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Flashback on ECJ Cases – C-262/16 (Shields & Sons Partnership) – The principle of neutrality cannot justify exclusion from the flat-rate scheme

On October 12, 2017, the ECJ issued its decision in the case C-262/16 (Shields & Sons Partnership).

Context: Reference for a preliminary ruling — Taxation — Value added tax — Directive 2006/112/EC — Article 296(2) — Article 299 — Common flat-rate scheme for farmers — Exclusion from the common scheme — Conditions — Concept of ‘category of farmers’


Article in the EU VAT Directive

Article 296(2) of the EU VAT Directive 2006/112/EC

Article 296 (Common Flat-Rate Scheme for Farmers)
1. Where the application to farmers of the normal VAT arrangements, or the special scheme provided for in Chapter 1, is likely to give rise to difficulties, Member States may apply to farmers, in accordance with this Chapter, a flat-rate scheme designed to offset the VAT charged on purchases of goods and services made by the flat-rate farmers.
2. Each Member State may exclude from the flat-rate scheme certain categories of farmers, as well as farmers for whom application of the normal VAT arrangements, or of the  simplified procedures provided for in Article 281, is not likely to give rise to administrative difficulties


Facts

Summary

This case concerns the UK Commissioners decision to cancel the certificate entitling an individual farmer to use the flat-rate scheme on the grounds that the earnings derived from the application of the flat-rate compensation percentage substantially exceeded the input tax which the farmer would have been able to deduct if they had been in normal VAT arrangements. The Court rejected the Commissioners arguments that allowing the farmer in this case to continue benefitting under the scheme in this way would undermine the principle of fiscal neutrality. The Court went on to state that the flat-rate scheme cannot ensure complete fiscal neutrality since the scheme is intended precisely to reconcile that objective with the objective of simplification of the rules which flat-rate farmers are subject to. Moreover the Court stated that the VAT Directive must be interpreted as laying down exhaustively all the cases in which a Member State may exclude a farmer from the flat-rate scheme.

Detailed

  • The appellant in the main proceedings is a family farming partnership which engages in agricultural activity in Northern Ireland (United Kingdom). It rears cattle purchased from an associated company, Shield Livestock Limited, which it fattens before selling them on to Anglo Beef Processors, a company that operates an abattoir.
  • On the advice of Anglo Beef Processors, the appellant in the main proceedings applied to join the flat-rate scheme, and the application was accepted on 1 May 2004. The appellant in the main proceedings was thus entitled to increase the sale price of the cattle by a flat rate of 4%, the increase conferring a right of deduction on its customers. In its application to join the scheme, it estimated that its turnover would be GBP 700 000 (approximately EUR 795 760) in the first year after joining the scheme. The accounting year ending on 30 June 2003 had shown a sales figure of GBP 633 718 (approximately EUR 720 410).
  • On 27 June 2012, officers of the Commissioners met the accountant of the appellant in the main proceedings in order to determine whether the latter could continue to use the flat-rate scheme. At that meeting, a number of financial statements were examined, including the profit and loss accounts and balance sheets of the appellant in the main proceedings, as well as a table comparing the amounts which it had received under the 4% flat rate and the amounts which it would have been able to deduct if it had been subject to the normal VAT arrangements.
  • The officers of the Commissioners thus established that, for the accounting years 2004/05 to 2011/12, the appellant in the main proceedings had derived a financial advantage amounting to GBP 374 884.23 (approximately EUR 426 170) from its use of the flat-rate scheme.
  • By decision of 15 October 2012, the Commissioners cancelled the certificate entitling the appellant in the main proceedings to use the flat-rate scheme, on the ground that the earnings derived from application of the flat-rate compensation percentage substantially exceeded the input tax which it would have been able to deduct if it had been subject to the normal VAT arrangements.
  • Following a review requested by the appellant in the main proceedings, the Commissioners confirmed that decision.
  • By decision of 8 October 2014, the First-tier Tribunal (Tax Chamber) (United Kingdom) dismissed the appeal of the appellant in the main proceedings, which brought a further appeal before the Upper Tribunal (Tax and Chancery Chamber) (United Kingdom).
  • The latter tribunal states that the parties to the main proceedings disagree, in the case before it, on two issues relating to the interpretation of the VAT Directive.
  • The first issue is whether the only cases in which a farmer may be excluded from the flat-rate scheme are those provided for in Article 296(2) of the VAT Directive.
  • The referring tribunal observes that the appellant in the main proceedings contends that that article lists exhaustively the conditions under which a Member State may exclude farmers from the flat-rate scheme, the VAT Directive not giving the Member States a discretion to exclude any particular individual. According to the appellant in the main proceedings, the flat-rate scheme must be operated so as to achieve fiscal neutrality of VAT pursuant to the relevant provisions of the VAT Directive. Among those provisions, it states that Article 296(2) provides for the possibility of excluding not particular farmers, but categories of farmers and farmers for whom application of the normal VAT arrangements is not likely to give rise to administrative difficulties. Finally, it states that Article 299 of the VAT Directive is concerned only with the setting of the flat-rate compensation percentages to ensure that the flat-rate scheme is fiscally neutral overall and that that article does not allow a particular farmer to be excluded from the scheme.
  • The Commissioners take the view that, in order to ensure fiscal neutrality of VAT, the Member States may subject use of the flat-rate scheme to conditions other than those referred to by the appellant in the main proceedings, provided that no provision of the VAT Directive is infringed. In their submission, the aim of the flat-rate scheme is to be as close as possible to fiscal neutrality of VAT on an individual and overall basis. They consider that allowing particular farmers to remain on the scheme when they are deriving too substantial a gain from it would undermine the fiscal neutrality of VAT in respect of farmers taken as a whole.
  • The second issue identified by the referring tribunal on which the parties to the main proceedings disagree is the interpretation of ‘categories of farmers’ within the meaning of Article 296(2) of the VAT Directive.
  • According to the appellant in the main proceedings, the Commissioners excluded it from the flat-rate scheme in the light of its individual situation and not because it belonged to a category of farmers defined in accordance with Article 296(2) of the VAT Directive. The word ‘category’ designates a group which can be identified by reference to objective characteristics, this enabling any farmer to determine with reasonable certainty whether or not he falls within that group. In the present instance, the Commissioners have failed to identify any group of farmers with sufficient certainty. To accept as a category of farmers within the meaning of Article 296(2) of the VAT Directive the category proposed by the Commissioners would grant the latter a discretion since such a category would result from words which are imprecise or which leave the Commissioners quite free to take their decision by reference to subjective factors.
  • The Commissioners take the view that the category proposed is sufficiently precise to be a category of farmers within the meaning of Article 296(2) of the VAT Directive and that it is defined in paragraph 7.2 of VAT Notice 700/46/12, according to which farmers who are found to be recovering substantially more as farmers subject to the flat-rate scheme than they would if they were subject to the normal VAT arrangements may be excluded from the flat-rate scheme. They state that regulation 206(1)(i) of the Value Added Tax Regulations 1995 is to like effect.

