Law Firms and Indirect Taxes May 2016

Law Firms and

Indirect Taxes

May 2016

Welcome

Welcome to PwC’s May 2016 VAT update for the legal sector. This update captures the key VAT developments for Law Firms from across the PwC VAT Global Law Firm network and reports on the recent UK Supreme Court judgement in the Airtours VAT case.

Table of Contents

1. VAT Legislative Changes 3

2. VAT Case Law 6

1. VAT Legislative Changes

VAT due on intra-branch supplies

Summary

Skandia (C-7/13) has carved out a significant exception to the well-established rule that services which are provided to a branch within a single legal entity cannot be treated as a supply for VAT purposes. Details of this case was reported in the previous VAT update.

Within Skandia it was held that where an EU branch forms part of a VAT group, it should be treated as a separate entity from the rest of the branch network. The implication of this is that services provided by a Non-EU Head Office to its EU branch should be treated as a supply for VAT purposes.

UK Tax Authorities Position

The UK tax authorities (HMRC) have released business briefs 02 (2015), 18 (2015) and 23 (2015) that sets out HMRC’s views on the implications of the EUCJ’s judgement in the Skandia case. These are, in

summary:

 HMRC does not consider it necessary to change the existing UK VAT grouping legislation;  The existing VAT grouping anti-avoidance provisions will remain in place; and

 With effect from 1 January 2016, taxpayers must now apply VAT in the following circumstances:

o services provided by the overseas VAT-grouped establishment to the UK establishment will normally be treated as supplies made in the UK under place of supply rules, and subject to the reverse charge in the UK if taxable. The supply will need to be declared on the UK VAT Return.

o services provided by the UK establishment to the overseas VAT-grouped establishment will normally be treated as supplies made outside the UK under place of supply rules. Therefore they will need to be taken into account in ascertaining input VAT recovery for the UK establishment. If the supplies are reverse charge services, they should be reported on the UK VAT Return and the European Sales Listing of such supplies.

Therefore, an overseas establishment of a UK established entity will be treated as a separate taxable person should the overseas establishment be VAT grouped in a member state that operates VAT grouping provisions similar to those in Sweden (the country considered in Skandia). This is regardless of whether or not the UK entity is a member of a VAT group in the UK.

Under these new rules, if a supply is received by a UK-established branch or head office of a Law Firm from its own EU head office or branch, it may have to account for UK VAT using the reverse charge mechanism, should the EU establishment be a member of a VAT group in one of the following Member States:  Belgium  Czech Republic  Denmark  Estonia  Hungary  Latvia  Slovakia

 Sweden

The position in Germany, Finland, Spain and Cyprus is not clear yet. Belgian Tax Authorities Position

The Belgian tax Authorities have confirmed the application of the Skandia judgment with effect from 1 July 2015 and the rules in Belgium are summarised below:

 services provided by a UK or EU VAT group to the Belgian branch office, becomes subject to Belgian VAT and should be invoiced to the Belgian branch office. The invoice should refer to the reverse charge mechanism. The Belgian branch office has to pay VAT on these amounts by reporting the transactions in the Belgian VAT return,

 services provided by Belgian branch office to a UK or EU VAT group, will be outside the scope of Belgian VAT but will need to be reported in the Belgian VAT return and the European sales listing.

The impact of the Belgian Tax Authorities guidance on the EU judgment is limited to transactions between a UK or EU VAT group and a Belgian branch.

Implications

Law Firms should take steps now, should they not have already done so, to identify if they have a UK or EU VAT Group and if the VAT Group makes transactions with another branch. VAT could be due on such transactions and Tax Authorities could apply penalties and interest for non-compliance.

Land related legal services: potential double taxation?

The place of supply of land related services is considered to be where the land (or immovable property) is located.

Implementing Regulation (EU) 282/2011 Article 31a sets out the type of legal services that can be considered to be in relation to immovable property for the purposes of establishing the place of supply of such services.

Additionally, the EU Commission has published Explanatory Notes to clarify the application of specific provisions of the VAT Implementing Regulation (Council Implementing Regulation (EU) No 1042/2013) dealing with the place of supply of services connected with immovable property.

