Opinion of the Advocate General — ECLI:EU:C:2020:302
Date: 2020-04-23
Language of the case: English
Subject matter: Taxation;Value added tax
Procedure: Reference for a preliminary ruling
Origin: United Kingdom

Appeal number: TC/2017/07278
FIRST-TIER TRIBUNAL
TAX CHAMBER
KAPLAN INTERNATIONAL COLLEGES UKLIMITED Appellant
- and-
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE & CUSTOMS
Respondents
Having heard Raymond Hill, counsel, for the. Appellants andOwain Thomas QC for the
Respondents and having read the draft terms of order agreed between the parties
IT IS ORDERED AS FOLLOWS
1. The questions set out in the Schedule attached hereto are to be referred to the Court of Justice
ofthe European Union pursuant to article 267 of the Treaty on the Functioning of the European
Union:
2. All further proceedings in this action shall be stayed until after the Court of Justice of the
European Union has given its ruling on the questions referred to it or until further order.
3. The Registrar of the First-tier Tribunal (Tax Chamber) is to send a copy of this Order and the
Schedule to the Registrar of the Court of Justice of the European Union.
4. There be no order as to costs
PHILIP GILLETT
~, -1. 0,2_. Z~191'~~::Pstrar
Fax I E-mail:. . ~
1'~ . LYRD Hewlett
Received 00: p1.:..£'l-,.;., Principal Administrator
TRIBUNAL JUDGE
RELEASE DATE: 30"" Jo...o ......~ <;to, ""1Registered at the 11
Court of Justice under No..1:.. 0 '1.. .tQ.i__
CURIA GRIFFE
....x.mbourg
fAMt -.1. 02. 2019
SCHEDULE TO THEOIIDER FOR REFERENCE
TO THE COURT OF JUSTICKOFTHE EUROPEAN UNION
Introduction
1. By this request for a preliminary ruling by the FIT of the United Kingdom, the Court of
Justice is asked to clarify the interpretation of Article 132(1)(f) of Council Directive
2006/112/EC of 28 November 2006 on the common system of value added tax (012006
L 347, p. 1) (the "Prin~ipafVAT Directive"). Inparticular, the issues in the national
'\' "
proceedings concern whether a number of subsidiaries of a single corporate group, which
are all established in the United Kingdom « and which are each members of an entity in
Hong Kong, also part of the corporate group, which supplies them withservices, can
benefit from an exemptioIdiofu VAT on those services purSUal1LtbArticle 132(1)(f).
The Parties
2. The Respondent, Her. M~je~ty's Revenue and Customs ("Hl\IRC"), are the authority
responsible for the assessment and collection of VAT in the UK. HMRC are represented
by QW£lin,Th()ffi(l:).QC,.l?arffste~jDstructedl?ytheGQm~sionerJ): Gener~CoullSel and
"Solicitor; HMReSolicitor~s Office, 4th.HoorWest;· Ralli Quays; 3 Sianley StreetSalford:
, , ' " ,-', -, -, •7. , ', ' ~
M609LB.
3. . ..'fIle i).l?peU~l)J~K(lplaIlJ_nteln~t~()!li~,tColleges VI( Ij:.rnile51t'KIG")is. t.b~repr~sentative
member of a y~Tgroup .. It operates as_? holding company of other companies in the
Kaplan group. KIC is represented by Raymond Hill, barrister, and by DLA Piper UK
LLP,Solicitors, 160 Aldersgate Street, London EelA 4HT.
The History of the Proceedings in the Domestic Courts
4. By a Notice of Appeal generated on 28 September 2017 KIC appeals against decisions of
HMRC, as follows: (i) Assessment letter dated 21 April 2017 in respect of periods from
10/14 to 07/16 in the sum of £5,252,264; (ii) Assessment letter dated 22 May 2017 for
period 10/16 in the sum of £590,000.
5. The decisions give effect to two further decisions of HMRC to the effect that services
received by KIC from Kaplan Partner Services Hong Kong Limited ("KPS") do not fall
within the scope of the exemption from VAT for Costs Sharing Groups ("CSGs") and
hence are subject to the reverse charge provisions in the domestic legislation on VAT
contained in the Value Added Tax Act 1994 ("VATA 1994").
6. The result of that analysis is that KIC is obliged to account for VAT on those supplies
under the reverse charge. Its outputs are predominantly exempt and hence the input tax it
incurs which is attributable to its educational activities is irrecoverable. KIC contends that
the servicessupplied by KPS fall within the scope of the exemption for services supplied
by CSGs to their members and hence there is no liability for it, as the representative
________ ____,IJm.....emh.....e. ...r_,o......Lth......e., YAT gmup...to accounLfuLthose-Supplies-undet:-t-he-re-v~~arg~e:r-----
provisions.
7. The case came before the First-tier Tribunal (Tax Chamber) on 15 and 16 January 2019
which decided to make this reference to the CJEU.
