Lessons from Case Studies Can Benefit Legal, Finance and Marketing Professionals

By Paul Stewart

Paul Stewart is a director of indirect tax services at KPMG in the UK and has been involved in advising on VAT in the vacation ownership sector for over 16 years. In such a colourful and interesting sector the last thing most subscribers will want to read about is tax! However, more than ever businesses are conscious of the need to manage tax risk whilst maximising the opportunity for savings. In this regard this article is not just aimed at those in-house people in finance and legal, but also at those involved in marketing.

The majority of countries will have some form of indirect taxation, be it a type of VAT or sales tax on transactions. This article focuses on two important cases in the European Union (“EU”) VAT system. The principles established could be relevant in other similar VAT systems.

First of all, in the interest of keeping you all with me its worth having a little refresher on the basic rules of VAT. It is the main form of indirect taxation in the EU and is a tax based on transactions rather than profits. It is important to understand “who is providing what to whom, when, where and for how much.” This helps establish the rate of VAT and the place and timing of when VAT is due. The fact that developers enter into different types of transactions, particularly in relation to property, and often on a multi-jurisdictional basisretailing to the end consumer means that the VAT consequences of transactions are not always straightforward.

VAT is a tax on consumer expenditure and is collected on business transactions. It is charged at each stage in the supply of goods and services where these are subject to a positive rate of VAT. If the customer is registered for VAT and uses the supplies for his taxable business activities, then he will be able to reclaim this VAT. In many cases (but not always) VAT simply “washes through” businesses and is ultimately borne by the final consumer. Particular rules apply to determine in which county transactions should be treated as taking place for VAT purposes. In the case of services, relevant factors can include the precise nature of the services, the place where the customer belongs and whether the customer is acting in a private or business capacity. As a general rule, services relating to immovable property are taxed in the country where the property is situated which seems straightforward. The difficulty in some instances is where the line is drawn between services that do and services that do not relate to property. The position is complicated further for those involved in cross-border transactions. Standard VAT rates vary from one EU state to another; for example, last year the UK standard rate was 15%, whereas the highest standard rate in the EU was 24%.

Added to this, member states have the right to use a lower rate although there is no consistency across member states. In southern Europe, the lower rate typically applies to hotel and touristic related services.

It is clear that in recent years the tax authorities in the EU have been focusing more closely on the vacation ownership sector – particularly in the UK, where two specific cases have reached the European Court of Justice. The cases involve RCI Europe Ltd (“RCI Europe”) where a ruling has been given and Macdonald Resorts Ltd (“MRL”) where a ruling of the European Court of Justice is still awaited. The RCI Europe case relates to the VAT treatment of enrolment, subscription and exchange fees whilst the MRL case relates to the VAT treatment of the sale of points. The services are multi-jurisdictional in nature and the common denominator is establishing the place of supply; i.e., in which country the services are to be taxed for VAT purposes. In view of the fact that VAT rates vary significantly within the EU and indeed certain non-EU jurisdictions do not have VAT systems, it is no wonder that businesses operating on an international level are keen to understand the most tax efficient structure from both a VAT and corporate tax perspective having regard of course to the key commercial and business drivers.

It all sounds complicated and quite frankly it is. What is clear is that in order to manage the tax burden and maximise the scope for lower rates and exemptions businesses in the vacation ownership sector need to understand how the tax impacts on their business. In particular, savings and a competitive edges could be obtained depending on how on how products are designed and marketed.

Case Study 1: RCI Europe
RCI Europe is a UK company which of course facilitates and organises the exchange of timeshare usage rights held by its members in holiday accommodation, the vast majority of which is located outside the UK. The case concerned the ‘RCI Weeks’ programme. Individuals make a number of payments to RCI Europe:

• An enrolment fee which covers one to five years
• An annual subscription
• An exchange fee on request for an exchange

The key issue was where the services provided by RCI Europe were treated as taking place. The UK VAT authorities (“HMRC”) took the view that UK VAT was chargeable on all enrolment and subscription fees. This was because in their view the service was not sufficiently connected with immoveable property and the place of supply for VAT purposes defaulted to the country where RCI Europe was established, which was conveniently the UK. With regard to the exchange fee, HMRC considered this as falling under an alternative VAT accounting method typically used by tour operators. Under this method, to avoid the administrative burden of multi jurisdictional VAT registrations, VAT is due under the gross margin earned only in relation to EU accommodation. Again this meant that all the VAT was payable in the UK where RCI Europe is established. To complicate matters (if you think that’s possible!) the Spanish authorities took a different view. This was that the services were connected with immovable property and therefore liable to Spanish VAT in the country where the property subject to the timeshare usage rights is located. Effectively, two EU countries were squabbling over the tax cake and the business was caught in the middle of the crossfire. Since ultimately double taxation should not arise, the case was referred to the European Court of Justice.

