ECJ rules on the rounding of VAT in Wetherspoons case
The ECJ has ruled that member states should decide on the rules and methods for rounding up amounts of VAT as long as they observe the principles underpinning the EU common system.
The decision follows a case involving HM Revenues and Customs (HMRC) and JD Wetherspoons, a UK pub chain. The company had argued that it was entitled to apply the method of rounding down when calculating VAT on sales while HMRC felt that VAT should be rounded arithmetically when the customer pays.
UK law states that a business may round down the total VAT payable on all goods and services shown on a VAT invoice to a whole penny and that fractions of a penny can be ignored.
However, as Wetherspoon only provides VAT invoices upon request, Wetherspoons argued that its method of aggregating these amounts and rounding them down the total to the nearest penny was a more efficient system.
The ECJ ruled that when member states establish or accept a particular method of rounding, they are obliged to observe the principles governing the common system of VAT.
The court judged that it is for member states to decide on the rules and methods for rounding amounts of value added tax, although those states must, when so deciding, observe the principles underpinning the common system of that tax, particularly the principles of fiscal neutrality and proportionality.
An HMRC spokesperson said: "HMRC welcomes the judgment which fully supports the UK's approach to rounding of VAT amounts consisting of fractions of a penny.
"The judgment also confirms HMRC is right to resist attempts by retailers to use sophisticated till technology to calculate and round down the VAT on each item sold thus keeping some of the VAT collected from customers instead of paying it to HMRC."
As Wetherspoon has already paid their VAT to HMRC, there will be no further penalty. However, a UK tribunal is to take place that will determine how costs should be allocated.
"The result is what you would have expected in that there are no European laws on this matter apart from the general rule that grants member states to impose their own rules," said one tax professional familiar with the case.
JD Wetherspoon declined to comment on this story.