Legislation
The Principal VAT Directive
8. The exemption for CSGs is set out in Article 132(1)(t) of the Principal VAT Directive
- -("PVD") and provides:
"1. Member States shall exempt the following transactions:
[ ...]
(1) the supply of services by independent groups of persons, who are carrying on an
activity which is exempt from VAT or in relation to which they are not taxable persons,
fmthe ..purposeof.rendering. their.members ..the.services.directly.necessary far the,
exercise of that activity, where those groups merely claim from their members exact
reimbursement of their share of the joint expenses, provided that such exemption is
not likely to cause distortion of competition".
9. The members of the relevant entity in- the' present case carry out exempt educational
activities. Article 132(1)(i) PVD exempts:
"the provision of ... university education ... by bodies governed by public law having
such as their aim orby other organisations recognised by the Member State concerned
as having similar objects".
10. The present case also raises issues as to the interrelation between the CSG exemption and
VAT grouping. Article 11 PVD permits (but does not require) Member States to "regard
asa-single·taxablepefsOirany·petSOtisl~stabliSned:-intlie··teirifof':f6f tliafMembeiSfa:te······
" , l' ,
who, while legallyindependent.are closelybound to one another by financial, economic
_', , )" .. " , " ::_, ., ..
~~~"e;:gaei~~!!?,'l~~l~~;-~~E~i!~~~~2q~J'_~!tW~C7~&;r~9PBtH~~~~J1te domestic
• -' • " _.. . _. '. ' '; _: " • _. ',',' ' ,".:', ., , . .-, ., ": . ~,.' "'_," 1 . _" " ~ .. , ‚o .;
legislation set out belowlandI~I(:;js·regiStered for VAT in theJJI{ as the. representative
memberoftbe VATgl"oup:·
,"1 .•
Domestic Legislation
11. The exemption forCSGs. is·iwplemep.teg into domestic law by Group 16, Sch~d~le 9
VATA1994 which provides:
"Item No
1The supply of services by an independent group of persons where eachof the
..following conditions.is.satisfied-e-Lc.... ._..... ... ---.- ...- ..
(a) each of those persons is a person who is carrying.on an activity ("the
relevant activity") which is exempt from VAT or in relation to whichthe person is
not a taxable person within the meaning of Article 9 of Council Directive
2006/1121EC.~_.:~. ." , . . ..-. ~
(b) the supply of services is made for the purpose of rendering the members of
the group the services directly necessary for the exercise .of the relevant activity,
(c) the group merely claims from its members exact reimbursement of their
. share of the joint expenses, and, .
(d) the exemption of the supply is not iikely to cause distortion of competition".
12. Further relevant provisions in relation to the place of supply, reverse charge and the
exemption for educational services are set out below.
13. Section 7A VATA 1994 provides in material part:
"7A Place of supply of services
(1) This section applies for determining, for. the purposes of this Act, the country in
which services are supplied.
(2) A supply of services is to be treated as made-
(a) in a case in which the person to whom the services are supplied is a relevant
business person, in the country in which the recipient belongs, and
(b) otherwise, in the country in which the supplier belongs.
(3) The place of supply of a right to services is the Same as that in which the supply of
the services would be treated as made if made by the supplier of the right to the
recipient of the right (whether or not the right is exercised); and for this purpose a right
to services includes any right, option or priority with respect to the supply of services
and an interest deriving from a right to services.
(4) For the purposes of this Act a person is a relevant business person in relation to a
supply of services if the person-
(a) is a taxable person within the meaning of Article 9 of Council Directive
2006/112/EC,
(b) is registered under this Act,
(c) is identified for the purposes of VAT in accordance with the law of a
member State other tIlan theUnited Kingdom, or . __ ........,.._~.--:-- -:-- ~
(d) is registered under an Act of Tynwald for the purposes of any tax imposed
by or under an Act of Tynwald which corresponds to value added tax,
and the services are received by the person otherwise than wholly for private
purposes" .
14. Section 8 VAT makes provision for the reverse charge mechanism and it provides in
, >" ~ - " ,. ' , ,.. , "
material part:
"(1) Where services are supplied by a person who belongs in a country other than the
United Kingdom in circumstances in which this subsection applies, this Act has effect
as if (instead of there being a supply of the services by that person)-
(a) there were a supply of the services by the recipient in the United Kingdom
in the course or furtherance of a business carried on by the recipient, and
(b) that supply were a taxable supply.
(2) Subsection (1) above applies if-
. (a) the recipient is a relevant business person who belongs- in the United
Kingdom, and
(b) the place of supply of the services is inside the United Kingdom,
and, where the supply of the services is one to which any paragraph of Part 1 or 2 of
Schedule 4A applies, the recipient is registered under this Act.
(3) Supplies which are treated as made by the recipient under subsection (1) above are
not to be taken into account as supplies made byhim when determining any allowance
of input tax in his.case under. section 26(lX'.- .,..-
15. Section 43 makes provision for VAT groups. Itprovides:
'~(DWh.e.re_under[sectioIl~ 4~AJQA~..Ql~IlyJ~_O,(!!~s.,c;orp()ratear~t eated as members
of a group, any business carried on by a member of the group shall be.treated as carried
on by the representative member, and- ..