The updated EU definition on which type of legal services that can be considered to be ‘in connection to immovable property’ contained within the amended Implementing Regulation (EU) 282/2011 only takes legal affect in all EU Member States from 1 January 2017.

However, certain EU Member States such as the UK, already apply the updated definition and in the UK, this was contained in the UK Tax Authorities business brief 22 (2012).

Given that this definition has not been applied yet in all EU Member States, PwC has identified certain transactions where the tax authorities in certain EU Member States apply different place of supply rules for land related services.

As a result of this inconsistent approach by tax authorities, Law Firms must be aware that certain land related services supplied between EU Member States may be subject to double-taxation or, indeed, not subject to tax at all! Where there is potential double taxation, Law Firms need to actively engage with the

German Law Firm German Business Client Real Estate Legal Services UK Real Estate German Law Firm UK Business Client Real Estate Legal Services German Real Estate

Tax Authorities in the respective EU Member States or structure the engagement with the client in a different way so if VAT is due, it is only due once.

For example, land related services provided by a German Law Firm could be subject to double taxation and this is illustrated below.

Double Taxation

Not subject to Tax

Intervention – potential double taxation?

In our previous Law Firm update we discussed the implications of intervention and its application by Tax Authorities in different EU Member States.

In summary, the Tax Authorities in each EU Member State are well aware of the intervention principle and some EU Member States, such as Belgium, have actively applied intervention and compliance is being

German View

• Frankfurt Office’s place of supply in Germany

• German VAT due

• Therefore double taxation occurs

UK View

• Frankfurt Office is the place of supply in the UK

• Requirement to register and charge UK VAT

German Tax Authorities View

• German Law Firm place of supply is in Germany

• German VAT due

• Therefore double taxation occurs

UK Tax Authorities View

• German Law Firm place of supply is in the UK

• Requirement to register and charge UK VAT

UK Tax Authorities View

• German Law Firm place of supply is in Germany

• No UK VAT implications for the German Law Firm

• Outside the scope of UK VAT

German Tax Authorities View

• B2B supply and outside scope of German VAT

• No German VAT implications for the German Law Firm office

closely scrutinised by the Belgian Tax Authorities. However, other EU member states such as Germany and France, the Tax Authorities have yet to enforce compliance but we are aware that they are going to focus on this area. The UK Tax Authorities have not implemented this part of the Directive into UK VAT Legislation and have no intention to do so. The UK Tax Authorities take the view that normal place of supply rules will apply in order to determine who is making the supply.

The lack of consistent application of the intervention rules by EU Tax Authorities could result in double taxation.

For example, a UK Law Firm provides general legal services to a French client. The French client is a passive holding company and is not in business. In order to provide its legal services it requires legal support from its French branch.

Under intervention, the French Branch has intervened in the supply and the entire supply is subject to VAT in France.

However, the UK Tax Authorities take the view that intervention does not apply. Therefore, since the supply is to a passive holding company not in business, the place of supply is in the UK and UK VAT is due on the entire value of the supply.

Therefore, double taxations occurs. Law Firms need to identify where such transactions could occur and if they can, take steps to mitigate double taxation. Such steps could include making a split supply, ascribing a value to the supply made by each office so in the example above, UK and French VAT would be due on the respective supplies.

2. VAT Case Law

Airtours Holiday Transport v HMRC [2016] UKSC 21

Summary

The UK Supreme Court (SC) has held that a Taxpayer with a contractual obligation to pay for a supply but no contractual right to receive it does not have a right to recover the VAT paid to the supplier. The

situation may be different if the taxpayer pays for a contractual right to have the supply made to another party, or if the contract for the supply does not reflect commercial reality, in which case the commercial reality must determine the outcome. But on the facts in this case, the SC held by a majority that there was no right to recovery.

Background

In 2002 Airtours was suffering financial difficulties and instructed PwC to undertake an independent business review and provide restructuring advice. Whilst Airtours was responsible for paying PwC's fees and expenses, the services were procured as a tripartite agreement with its financing partners, the Banks. It was understood that the Banks wished to rely on the advice being provided by PwC. The case concerns whether Airtours is entitled to recover the input VAT which was incurred on PwC's fees.

