duties are satisfied must bear the consequences arising from that inability, despite having acted in good faith – cannot be relied on in a situation such as that in the case in the main proceedings, in order to call in question the foregoing considerations. As the Advocate General has noted in point 53 of his Opinion, that case-law cannot be transposed to the specific situation of a taxable person under the common system of VAT put in place by the Sixth Directive, because of the differences in structure, object and purpose between such a system and the Community regime on the levying of customs duties." (Netto Supermarket C-271/06)