(a) any supply of goods or services byamemberof the group to another
member of {hegroup shall be disregarded; and .
(b) any supply which Isa supply to which paragraph (a) above does not apply
and is a supplyZ'cf goods or services by or to a member of the group shall be treated
as a supply by: or to' the representative member; and ..i
(c) any VAT paid orpaYClpleby Clmember of the.group an the acquisition of
goodsfrom another membe.rState. ._or, 0.110 the importation ()f goods from a place
outside themeinber Statess4ailbetreated"aspaidorp(iYjlble by therepresentative
.member.andthe~oOdsshallpelrealeu-;-:=;::-:' - -.-----. ---.--.--; .-'" - -. .-.. --,
(i)in the case of goads acquired from.anothermember State, far the purpases of
s,esti()n73(?)i,3;Il~L _.;'" -if' .i: , ; ,:., . '. .....
(ii)in the case.o!_gp()~siInP_ort.edJ!()Ill.apJ~ce-_O-l!~<!~_th~'!!!~ll1berStates,for
.....'.•.thase purposes and the PlIW9~~;or:~~,c,tj.9,D,:38;-,' .' .
as asquiredor, as thecaseim(lype:fmRarted6y:'thereHre~entative member;
-and all members ofthe graupshafrbe'.ljablejeintly andseveraUY far any VAT due
from the representative meniber,".": '," . .....
16. Section 43(lAA) pra~idesthatwhere
(a) it is material, far thepurpases of any provision made by or under this Act ("the
--relevantprovision2~)~-whether-thepersorrby-arto-whom;asupplyismade;o(·the
person by wham goods are acquired or imparted, is a person of a particular description,
(b) paragraph (b) or (c) of subsection (1) abave applies to. any supply, acquisitian or
importation, and
(c) there is a-difference that' would' be material for the purposes of the relevant-----proviSionOet\Veen_::----·-···-- ..·-------;----;-~----.:..;----·-··-·-.. .- ---.------. --r:----..' --. .,--'
(i) . .thedescriptian applicable to therepresentatlve.member.und
(ii)the description applicable tothe body which '(apart from this sectian) wauld be
regarded far the purposes of this, Aetas .making the supply, acquisition or
importation or, as the case may be.asbeingthe person to wham the supply is made,
the relevant provision shall have effect in .relatian to that supply, acquisition or
importation as ifthe only description applicable to.the representative member were the
description in fact applicable to.that body."
17. Section 43(lAB) then provides:
"Subsection (lAA) above does not apply to the extent that what is material for the
purposes ofthe relevant provision is whether a person is a taxable person."
18. The exemption for supplies of education is contained in Group 60f Schedule 9 VATA
1994 and provides (in material part) exemption for:
"GROUP 6 - EDUCATION
Item No.
1 The provision by an eligible body of-
(a) education;
Notes:
(1) For the purposes of this Group an "eligible body" is-
(b) a United Kingdom university, and any college, institution, school or hall of such a
university;"
Relevant Facts and the Issues in ,the Proceedings
19. The First tier Tribunal (Tax Chamber) has heard witness evidence,but not yet made
definitive findings. of fact in this ..case pending the ruling of the CJEUc;m the questions
referred. However, the issue of distortion of competition has not yet been examined given
the need for clarity as.to the-test which should.be applied in the circumstances of this case.
20. KIC is a member of the Kaplan corporate group, which provides educational and career
services. It has nine UK subsidiary companies ("the Kaplan colleges"), each of which
runs a higher education college ("the international colleges") in the UK in collaboration
with 17 UK universities.
21. HMRC have confirmed to KIC that its subsidiaries currently qualify as "colleges of a
university" under the UK implementation of Article 132(1)(i) PVD. Therefore, the
Kaplan colleges are currently entitled to treat the educational services which they provide
to students as exempt from VAT .
.....22; Each inrernattorral collegets tOO%~oWfied by KIC,-saveToYflieUiiiverslty' of York
International Pathway College ("UYIPC"), in which the majority share (55%) is owned
by the University of York. The University of York approached KIC to seek this joint
venture.
23. The international colleges prepare students almost exclusively fromnon-Elf states for
entry to both undergraduate and graduate programmes at the relevant universities. The
majority of their students are recruited from states in South East and East Asia.
24. Other significant educational groups run similar international collegesinthe UK - as well
.. '..a&somesmallerbusinesses ..Each.ccllahorates.with.a.different. group of UK universities
to p~epqr~ international swdents forthose universities e .rq:Gcompe.tes!with .those groups
to attract international students to study at its international collegesand'then progress on
l&courses'ilfits partner. universrt~~t;~~,~~u,~f)~~.=q~::UK7Y~Iv~rslti~~op~r~t~.!ih iE9}Vn'
international colleges independently of the main educational groups.