The First Tier Tribunal (FTT) held that the services and the preparation of a report carried out by PwC under the terms of an agreement with the Taxpayer and a number of banks (the engaging institutions) aimed at obtaining an extension of a revolving credit facility was needed by the Taxpayer for the purposes of its business, that the Taxpayer had requested, authorised and secured the services for its own purposes, and that the Taxpayer had made a binding promise to pay for the work, and therefore that the Taxpayer was entitled to recover the VAT charged by PwC. That decision was overturned by the Upper Tribunal and the Taxpayer appealed.

The Court of Appeal's judgment that it was not enough for the Taxpayer to show that it had needed a report produced by PwC, it was required to show that PwC had supplied its services to the Taxpayer. The terms of the engagement letter with PwC indicated that its services were supplied to the engaging institutions considering the refinancing, and the Taxpayer was solely responsible for paying the fees. The Court of Appeal therefore held, by a majority, that the Taxpayer was not entitled to recover the VAT charged by PwC.

The SC considered that, in order to be entitled to recover VAT, the Taxpayer had to have paid the VAT on a supply to it of services by PwC, and this gave rise to two questions:

 whether, under the terms of the engagement letter, PwC agreed to supply the Taxpayer with the services and the report; and

 if not, would it be necessary, in order to show that it had received a service from PwC, for the Taxpayer to show that it had a contractual right to require the PwC services to be provided to the engaging institutions by PwC.

Details of the Judgment

On the first question, the majority considered that the contractual commitment between the parties was reflected by the engagement letter. On review of that letter, the majority held that the contractual obligation of PwC was to the engaging institutions and not to the Taxpayer. In particular:

 the engagement letter was addressed to the engaging institutions, not the Taxpayer;  the engaging institutions, not the Taxpayer, retained the services of PwC;

 the engagement letter stated that the report produced was for the sole use of the engaging institutions;

 the Taxpayer was only entitled to a copy of the report which could be redacted; and

 the engagement letter referred to a duty of care to the engaging institutions, and there was no reference to a duty of care to the Taxpayer.

Although the Taxpayer countersigned a copy of the engagement letter, this was in relation to its

commitment to pay PwC's fees and, although the engagement letter could have included a duty of care by PwC to the Taxpayer, the majority found that it did not, and there was no contractual obligation for PwC to supply the services to the Taxpayer.

The Taxpayer had also sought to argue that the commercial background to the engagement demonstrated either that PwC had, in reality, an implied contractual obligation to the Taxpayer to provide the engaging institutions with the services, or that the engagement letter should be interpreted in that way. In support of this argument, the Taxpayer pointed out that:

 it was in the Taxpayer’s interest that the services were provided,  the Taxpayer was to pay for the services,

 the Taxpayer initiated the idea of having the report and was involved in selecting PwC,  the Taxpayer was a party to the engagement letter as counter signatory, and

 the Taxpayer took on liabilities to PwC under the terms of the engagement letter.

But the majority did not agree, holding that these factors carried little weight and that the Taxpayer would have been unlikely to have paid for the PwC report if the engaging institutions had not insisted on the report being prepared.

The SC then addressed the second question, i.e. whether, in order to show that it had received a service from PwC, the Taxpayer had to show that it had a contractual right to require PwC to provide the services to the engaging institutions.

The authority relied on by the Taxpayer was the judgment of the House of Lords in Redrow Group plc [1999] UKHL 4 that a company could be entitled to VAT recovery if it had sufficient financial interest in "anything at all - used or to be used for the purposes of his business in return for that payment". However, the majority considered that this had to be read in the context of the Supreme Court's subsequent

comments in Aimia Coalition Loyalty UK Ltd [2013] UKSC 15, in particular that the reference to "anything at all" in Redrow might be construed too widely, and that Redrow did not rule out the possibility that amounts may be paid as third party consideration.

The majority reviewed the case law concerning when it was appropriate for a court to subordinate the contractual position in favour of 'economic reality', i.e. where there were facts which led it to believe that the contract was artificial or that vitiated the court's findings based on the contractual position. But the majority concluded that in this case the engagement letter reflected the

economic reality of the transaction, and the economic reality was that the engagement provided for the services to be provided to the engaging institutions. So as there was nothing in the engagement letter concerning a right for the Taxpayer to have PwC supply the services to the engaging institutions, it was not appropriate to imply that such a right had been obtained.