Questions

With regard to the common flat-rate scheme for farmers which is established by Chapter 2 of Title XII of Council Directive (EC) 2006/112/EC1 , is Article 296(2) to be interpreted as providing an exhaustive regime as to when a Member State is able to exclude a farmer from the common agricultural flat-rate scheme? In particular:

Is a Member State only able to exclude farmers from the common flat-rate scheme for farmers pursuant to Article 296(2)?

Is a Member State also able to exclude a farmer from the common flat-rate scheme for farmers using Article 299?

Does the principle of fiscal neutrality give a Member State a right to exclude a farmer from the common flat-rate scheme for farmers?

Do Member States have an entitlement to exclude farmers from the common flat-rate scheme for farmers on any other grounds?

How is the term “categories of farmers” in Article 296(2) of Council Directive (EC) 2006/112/EC to be interpreted? In particular:

Must a relevant category of farmers be capable of being identified by reference to objective characteristics?

Can a relevant category of farmers be capable of being identified by reference to economic considerations?

What level of precision is required in identifying a category of farmers which a Member State has purported to exclude?

Does it entitle a Member State to treat as a relevant category “farmers who are found to be recovering substantially more as members of the flat-rate scheme than they would if they were registered for VAT”?


AG Opinion

(1)      Articles 295 to 305 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax should be interpreted as meaning that the only acceptable premisses for the exclusion of a flat-rate farmer from the common flat-rate scheme for farmers governed by those provisions are those set out in Article 296(2) of that directive.

(2)      Article 296(2) of Directive 2006/112 should be interpreted as not authorising the exclusion from the flat-rate scheme of the category of farmers defined as farmers who are found to be recovering substantially more as members of that scheme than they would recover if they were registered for purposes of VAT.


Decision

1. Article 296(2) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as laying down exhaustively all the cases in which a Member State may exclude a farmer from the common flat-rate scheme for farmers.

2. Article 296(2) of Directive 2006/112 must be interpreted as meaning that farmers who are found to be recovering substantially more as members of the common flat-rate scheme for farmers than they would if they were subject to the normal value added tax arrangements or the simplified value added tax arrangements cannot constitute a category of farmers within the meaning of that provision.


Summary

A Northern Irish family company carries on an agricultural activity. The partnership breeds cattle that it buys from an affiliated company and fatten it up to then sell them on to a slaughterhouse. The partnership has submitted an application for and has been admitted to participate in the lump sum scheme. The tax authorities subsequently found that for the financial years 2004/2005 to 2011/2012 inclusive, the partnership had enjoyed a financial advantage of approximately EUR 426,170 as a result of its participation in the lump sum scheme.

According to the ECJ, this is not allowed. The principle of neutrality cannot justify exclusion from the flat-rate scheme. Article 296, paragraph 2 of the VAT Directive provides exhaustively in which cases a Member State may exclude an agricultural producer from the flat-rate scheme. An agricultural producer must be able to check in advance whether he is excluded from the flat-rate scheme. 


Source:


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