The Decision
The court had to define precisely the service being undertaken and came to the view that the enrolment and subscription fees must be regarded as constituting payment for RCI Europe’s service of providing participation in a system to enable each member to exchange his or her timeshare right.

In terms of its assessment of the VAT place of supply rules, the court concluded that the service between RCI Europe and the consumer is connected in its entirety to the property over which the consumer has a timeshare usage right. Interestingly, the court did say that if such services were treated as taking place for VAT purposes where the supplier is established, then it would then be easy for an operator to relocate to a place outside the EU and avoid paying any VAT at all. This almost certainly played in part in the court’s decision. In answering the questions referred from the UK, the court responded that the place of supply for all the exchange services provided by RCI Europe is the country where the customer holds his existing timeshare usage rights – i.e., there is an obligation to charge and account for VAT is on a multi-jurisdictional basis rather than accounting for UK VAT on all the services. On the face of it, the decision gives rise to multi VAT registration requirements. Once again this raises the question of the extent to which the nature of services can be adapted to achieve a more advantageous tax result without comprising from a commercial perspective.

Summary
The judgment is slightly surprising and was not fully anticipated by the parties and other contributors to the case. The judgment refers to the logic of taxing services as far as possible in the place of consumption but many would have considered this to be in the country where the timeshare obtained is enjoyed.

The decision does provide more of an insight to the approach by the courts in assessing whether services are connected with immoveable property. In this case they were considered to be sufficiently linked to the timeshare usage right be held by the member, such that it did not matter where the supplier of the services was established. This takes us neatly onto the MRL case.

Case Study 2: MRL
MRL is a developer which sells timeshare usage rights in resorts located both in the UK and in Spain. The majority of inventory and the place where most sales are concluded is Spain. The sale of timeshare weeks in Spanish accommodation is subject to 7% Spanish VAT whereas in the UK the sale of timeshare weeks is exempt from VAT if the accommodation is more than three years old. MRL is registered for VAT in the UK and Spain. MRL subsequently introduced a pointsbased system for timeshare sales which was designed in such a way to preserve the VAT treatment for more traditional timeshare sales. MRL attributed income on all points sales to the UK and Spain by reference to the inventory mix.

HMRC challenged the basis for VAT accounting contending that VAT (at 17.5%) was due in the UK on the full sales value of points including upgrade fees, irrespective of the age and location of the inventory mix and where the contracts were concluded. MRL considered that under the terms of the constitution of the points club, members were granted occupancy rights (right to exclusive use and occupation) of the club accommodation. MRL considered that the introduction of the points system should not result in a significant increase in VAT due on what simply amounts to the sale of timeshare usage rights. MRL has designed its product to address any challenge from HMRC so that the Spanish and UK authorities would continue to each get a slice of the VAT cake.

The UK VAT authorities, however, want UK VAT on all sales just as they did in the RCI Europe case. It seems that they have not even contemplated the fact that if they were correct all businesses may restructure operations in such a way to fall outside the VAT net. The Spanish authorities have not been consulted but one suspects that they are once again not likely to agree to the UK’s view!

The finding of the court in the RCI Europe case that the services related to immovable property and the fact that the court commented specifically that off-shoring would lead to an irrational result points (no pun intended) to the MRL case being decided in favour of the taxpayer. Those affected should be aware of the implications arising from both a taxpayer win and taxpayer loss. The current status of the case is that MRL and HMRC have agreed the wording of the questions referred to the European Court of Justice and a hearing will take place later in 2010.

The options are that the court will rule that the sale of points represents (i) a supply which should be apportioned based on an inventory mix basis (ii) a supply which is taxable in its entirety where the supplier has established his business, i.e., in this case the UK.

Summary
The evolving case law is, particularly in borderline cases, leaning towards services being linked to immoveable property. This can affect businesses established outside the EU if the immoveable property to which their services relate is located within the EU. It can also affect the established businesses in terms of managing the place and rate of indirect taxation on their services. Depending on the impact businesses may wish to explore whether service can be adapted to achieve a better tax result both from a financial perspective or simply to reduce the administrative burden.

Paul Stewart is a Director of VAT services at KPMG. The views expressed are those of the writer and not necessarily those of KPMG.

For more information, contact Paul Stewart, director, KPMG LLP at:
Indirect Tax
St James Square
Manchester M2 6DS
Direct line +44 (0) 161 246 4917
Mobile +44(0) 7801 522 308
Fax +44 (0) 161 246 4026
paul.stewart@kpmg.co.uk

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For information on advertising and editorial opportunities with Perspective Magazine & Owners Perspective Magazine; the leading independent B2B & B2C magazines for the timeshare and fractional ownership industries visit www.perspectiverates.com

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Tags: EU, KPMG, Macdonald Resorts Ltd, Paul Stewart, RCI Europe Ltd, Tax, Vacation Ownership, VAT