Implications

So what has this case settled?

1. If the parties to a tripartite contract intend that the party paying for the deliverables should be regarded as receiving a service of the right to instruct the service provider to deliver them to another party, the contract must state that expressly. They must not rely on an understanding between them, nor can they rely on a tribunal or court seeking to interpret the contract, in the context of 'economic reality', as implying that such a right exists. Some courts may have done so in the past, but it should not be assumed that others will do so in future.

2. In a tripartite contract, if the party responsible for payment is not contractually entitled to receive any supply at all, the payment is likely to be regarded as third party consideration paid to the supplier in respect of the services carried out.

What has this case not settled?

Whilst the SC did not go on to consider the point in the circumstances of this case (where the engaging institutions would have had no right to recover the VAT on the PwC services), it is questionable whether the party receiving the supply, who has not paid any VAT, will have an entitlement to VAT recovery. That may be the subject matter of a future case in circumstances where a taxpayer (in a similar position to that of the engaging institutions in this case) would have a taxable supply to which the input VAT might be attributed.

Summary

In summary, this was a decision that was almost exclusively based upon the engagement letter terms and if there had been a contractual right for a supply by PwC to Airtours of the right to have services delivered to the banks then the decision would have been materially different.

The judgment potentially opens up future opportunities to restructure tripartite contracts to obtain input VAT recovery entitlement for the payee of the fees in circumstances where the right to have services supplied to a third party can be made explicit in the contract.

The Upper Tribunal (UTT) upholds VAT ‘offshore brokerage’ arrangement:

Paul Newey t/a Ocean Finance [2015] UKUT 0300 (TCC)

Summary

The UTT upheld the decision of the FTT in this important case for businesses that have sub-contractor arrangements with non-UK established companies.

In this case, the FTT rejected HMRC's argument that the true recipient of third party advertising services was the UK Taxpayer rather than its Jersey subsidiary. HMRC's 'abuse' challenge was also rejected by the UT, applying the principles established following its referral of questions to the EUCJ, on the basis that the arrangements were not artificial.

This case has implications for Law Firms and how they identify who is actually receiving their services. It confirms that contractual documentation is still a good place to start but substance and economic reality still matters when identifying the actual recipient of the supply. Background

Paul Newey t/a Ocean Finance (‘Ocean Finance’) is a UK taxpayer who participated in a UK loan

brokerage business, which involved advertising loans in the UK media and introducing borrowers to third party lenders, a VAT-exempt intermediary service. Ocean Finance suffered irrecoverable input VAT on these advertising costs.

However, it became clear to Ocean Finance that competitors with establishments in non-EU locations were obtaining significant advantages in terms of reduced VAT costs, in particular with respect to advertising costs. Ocean Finance therefore incorporated a Jersey company (Alabaster) to carry out the brokerage business and incur costs in relation to advertising. Ocean Finance, under this arrangement, now only did loan processing and other related activities as a sub-contractor of Alabaster. The result of this was no UK VAT being incurred by Alabaster on the UK advertising.

However, HMRC argued that this arrangement should be challenged for two reasons. Firstly, it argued that the true recipient of the advertising services was Ocean Finance (not Alabaster) and therefore, UK VAT was due on advertising services. Secondly, HMRC argued that the arrangement, when viewed as a whole, constituted an abuse of the EC Sixth Directive, and that the abusive advantage should be removed by treating Ocean Finance as if they had received the supplies of advertising services.

Details of the Judgment

The FTT found that the Services agreement did represent and reflect the real activities of Ocean Finance and Alabaster. The fact that there were limited resources in Jersey had no impact on Alabaster carrying out the loan brokerage business, as it was equipped to carry on such a business by outsourcing the processing operations to Ocean Finance. The UTT upheld this decision and stated that it is not a valid approach to compare new arrangements with what has gone before.