25. Each of KIC's international colleges has its own management and governance structure.
·,Ea<!iI!hasa-separate-Joinr Managenient-Beard, whieh-is chaired by the university partner
.aIl~.~(msists.2t~(!llr.l!S~Ilt~tiy:{!s'fr<!~ ,Q9th.th~.K(\pJ~l!·,~QnegeC!n:d'the. relevant university.
- and each has a-JointAcadernic'Board; which is alsochaired'by the relevant university
with representatives from both KIC and the university concerned. For each international
=?~~e~~;~!~~U~~~.~~~i~~..p. r~~~~~ll ~~r~~~!~e~~~~,a!~?~~l.p!:~~~~~~!~.~~ht~~~i~~ are .
distinct for each college on the basis that they are preparing students for specific degree
courses at that specific university.
I
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26. The international colleges recruit 85% of their students through a network of 500
educational.recruitment agents ("the agents") in 70 countries. They play a vital role in
student' recruitrnerrt.vrrrarketingrthe" cotlrses~-'ptoviding ·advice 'and" information to
prospective students and their families and supporting students in applying for visas to
live and study in the UK. None of the agents has an exclusive relationship with the
members of the Kaplan CSG and they are also entitled to work for the Kaplan colleges'
direct competitors, as well as the universities directly. In return for their services, the
agents receive a commission.
27. Prior to October 2014, the agents contracted directly withKIC in the UK. The agents
liaised directly with the marketing and admissions teams at KIC in London in order to
recruit students to the international colleges.
28. Prior to October 2014, KIC supported its agent network through a number of
representative offices in some of its key markets, including China, Hong Kong, India and
Nigeria. The representative offices provided the agents with operational support,
including marketing materials, training as to the institutions and courses being marketed
and the admissions and compliance procedures;. face to face meetings with' prospective
students and parents, help answering specific questions raised by prospective students as
well as support at promotional events. Prior to October 2014, the representative offices
were also managed from KIC's London office. The representative offices made supplies
of services to KI~ for· payment. The representative offices are members of the Kapla!!, _----------------------------
corporate group save for one representative office in Vietnam.
29. Prior to October 2014, KIC was liableto UKVAT under the reverse charge on both the
services provided by the agents and those provided by the representative offices.
30. In October 2014, the Kaplan Group established KPS in Hong Kong, with 20 employees
there (as of December 2018). Following the establishment of KPS, KIC continues to
operate through a network of local representative offices and third party agents. However
the contractual arrangements with the local representative offices and third party agents
now sit with KPS. KPS is a company limited by shares. It is established in Hong Kong.
The members ofth~_~ompanyeach hold one share.KPS operates under the terms of a
membership agreement. The current members of KPS are the 9 Kaplan colleges
(including UYIPC) - so KIC indirectly owns just under 94% of KPS, with the remainder
being indirectly owned by the University of York, through its majority ownership of
UYIPC. KPS does not provide services to non-members of the CSG, save that it does
provide agent and representative office services to Kaplan's North American Pathway
"lmsiness.The membershipagreement was changed in: 2015/l6-tO-alloWUYIPCto join,
even though it is majority owned by the University of Yark.
, ,31. Since--2014, both' the representative office-network and the-independent agents have
contracted with, and rendered their recruitment services to, KPS in Hong Kong. KPS has
taken on responsibilities which were formerly carried out by KIC in London and also it
centralises some functions previously carried out by each of the representative offices.
KPS is~lso responsible for managing the representativeoffice network worldwide. Since
2014, the representative office network has expanded and there is an increased level of
activity between KPS and the representativeoffices, ..with th€clatter focusing now on the
• ~' ~ '. - - • - - > • '.'-
-" daytacday management-ofagefits~-Therefote,~theteare. thre.e txpes -QfsUpplies-made by
K\S,Jt0'KICww<;h form part of thedispute"fir,st the services which KPS procures from
, the .agents, second the service» whichKPS proc9resfrot:nthe representative,offices and
~-'~'7~:::';;:;i:~-:;;- .:_-:.~-;;:;~~-=::::==:~ _-~;:<:;,=~.;:;;:-' ,:.",""-~'"7._=--~==~:::;'_':'~·:,,:::_;::'.::~0«:c·:::-: ~_"':;-;;::::-:;:-:::---~:-;'-~:::~;:;:;~~~::::'7'...:::,,~~.~_.~.~.-.;~-:.:, .. ~.-:::;: .:.~: ,:'::':~,'" :-- :-0' - -
_,;,,9.l),a¥~~~)~!Y~~~~if1~<!!il),&~i!;l})matters~l1:l.c~.~~c9qml?g'tq~,:t~g~t!t~~,w;mr!be;QnJ,er'adivities,
discus$~C;1above such as supportingthe agents,whichJ{pS itst1lfsuppJies.toKIC. '
j , j ,,, --' ,-, - :~ . -:, . - • - : - ~ •
32. KPS is also responsible for agent management in East and South EastAsia. KPS provides
an agent service centre which, is geographically.close and in, the- s,!me time-zone as-the
__.J~~~,!:.!\~ti~l}~lco !ege~:J~g~§t_r_~.c.l]!it!!!~l!t~'!L~Jlh __'7'-'
33. IUsc.?_Illmo~,g~o~n? that t~ere~er.e sound, coml!lerc,aLrea~ons fqr~e!ting up KPS in
HongKong, It is not alleged .that.Kl'S is an artificial entity and there is no suggestion by
-theUKfaj( authoritiesthatthe establiSliirieiiroflP'S-:givf)~frisetoaU-a5Useof rights."
