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VAT: ECJ rules on timeshare points scheme

Practical Law UK Legal Update 0-504-4145 (Approx. 5 pages)

VAT: ECJ rules on timeshare points scheme

by PLC Tax
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The Court of Justice of the European Union has ruled on the classification of the nature of a supply for the purposes of determining the proper VAT treatment of a timeshare points scheme. (MacDonald Resorts Ltd v HMRC (C-270/09).) (Free access.)
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The ECJ has ruled that services supplied under a timeshare scheme, under which members redeem points previously acquired for cash, fell within the exemption for the leasing or letting of immoveable property and that, therefore, the place of supply was the country where the property was located. The ECJ also ruled that the tax point for the supply could not arise until redemption of the points as, until then, the services were not clearly identified and goods and services that have not been clearly identified cannot be subject to VAT. Further, although the supply was within the scope of the exemption, member states had a measure of discretion in defining the type of accommodation that could be taxed where the accommodation was "in the hotel sector or sectors with a similar function".
The ECJ did not duck making a decision that is likely to give rise to considerable practical difficulties in applying it to schemes of this nature. In principle, it seems right that VAT should be paid in the member state where the temporary accommodation is consumed. However, while the ECJ's decision resolves the uncertainties of where the supply takes place and whether or not it is exempt, its ruling that the time of supply is when the points are redeemed creates a new set of problems. (MacDonald Resorts Ltd v HMRC (C-270/09).)

Background

The Sixth Council Directive 77/388/EEC of 17 May 1977 (Sixth Directive) established the common system of VAT. Directive 2006/112/EC of 28 November 2006 (Principal Directive) recast the Sixth Directive without substantive changes.
The place of supply rules determine the country in which VAT is chargeable. The rules are designed to ensure that VAT is payable only once within the European Union (EU), avoiding non-taxation and double taxation. For supplies of services by a business to a consumer, the general rule is that the place of supply is where the supplier is established (Article 9(1), Sixth Directive, now Article 45, Principal Directive). However, there is an exception (among others) for the supply of services connected with immoveable property (Article 9(2)(a), Sixth Directive, now Article 47, Principal Directive). For more information on the place of supply of services, see Practice note, Cross-border transactions and VAT: place of supply of services, refunds and EC sales lists.
The leasing or letting of immoveable property is exempt from VAT, subject to certain exceptions including the provision of accommodation in the hotel sector or sectors in a similar function (Article 13B(b)(1), Sixth Directive, now Articles 135(1)(l) and 135(2), Principal Directive). Member states may also apply further exclusions to the scope of the exemption in Article 13B(b)(1) (now Article 135(1)(l)).
The Sixth Directive contains rules for determining the date when VAT must be accounted for. In particular, Article 10(2) of the Sixth Directive (Article of the 65 Principal Directive) provides that where a payment is made on account before the goods or services are supplied, VAT is chargeable on receipt of the payment.

Facts

MacDonald Resorts Limited (applicant) was established in the UK. It set up a scheme that enabled members of the scheme to acquire points by purchasing them or by exchanging their existing timeshare holiday rights for points and paying a fee. Members could then exchange their points for the right to occupy holiday accommodation for a specified period. Management charges applied and a reservation fee was payable when points were redeemed.
HMRC assessed the applicant to UK VAT on the basis that the applicant supplied membership services for a consideration and, under the normal place of supply rules, the service was supplied in the UK (the place where the applicant had its business).
The VAT and Duties Tribunal dismissed the applicant's appeal, but the Court of Session stayed proceedings and referred a number of questions to the Court of Justice of the European Union (ECJ), which in essence concerned:
  • The nature of the services supplied by the applicant and, therefore, the place where those services were supplied.
  • Whether the services supplied by the applicant were exempt from VAT under Article 13B(b).

Decision

The ECJ disagreed with HMRC’s classification of the supply and held that the services supplied fell within the exemption for the leasing or letting of immoveable property and that, therefore, the place of supply was the country where the property was located. Further, although the supply was within the scope of the exemption, member states had a measure of discretion in defining the type of accommodation that could be taxed where the accommodation was "in the hotel sector or sectors with a similar function".

Place and time of Supply

The ECJ noted that while the mechanics of the applicant's scheme were different to the scheme in RCI Europe v HMRC (Case C-37/08) (see Legal update, No further guidance on meaning of connection with immovable property for VAT purposes) the criterion applied for classifying the nature of the supply in RCI, namely, the member's ultimate intention when he paid for the services received, also applied to the applicant’s scheme.
As the member’s intention was to acquire points in order to convert them into the right to occupy holiday accommodation, it was at the moment of conversion that the member received the services for which he paid the consideration. It followed that it was at that point that the nature of the supply and, therefore, the place of the supply, should be analysed even if that approach led to difficulties (such as non-taxation because the member does not convert his points). Accordingly, the ECJ determined that the applicant’s supply was of services connected with immoveable property and, therefore, the place of the supply was the place the property was located.
The ECJ also ruled that it was not possible to bring the tax point for the supply forward because until conversion the services were not clearly identified and, in accordance with ECJ case law (BUPA Hospitals and Goldsborough Developments (C-419/02), see Practice note, Anti-avoidance case law and tax: VAT abuse of rights: BUPA), goods and services that have not been clearly identified cannot be subject to VAT. Therefore, a tax point was not triggered until points were redeemed.

Whether services exempt

The provision of hotel accommodation is outside the exemption in Article 13B(b)(1), so to the extent that points were redeemed for hotel accommodation, VAT became chargeable in the country where the hotel was located. The ECJ noted that the right to temporary use of a property under the scheme entitled a scheme member to occupy a property as if he were the owner and to exclude any other person from its enjoyment for the specified period. This satisfied the quality of occupation required for it to amount to the leasing or letting of immoveable property (Commissioners of HM Customs & Excise v Cantor Fizgerald International (C-108/99) and Sinclair Collis v Commissioners of HM Customs & Excise (C-275/01).
However, the ECJ also ruled that member states had a measure of discretion in defining the type of accommodation that could be taxed as a derogation from the exemption, limited only by the requirement that taxation be confined to the provision of accommodation "in the hotel sector or sectors with a similar function" (which should be given a broad construction).

Comment

The ECJ did not duck making a decision that is likely to give rise to considerable practical difficulties in applying it to schemes of this nature. In principle, it seems right that VAT should be paid in the member state where the temporary accommodation is consumed. However, while the ECJ's decision resolves the uncertainties of where the supply takes place and whether or not it is exempt, its ruling that the time of supply is when the points are redeemed creates a new set of problems.
VAT must be accounted for in the member state where the property is located and at the time points are redeemed. Redemption of points may take place years after the money has been paid to acquire them. Given that scheme properties may be located in several member states (with the taxpayer having to deal with different tax authorities) and property services may be obtained on the redemption of points acquired at different points in time, issues of valuation are likely to arise, which may be compounded when dealing with several tax authorities.
More immediately, those that have been operating schemes of this nature and who have accounted for UK VAT should consider making a claim for overpaid VAT.
Case: MacDonald Resorts Ltd v HMRC (C-270/09).
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Resource ID 0-504-4145
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Published on 07-Jan-2011
Resource Type Legal update: archive
Jurisdictions
  • England
  • Wales
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