On the second issue, the FTT found that whilst the “essential aim” of the structure was to save irrecoverable VAT, this advantage was not contrary to the purpose of the VAT system. The UTT

considered a hypothetical case in which a new brokerage company established in Jersey and outsourced its administration and advertising to UK suppliers. The UTT considered that there would be no suggestion

that the structure, implementation and operation of such a company would raise a question of abusive practice. Therefore, the UTT rejected HMRC’s argument that there was an abusive practice being carried out.

Implications

So what does this judgement mean for Law Firms?

This case and others like it (e.g. Secret Hotels) support the position that contractual documentation is still a good place to start in identifying the actual recipient of the supply. However, substance and economic reality are also important to back up these contractual arrangements. Substance and economic reality are reflected in who has benefited from the supply, who has actually received the supply and who used the services for their own needs. Any arrangement that lacks substance and economic reality could be considered shams and therefore disregarded (see Secret Hotels).

Secret Hotels2 Ltd (formerly Med Hotels Ltd) [2014] UKSC 16

Summary

As a recap of this landmark case that was heard a few years ago, it centred on the way in which contracts should be interpreted, the UK Supreme Court (SC) decided that the Taxpayer acted as agent in the arrangement of hotel accommodation, rather than principal.

This ruling has confirmed that where a contract is, under domestic law, clearly a contract of agency, then that alone is sufficient for a VAT analysis that the supplies fall under the concept of 'agency' in the UK and the concept of 'intermediary' in the wider EU context.

Background

This case concerns whether the Taxpayer acts as principal or agent in the supply of hotel

accommodation. The Taxpayer considered that it acts as agent and obtains a commission for so doing, and the hotels, whether in the UK or elsewhere, are responsible for accounting for VAT on the supplies of hotel accommodation to holidaymakers, with hotels outside the UK also required to account for any local taxes on the commissions. HMRC, on the other hand, considered that the Taxpayer acts as principal in the supply of the hotel rooms and therefore has to account for UK VAT on those supplies.

The Taxpayer had been unsuccessful at the First Tier Tribunal which had essentially accepted that, on the basis of both the contractual relationships between the parties and the way in which the parties behaved, the Taxpayer had been acting as principal. The Upper Tribunal, however, had taken a different view, holding that the contractual relationships were sufficient to establish that the Taxpayer was acting as agent. The Court of Appeal reversed that decision, reverting to the approach of considering both the contracts and what was actually done by the parties to them.

Details of the Judgment

The SC had little difficulty in deciding that the accommodation agreement clearly portrayed the hotel as supplying the accommodation to the customer and the Taxpayer as agent marketing the accommodation on the hotel's behalf. The gross amount paid by the customer was the consideration for the

accommodation and the difference between the amount paid by the customer for the accommodation and the amount received by the hotel represented the Taxpayer's commission.

The SC did not agree with HMRC that aspects of the agreement were inconsistent with an agency

agreement. Establishing the amount of commission according to how much the gross amount received by the agent exceeded what the principal received per room, for example, was common in financial services intermediary arrangements. And the fact that hotels agreed to indemnify the Taxpayer and do some things that they might not ordinarily be expected to do was, in the SC's opinion, down to the Taxpayer's place in the market and ability to negotiate advantageous agreements as a result. The SC therefore concluded that the agreements characterised the Taxpayer as agent of the principal hotels.

Implications

The Supreme Court has confirmed that where a contract is not clear on the arrangements between parties, the behavioural aspects remain a factor to which the Courts consider to inform the reading of those contracts. This is not saying that subsequent behaviour alters the nature of the contracts, but that in determining the nature of the contract itself, reliance may still need to be placed on behaviours.

A 'retainer' contract for advice can be a supply, even if no advice is given:

Asparuhovo Lake Investment Company OOD (C-463/14)

Summary

This case concerned when a 'chargeable event' (tax point) occurred under a 'retainer' contract for advisory services. The parties had agreed that the service providers would make themselves exclusively available to the Taxpayer, and the Taxpayer would pay a fixed fee weekly in arrears, irrespective of how much advice had been provided. The ECJ held that the service supplied was the service provider making itself

available, not the advice, and the weekly payment created a tax point for the supply of being available for the previous week.