34. KI~ has given evidence to the national tribunal that the KapIan international colleges
would not seek to obtain recruitment services from another entity, other than KPS, even
if KIC was not entitled to VAT exemption on the services provided to it by KPS.
35. Each of the Kaplan colleges also forms part of a VAT group, save for UYIPC. As UYIPC
was not a wholly or majority owned subsidiary of KIC, it could not form part of the VAT
group registration.
36. Each agent invoices KPS directly. KPS then pays each agent. Although KIC is the
representative member of the VAT group, of whichthe Kaplan colleges are members, in
practice KPS charges each Kaplan college separately for the money due to agents for the
services provided to the relevant Kaplan college. KPS charges each Kaplan college both
for its own serviceste.g. compliance) and those procured from the representative offices
on the basis of the number of students recruited for that college. KPS calculates the
charges by pooling the costs and then dividing them on the basis of student numbers. It
then invoices each Kaplan college separately. Agents' marketing expenses are managed
in the same way. However, agent commissions are directly attributable to individual
students and are charged tothe destination college for the student,
37. No VAT is charged on the services provided by the agents to KPS, from the representative
offices to KPS and from KPS itself. KIC argues that the supply between KPS and KIC is
exempt, applying the CSG exemption in Article 132(1)(f) PVD. Therefore, although there
---------Were-co-llll11ercial-reasOllS---for-estab.lishing-KP-S-ill-Hollg-Keng,the establishment-ef-KP-8---o--_o-
also had the effect that (if KIC is correct that it is entitled to exempt the services received
from KPS) there is a VAT saving on the services formerly provided directly by the agents
and representative offices to KIC. However, as stated above, it is not alleged that KPS is
an artificial entity and there is no suggestion by the. UK tax authorities that the
establishment ofKPS gives rise to an abuse of rights.
38. Turning to the issues, it is not in dispute that KPS provides its members, the Kaplan
colleges, with the services directly necessary for the exercise of their exempt activities. It
is also not in dispute that the method of charging adopted by KPS provides for exact
reimbursementof each membe_r's share of thej_o~nt~~p~J:ls~~~
i
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39. Four key matters remain in dispute:
(a) Whether or not the exemption from VAT for services supplied by a CSG to its members
‚applies illCiX:CUIUstanceswheretheCSG belongs. and is resident, outside the UK.,
(b) The manner in which the national tribunal should assess whether or not any
such exemption, if available, is likely to lead to a distortion of competition;
(c) Whethbr or not the supply of services by the CSG in this case can qualify for the
exemption in circumstances where the CSG is a separate taxable entity from its
members, but the members are part of the same corporate group and are therefore
related to each other independently Of their membership of the CSG;
(d) Whetherthe esemptioncan apply .whilst .all of the members -of the .CSG'are· also
..-- --------members·of-aVATgroup-and-are theremretmtyoneraxable person -afidWoete toe
single taxable person for the purposes of the VAT Directive is not a member of the
csn.
40: . KIt: submits that the exemption for cost sharing groups inArticle 132(1)(f) can apply in
.---,c~oss~fi-6rdercases:lf~an'apply-6oifiln'cas~swh~_iethe CSGi~ estabiish~;din one Member
+-State of the EUand the members ·are-established in anot~erEU Member State; or indeed
, .
~': H' " f, ,. " .~. ,
. in several Member States. It can also apply (as in KIC's case) where the CSG is
established in a non-Member state of the EU and the members are established in an ED
‚Membet:.State(or more.than.one.Elf MemberState).Therais.supportfor.this.submission----
in European Commission VAT' Committee working papers 450, 654, 856 and 883.
41.· Although Advocate GeneralK0kott expressed the view in CaseC-605/15 AViva and Case
C...326/15 DNB.Banka that the exemption in Article 132(1)(1) could only apply where
both the CSGand its members were established in the same EU Member State, that view
was not endorsed by the Court in either case. As the learned Advocate General herself
accepted, the wording of Article 132(1)(1) does not contain a restriction requiring both
the CSG and ifs members to be established in a single Member State - whereas other
provisions of the Principal VAT Directive which have a limited territorial scope (such as
Article 11) expressly indicate so in their wording.
