A Trip to Luxembourg (Part 2)
A couple of months have passed since writing about my visit to the Court of Justice in Luxembourg and the Advocate General has now delivered his opinion on the case. As explained in my earlier blog (read here), the role of the Advocate General is to advise the Court on the answers it should give to the UK Court which referred the case to Europe.
At this point I should explain the facts and issues in the dispute with HMRC. My client is “Shields”, a farming partnership based in Northern Ireland. Shields farm beef cattle and chose to use the agricultural flat-rate scheme rather than ordinary VAT accounting. Under the scheme, a farmer cancels their VAT registration and is allowed to charge a flat-rate addition (currently 4%) to its VAT registered customers – in this case the local abattoir, who in turn are entitled to treat the flat-rate addition as if it were input VAT and reclaim it on their own VAT returns.
Shields is allowed to retain this 4% addition, effectively as compensation for the input VAT which the partnership is unable to claim as a result of not being registered for VAT. The scheme is intended to be VAT neutral overall, so that farmers on the scheme should not collectively profit from it.
The problem, as HMRC see it, is that Shields were profiting from the scheme to quite a significant extent. HMRC therefore expelled my client from the scheme for ‘the protection of the revenue’, which UK law expressly mentions as grounds for expulsion. The First-tier Tribunal upheld that decision, but the Upper Tribunal referred questions to the Court of Justice as, on behalf of Shields, we were able to point out tensions between UK and European Law.
The Advocate General has sided very clearly with Shields, as had the European Commission and the French Government, who had both made observations to the Court during the course of proceedings. He has recommended to the Court that they accept our argument that member states cannot expel farmers individually on the basis of excess benefit from the scheme. The Directive requires neutrality as compared to ordinary VAT accounting, but this is to be achieved across farmers as a whole rather than by expelling individual farmers. The UK has the power to vary the flat-rate addition downwards and can differentiate rates between categories of farmers. The UK had failed to use the tools at its disposal.
Now we await the full decision of the Court which we hope will follow the advice of the Advocate General. The Court disagrees with the Advocate General in about 15% of cases, so my client can’t start celebrating just yet. They will hope for retrospective reinstatement onto the scheme, but the application of the scheme itself is under threat as part of a current review by the Office of Tax Simplification.
So far so good with my trip to Luxembourg. My personal view is that the Court of Justice has played a vital role in explaining the fundamental principles behind the VAT system and I fear that the higher UK Courts will have neither the time nor the inclination to carry out the same thorough job post-Brexit.