On 17 November 2022, the Court of Justice of the European Union ("CJEU") handed down its judgment in the GE Aircraft Engine Services Ltd v The Commissioners for His Majesty’s Revenue and Customs (Case C‑607/20). Mishcon de Reya LLP acted for GE Aircraft Engine Services Ltd ("GE") resolving a long-standing dispute dating back to 2017. This appeal concerned the VAT implications on the supply of employee-incentive vouchers from GE to its employees. Importantly, the decision represents one of the last successful VAT cases referred to the CJEU from the UK.
The incentive scheme
GE operated the "Above & Beyond" programme, which allowed any employee to nominate one of their colleagues for high performance and hard work. These rewards were presented in the form of a voucher, which the employee could then use at a retailer of their choice from the selection listed by the "Above & Beyond" programme (or choose not to use the voucher). It was HMRC's view that output VAT was due on the vouchers when purchased by GE, on the basis that the vouchers were issued for the employee's private use, and not a business purpose (therefore falling within the scope of Article 26(1b) of the VAT Directive). It was GE's position that the vouchers were in fact issued for a business purpose - to motivate colleagues to work harder.
Business purpose v private use
This question was first presented to the First-tier Tax Tribunal in 2020, which was subsequently referred the CJEU before the expiration of the transitional period.
It was GE's position that the voucher scheme was clearly implemented for a business purpose, as a genuine method of incentivisation to encourage employees to work harder. The vouchers were issued to promote high-performance, rather than act as a replacement for an employee's salary or as a gift to employees. In addition, GE argued that, if VAT was charged at the first transaction (when GE purchased the voucher), VAT would be charged a second time by the retailer when the voucher was used, and this would amount to double taxation.
HMRC's primary argument centred on their contention that the vouchers were directly issued for the employee's private use and not for a business purpose. HMRC maintained that, as the vouchers were issued free of charge and the employees were able to enjoy the vouchers for their personal use outside the context of GE's commercial activity, Article 26(1)(b) was satisfised.
Prior to release of the CJEU decision, Advocate General Capeta ("AG") published her Opinion in January 2022. Her view was that there was a risk that the onus would then fall on the individual taxable person to determine whether a particular transaction had a business purpose and, as such, whether it was taxable.
However, it appears that the CJEU did not agree with the AG's Opinion. The judgment was rare in two ways; firstly, offering a clear and concise decision, and secondly, departing from the AG's opinion in confirming that the scheme was in fact implemented for a business purpose (and was outside the scope of the Directive). The CJEU held that in order to determine whether the supply of offering high-performing employees vouchers constituted a supply of services for consideration, all of the circumstances must be assessed and in particular, the nature and objectives of that programme.
To that end, the CJEU found that the issue of vouchers was "intended to increase the performance of its employees and, therefore, leads to the proper functioning and profitability of the business". Further, the CJEU also reasoned that the principle of double taxation should not be infringed, as the retailers independently declared output VAT on the value of the retail vouchers at issue.
Waqar Shah, the Mishcon de Reya Partner leading the case, commented: "The CJEU's judgment concludes this longstanding appeal and provides some clarity on the business purpose v private use test. The outcome will also provide useful guidance to businesses/employers with a similar voucher incentivisation schemes. It is a truly fantastic result which further underlines the very close relationship between the Mishcon de Reya and GE teams".
The Mishcon de Reya team consisted of Waqar Shah, Consultant Les Allen and Associate Tabassum Khan, with Les Allen conducting the advocacy from the Tribunal to the CJEU.