42. To restrict the exemptionto CSGs and members who are all established in the same
Member State would be contrary to the fundamental freedoms (as regards cross-border
supplies between Member States). It would also be contrary to the purpose of the
exemption (both as regards cross-border supplies involving CSGsestablished in Member
States and non-Member States) which was to ensure that services provided by a CSG are
not subject .to VAT where the provision of those services contributes directly to the
exercise of the activities in the public interest of its members (see the Court's judgment
inAviva at paragraphs 28.,.29andDNB Banka at paragraphs 33-34).
43. Granting the exemption to the supply of services from aCSGestablished in a non-
Member State to .members in' a Member State will not cause difficulties in evaluating
distortion of competition. The Court has already held in Case C-8/01 Taksatorringen that
distortion is to be assessed at the level of alternative suppliers to the members of the CSG
and cannot exist if, irres.pecti~e-o.:Lan¥-taxati.g.Il--QI-~mptien,-the--C-8G-is-assured-of'------
keeping its members' custom. On that view, distortion is to be assessed by reference to
the. members' likelihood of purchasing alternative supplies in their Member State of
establishment. Even if distortion is to be assessed by Iooking at the effect of the exemption
on recipients of similar services who are not members ofthe CSG,distortion Cannotoccur
ifthose recipients can either apply to join the CSGorjoin or set up another,CSG, or take
advantage of]any other VAT efficiency, such as headquarters to branch supplies. That
question is again to be assessed by reference to the market in the Member State of the
members.
,
44. As to the requirement that the CSG be an "independent group of persons", KIC submits
that this requires the CSG to be a taxable person which is separate from its members. The
members do not have to be free from close financial, economic or organisational links
1
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i
with each other. This interpretation is required for four reasons. First, the wording of
Article 132(1)(t) in the English, French, Spanish and German language versions all make
clear that it is the group which has to be independent and not the persons. Secondly, that
.. inter pretatiorris consistenrwittrthe Court'sprevious 'case-Iaw. Irrneither'Avner nor DNB·· ..
Banka, which each concerned CSGs whose members were drawn solely from a single
corporate group, did either the Court or Advocate General Kokott suggest that the
':.indep._e_ll~~~!~W~~P.. !pe_rs~11S"_co~~iti~n__reguired th~_IIl~mbersofthe ‚gS<;T!~be wholly
unrelated toeaeh.other, as well as the CSG itself. Thirdly, to require the members of the
CSGto be, independent of each' other, as well as the CSG itself, is not required by the
purpose of the: exemption. The purpose of the exemption is satisfied, even where the
members of the CSG are all members of the' same corporate group, where the members
need to peottheir resources to purchase input goods and services= and the provision of
those services by the CSGcontributes directly to the exercise ofthe activities in the public
..._...i!l!~resl,Qf_j!!im~m.1?~r§.E9!1r!.1:l1y,jtw.()uldJea<itQPIll.cticlll p;rQ1:Ilem~in determiningthe
level ofindependeIlc:e, required-between members of the CSG for the exemption to apply.
To ceuntelf,thes<iFpra~tiGalproblems; the legislation itself would surely have contained
'~·.•,-;';~;spedfic-reqUifements'fa&~to~'1lte:eXtenf"'or-nl~"perffiissloIe'·'·relafionslUp'1Jefween.the··
'. melllbei&:oHhe':CS~~ii_fguth-aCOrldfiionIiadbehn intenGed. .
45. . KIC submits that theexemption remains available,even where the members of the CSG
are::all~members ;of_,a.,single~ATgroup:and4herefoieasingle taxable person. Although
...._t.~_~~~}!~~!~_~~_!~._~_e__~._s~P~~!e_t~_a~le~personfromthe inember.s~the members
themselvesdonot have to be taxable persons/at all, as is clear from the wording of Article
/,132(1 )(1). itself~;Therefore~allthat is/needed. forthe'CSG to be/an "independent group of
personas is for~twoor·morenatural or legal persons to be members of the CSG. Again,
,~<-----,,-, ,---_- -_.._-._-_._-_.-., ..._-_._..,-,--, .._-------_.---, .._--_-_._----_. __ .._:_.._-_....._---. ----..~.----..---- ._...._._--_._. - ..._,--,..- ... __...--_'.-_., ..__- ..--.-- ..",
that is/consistent with the purpose of the exemption;
46. The fact that, in national law, the single taxable person to whom the supplies were made
was xtc, which was not itself a member of.the CSG, is irrelevant to the application of
c- • ", f,i " :
the Elf.exemption in Article132(1)(f). It is the UK which has chosen toimplement VAT
.grouping,\lsj!lgJ!1eJic!iqn.,tllat ~upplie~ .areJ~Ct~iye9 and madeby.tJ:le,r<fRresentative
member, even though they are in fact used by the Kaplan colleges. And it is the UK which
has provided a solution to this problem by recognising in section 43(IAA) VATA that
the legal fiction created by VAT grouping can be dispensed with when other provisions
of the UK VAT legislation require it.