Background

In August 2011, the Bulgarian Taxpayer entered into subscription contracts for consulting services with four service providers for advice in relation to corporate finance, commercial development, legal advice and information security. These service providers would make themselves exclusively available to the Taxpayer, and the Taxpayer would pay a fixed weekly fee in arrears, irrespective of the amount of advice provided in the prior week. On these weekly fees, the consultants charged VAT which the Taxpayer deducted in its VAT returns.

During a subsequent VAT inspection, the Bulgarian tax authorities took the view that no evidence had been provided as to the type, quantity and nature of the services actually provided, there was no first hand document relating to the number of hours performed and no information with regards to how prices were set. In August 2013, the tax authority issued an assessment refusing the Taxpayer the right to deduct the VAT invoiced by the service providers. The Taxpayer appealed this to the referring court.

Questions were referred to the EUCJ by the court as to whether a subscription contract of this kind constituted a ‘supply of services’ within the meaning of Article 24(1) and/or 25(b) of the Principal VAT directive and whether the chargeable event and the chargeability of the tax took place on expiry of the period in respect of which the payment had been agreed.

Details of the Judgment

The EUCJ held that subscription contracts constitute a 'supply of services' in art 24(1) for the supply of consulting services of a legal, commercial or financial nature, under which a supplier has agreed to be

available to the customer during the term of the contract. This was on the basis of two previous cases that were put before the EUCJ (Kennemer Golf and Le Rayon d’Or).

The EUCJ held that the object of the supply of services was not to provide specific advice, but to be available to the customer in order to advise it. The service provider was therefore making its supply of services simply by being available during the period agreed in the subscription contract, irrespective of the quantity and nature of the consulting services actually provided during that period. Art 64(1) provides that, where it gives rise to successive payments, the supply of services is to be regarded as being completed upon expiry of the periods to which those payments relate. And so the service providers' services, remunerated by means of fixed sums paid periodically, must be regarded as being supplied in the period to which the payment relates, whether or not the service provider has actually provided advice to its customer during that period. The supplies must therefore be regarded as having been completed, for the purposes of art 64(1), at the end of the period to which each payment relates.

Implications

In many EU Member States, where a supplier makes itself available, for a fixed fee, for a fixed term, to supply taxable services on an ad hoc basis, it is probably accepted that the fee for so doing will be liable to VAT, irrespective of whether or not the services are called upon. Additionally, many Member States, including the UK, will have derogated on the basis of article 66(a) and/or (b) so that VAT becomes due on the date of payment or issue of the invoice.

This EUCJ ruling has clarified that there is a service by a business of making itself available for a consideration, irrespective of whether any underlying service is actually provided. This service is completed when the agreed billing period expires, and VAT will become due on that date (unless an overriding tax point exists).

No VAT exemption for outsourced settlement of insurance claims: Aspiro

(C-40/15)

Summary

The EUCJ has held that the activity of a Taxpayer which performs all of the functions necessary for dealing with insurance claims, from receipt of the claim form to repairing the damage and dealing with any post-repair complaints, constitutes neither an insurance activity nor the activity of an insurance broker or intermediary. Therefore, the Taxpayer’s activities we found not to be within the VAT exemption for insurance services.

Background

This case concerns whether the Polish Taxpayer’s activity of dealing with the whole process of damage repair following accidents, disasters etc. falls within the VAT exemption for insurance services. In this context, it deals with the insured in the name of and on behalf of the insurer, but it is not an insurance company, an insurance broker or an insurance agent and it does not have any liability to the insured persons. The question referred to the EUCJ concerns the scope of Article 135(1)(a) of the Principal VAT Directive, which states that Member States shall exempt ‘insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents’.

Details of the Judgment

The EUCJ considered that it was required to decide whether the Taxpayer’s activity fell within either ‘insurance transactions’ or ‘related services performed by insurance brokers and insurance agents’ for the purposes of Article 135(1)(a).