HMRC's arguments in outline
47. There are two Advocate General opinions in Cases C-326/15 DNB Banka and Case C-
605/15 Aviva which directly address the question of whether the CSG exemption can
apply in a cross border scenario. The AG opinion in A viva contains a detailed account of
'.
why the exemption should be interpreted so as to preclude its application to cross.border
transactions between CSGs which are not situated in the same Member State as their
members (or some of them) and in addition why the application of the exemption beyond
the EU is even less tenable. HMRC relies on the opinion iI}Aviva at 36-67 and DNB
Banka at paragraph 47. It is important to recognise that the AG Opinion inAviva was
delivered against the context of the factual scenario in both Aviva and DNB Banka.
----48. HMResubmtts-th-mhis case grapliIcalIy IllustrateSl1ie tension between the provisions of
Article 11 which allows VAT groups, and which allows groups of companies which are
closely bound together to be treated as one taxable person for the purposes of VAT,and
the provisions ofthe CSG exemption. The companies in the VAT group in this case are
part of a corporate group. Such a group which imported services from a HongKong entity
such as KPS would be liable to VAT on those services as a.result of the reverse charge.
Such an entity, even it if it were within the same corporate group as KPS, would not be
able to join the VAT group and the provisions which effectively ignore the transactions
between members of the same group, because they are the same taxable person, would
not apply. By making KPS into a CSG the reverse charge is entirely. avoided in
circumstances where the supplies. remain between entities in the same corporate group;
49. This inconsistency is referred to at paragraphs 46-49 of the AG Opinion in Aviva and
HMRC submits that it is starkly illustrated by the facts of this case.
50. In relation to distortion of competition, the CJEU has already indicated that the issue of
whether the exemption is likely to give rise to distortions of competition is to be resolved
by analysing whether it is the conferring of the exemption itself which is produces a real
-possIbility-ofsllclidistoiilon:-TlieIssues-iIi-lliiscase,if 'tne·csn' exemption-applies atall,
is how that test should be applied to a case where the CSG entity is situated in Hong Kong
whereas the group members are in the UK. KIC suggests that this can be resolved simply
by reference to whether the group members wouldseek these services elsewhere even if
there were no exemption. There is no reason to adopt such a narrow' approach. The
analysis shouldbe conducted at the' national level relevant to the suppliers who make
siinilar·typesofsuppHes(see'Cas€{C-2S8/071sle ofWight Council, see also paragraph
---------:-i23-oft~~}\G-OplniOrl'ht-C<lSe--C~8/01-TtI~~t~;~ingen ),cAt pa;graph;-SO et;~q ~fthe
AG'Opinion in A~iva,:!~hci;~l~rsto the many difficulties in adopting this approach if the
, ,_,__CSGi~:Sit~ateaoutSid(fiheEiJr_-~~c' ' ---"t ., ., ,., . '--
of competition whichlridependentbperators-fa~e when, probably because of their size,
--------theyaie~unabietosouice-servlcesfrom-Inteniarfes(jurces -and are Instelicrfofced-to seek
. .; ":' .,
them on theopenina.rket. SlIcntraders suffer the Vkrburden on those services where
they are engaged in exempt activities but are relived of this burden if they co-operate with
----~-------~--~the~~~~~~~~~~-~Hes~~~~~~on--a~t~-~~--------
basis. HMRCsubmits that the application. of the exemption to persons who, are already
constituted as a group plainly goes beyond this purpose and does not fall within the scope
of'the -exemption.
- _"_- ., ._--.-- .., .
51, The third issue is Whether the CS(} exemption can apply to groups which are already
constituted as. members ofa corporate grolipand which are therefore linked by legal,
---..-,---_----.--...--....-----.-..-~-':""'-'-~~·.-:-77·,·--;-~._-:---~-:~;'-""--'_, _',,-. ;~~_;_:-_'_rT'-~~_·~:::_:···-""::··'·~·.~'7~· _---:--:--:--;:-.~,-,--- "~.'~.--~---~'-~~."..-.-.,_.2._.-.-- ..•-----.-----.~-. - ... __:,
financialand organisational ties, The purposeof the exemption is to avoid the distortion
52. The fourth issue is that for some of the periods covered by the assessments in this case
there was only one taxable person to whom the supplies of KPS were made. The supplies
were not therefore made to the members of the group but to one person. That falls outside
the scope of the exemption which requires that the services are supplied to the members.
Furthermore, KIC, which was the single taxable person in the UK to whom the supplies
were made, was not itself a member of the CSG. For this reason too, the exemption cannot
apply.
Relevant case law
53. The Court has not hitherto had an opportunity to clarify the territorial scope of the CSG
exemption or therefore to address the correct application of the requirement that the
exemption should not be likely to cause distortion of competition in a cross border supply
where the CSG is established outside the EU. The Advocate General in Cases 326/15
iJNB Banka'and Case C-605/15 Aviva addresses the territorial scope of the CSG
exemption in the course of answering questions concerned with the meaning of distortion
of competition in the CSG exemption but the issues raised were not addressed by the court
,
in its judgment since it was unnecessary to do so. The issue of distortion of competition
has been considered by the Court previously in Case C-8/01 Taksatorringen, as well as
by the Advocate General inA viva.