With regards to the ‘insurance transactions’, the EU case law had established that they required the insurer to undertake, in return for prior payment of a premium, to provide the insured, in the event of the risk covered materialising, the service agreed when a contract was concluded. In Taksatorringen (C-8/01) it was also established that this concept could also encompass the provision of insurance cover by a taxable person who is not an insurer but, in the context of a block policy, procures such cover for his customers by making use of the supplies of an insurer who assumes the risk insured. However, these transactions imply the existence of a contractual relationship between the insurance provider and the insured. In this case, the Taxpayer did not ensure that the insured person was covered in respect of a risk and was not connected to the insured person through a contractual relationship. Therefore, the

Taxpayer’s service did not constitute an insurance transaction for the purposes of Article 135(1)(a). As regards ‘related services performed by insurance brokers and insurance agents’, the EUCJ did not consider that the fact that the Taxpayer was neither an insurance broker nor an insurance agent to be decisive. They deemed that it was necessary to examine the content of the activities in question. There were two conditions to satisfy:

 The service provider must have a relationship with both the insurer and the insured party (e.g. Taksatorringen) which could be only indirect if the provider is a sub-contractor of the broker or agent; and

 Its activities must cover the essential aspects of the work of an insurance agent, such as finding of prospective clients and their introduction to the insurer (e.g. Arthur Andersen)

The EUCJ considered that the Taxpayer met the first condition because it had a direct relationship with the insurance company in whose name it performed activities, and an indirect relationship with the insured party. However, the EUCJ did not accept that the Taxpayer met the second condition because its activities did not involve finding prospective clients and introducing them to the insurer with a view to the conclusion of insurance contracts.

Therefore, the Taxpayer’s activities we found not to be within the VAT exemption for insurance services. Implications

In the UK, the insurance intermediary exemption under UK legislation has generally been interpreted on a broader basis than in other EU Member States. In light of this recent development, the UK may come under increased pressure from the EU commission to revise its interpretation of the insurance exemption, and to bring it in line with EU law.

We recommend that any Law Firm that has outsourcing arrangements in respect of claims handling services reviews its position to ascertain the potential impact and whether the services fall, in full or in part, under any other VAT exemption, such as those of financial services.

3. Territory by territory round up

Belgium

Administrative Decision E.T. 124. 411/2 of 23 February 2016: Increased threshold for

applying the 'special' VAT regime for lawyers

On 23 February 2016, the Belgian VAT authorities published VAT Decision no. E.T. 124.411/2 which increases, with retroactive effect as of 1 January 2016, the yearly turnover threshold for external client lawyer services where the special VAT regime is applied.

VAT Practice Note 47/2013 of 20 November 2013 already provided an optional simplified VAT regime for lawyers (i.e. not salaried staff) who render law services exclusively to a Law Firm, under which regime external client services are allowed for a maximum turnover (excluding VAT) of EUR 15,000 per year. As of 1 January 2016, the yearly turnover threshold of the additional activity for applying the special VAT regime is increased to a turnover of EUR 25,000 per year (excluding VAT), which is aligned with the increased threshold for applying the VAT regime for small enterprises.

Implications

Following the increased threshold, the special VAT regime can have a broader scope of application. More lawyers might have the possibility to apply or opt for this special VAT regime.

Under the special VAT regime, lawyers are relieved of most of their VAT obligations, i.e. the obligations will be largely shifted to the Law Firm, in particular in the form of the mandatory application of a system of self-billing with reverse charge of 21% VAT. However, the right to deduct input VAT incurred on business expenses will be waived by the lawyers.

It has to be verified within the Law Firm whether switching from the normal VAT regime to the special VAT regime can be beneficial for specific lawyers and/or the Law Firm.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No

representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act,

Our network

We have set out below some of our key VAT team members, who have significant experience in advising international Law Firms. Please feel free to contact any of the below if you wish to discuss the issues referred to in this document, or any other VAT matters.

UK

Keith Lawson Charishma Juddoo

+44 (0) 20 7804 9064 +44 (0) 20 7213 5466 keith.lawson@uk.pwc.com charishma.juddoo@uk.pwc.com

Belgium

France

Stephen Dale Stephane Henrion

+ 33 1 56 57 41 61 + 33 1 56 57 41 39

stephen.dale@pwcavocats.com stephane.henrion@pwcavocats.com

Germany

Stefan Bernütz Fabian Hammler

+49 30 2636-5205 +49 30 2636-5529