TheFfT'sorder
54. Having 'consideredth~ issues raised in the appeal at a hearing on 15 and 16 January 2019
the First-tier Tribunal decided that the disposal of the appeal rested on several issues
concerning the interpretation of the CSG exemption and that it should make a reference
for a preliminary ruling from the CJEU to answer the following questions.
Questions referred
1. What is the territorial scope of the exemption contained in Article 132(1)(f) of Council
Directive 2006/112/EC? In particular (i) does it extend to a CSG which is established
-------- --- ---------
in a Member State other than the Member State or Member States of the members of
the CSG? And if so, (ii) does it also extend to a CSG which is established outside of
the EU?
2. If the CSG exemption is in principle available to an entity established in a different
Member State from one or more members of the CSG and also to a CSG established
outside the EU, how should the criterion that the exemption should not be likely to
cause disfortion ofcompetitioiifie- appIieoTliip-articular,'~
(a) Does it apply to potential distortion which affects other recipients of similar
services which are not members of the CSG or does it only apply to potential
distortion which affects potential alternative providers of services to the CSG's
members?
,(b) If-it-applies only-to-otller,reeiments;:e-rutJhere'bea real-possibility- of-distortion-if-
, , .,: ., ". • • ~'. ',_,. - ,'';.., • ocr ';.,.- •
othe.~:reFi}Jj~nts)vh?~r~ l1qt.~~.1~brrs_9f:_t~e!_~SG.are"£lbl~,~ither to-apply to join
tlle<:Sg}Jl,q\le~ti911~ot_to__,l?et~p~~eif9:'Yll_CSGto, q1?tain; similar .services, orto
;::~~~"!..-~=-:::;::,...~_:.;:~.=:.:~~~~~-::-~=-=.~z;;'.:;;'.::;:s::::.:""·--~':~·=:,:,~:::~·~::':::"':::--~.;;;;:::=.='=~'-~~"::;;"_'~""-:';;::":'~:.::! •.:;:."""":~.:;'::::,::::,::':."~-:-:':' : ...•_. .,_., ,,
obt4a.i1J:~qlliyaJel1~-Vj~l"$ll;vings._b~_o~4«:'~i-~~thod&(sll.cll.£l:shysetting up a branch
:'~~'':'·'f:''''::'7?;'''~·.:+·.4_~~~ .. ",~,!,-- -"t)_.~--_,.-,-__~,r:", --:_''"''''~'''''''_'_,,:.,"_._".. ,.'. ""-""~_'-',~"", " ,', "" v.
inthe Member-State prJhh"dstatp-:illq:uestiQn). ;. ", ",."..... .. " .' .
(c) If it applies only to other providers, is the real possibility of distortion to be
assessed by 'determiningwhetherthe CSG" is assured of" ke_eping its IIU!lIlbers'
--.custom-,'irrespective-of the-availability. ,of .the.VAT-exemption ..,."and theref-ore to
be assessed by referencejotbe ‚access of a1ternat~vepro~iders to the national
" !." ,{t "'f' f.,,:, '., •. '..~ - ," .
market.in which the meinbersonhe~CSG are established? If so,does it matter
• :. j •
.' .. .
_________~ ______.~ .__ whe!heLt_h~__CS_G is assu~d Q_f k~~Q!!!g___tt~l!!~JI1bet§~cu~t<!in!?_~_~~!!~_~_;_!ht?Y£lrepart
of thesame corporate gr9':lP~
1,1) Sh" ..lrl note ...+;",l distortion h .. assess ..r1 ...t ...national level in relation to alternative. \. u, ,uUJ.U· P l1.t.J.'U. U J., I.. "'''"' L)\.I ,,",U 'U" u.- """LV U.U. .1 • _.l. . .L", .. ,'"" .....\.4. ~ .... 4. ,,, ........"'" • '"
providers in the third state where the CSG is established?
(g) Can the presence of a real possibility of distortion be established by the
identification of a commercial market in the third state?
(e) Does the tax authority in the EU which administers the VAT Directive bear an
evidential burden to establish the likelihood of distortion?
(t) Is it necessary for the tax authority in the EU to commission specific expert
evaluation of the market of the third state where the CSG is established?
3. Can the CSG exemption apply in the circumstances of this case where the members of the
CSG are linked to one another by economic, financial or organisational relationships?
4. Can the CSG exemption apply in circumstances where the members have formed a VAT
group, which is a single taxable person? Does it make a difference if, KIC, the representative
member to whom (as a matter of national law) the services are supplied, is not a member of
the CSG? And, if it does make a difference, is this difference eliminated by national law
stipulating that the representative member possesses the characteristics and status of the
members of the CSG for the purpose of applying the CSG exemption?
Dated this 29th day of January 2019