ECJ Ruling: Fenix International vs. HMRC - OnlyFans VAT Case Explained

The case of Fenix International Limited (Fenix), a UK-based company, vs. the Her Majesty’s Revenue and Customs (HMRC), a UK Tax Authority, refers to a case in which Fenix, as an operator of a popular online digital platform, OnlyFans, failed to pay the VAT due appropriately, as HMRC states.

The OnlyFans online platform has two users: creators(providers of services) and end customers. The platform allows its creators to upload and sell original content to users willing to pay the fees defined by the creators.

The dispute between Fenix and HMRC arose from the different interpretations of how turnover generated from these fees is taxed.

Background of the Case 

The dispute between Fenix and HMRC dates back to 2020, when the HMRC, after conducting a tax investigation, sent a series of VAT assessments to Fenix, stating that Fenix did not correctly calculate, report, and pay the VAT due.

Fenix operated by collecting the fees that users pay to creators, deducting 20% from the stated amount as a fee for services it provides to creators, and distributing the remaining 80% of the fee to the creators. In its VAT reports, Fenix only charged and accounted for the 20% VAT rate on the 20% levy charged to creators and not on the total revenue paid by the users.

In its assessment, the HMRC stated that Fenix should be treated as if it acted in its name, following Article 9a of the Implementing Regulation No. 282/2011, and that VAT should be accounted for and paid on the total amount received from the users and not only on the 20% deduction.

In response to these statements in tax assessments, Fenix filed an appeal before the First-tier Tribunal - Tax Chamber (FTT), challenging the validity of implementing Article 9a into United Kingdom law. Fenix argued that Article 9a goes beyond what is legally allowed for the Council when creating necessary measures to implement the VAT Directive and that, as such, it is opposite to powers granted by Article 397 of the EU VAT Directive; therefore, it should not apply to their case.

Moreover, Fenix claimed that Article 9a does not comply with Article 28 of the EU VAT Directive, as it forces the platforms to assume the role of suppliers, thus altering the commercial and economic freedom where the platform must bear the VAT burden.

In considering and interpreting national and EU law, the FTT stated that it is uncertain if Article 9a falls within the Council's authority or oversteps its intended purpose of simply clarifying the VAT Directive. More specifically, FTT noted that the rules stated in the first paragraph of Article 9a could apply to any taxable persons involved in the supply of online services. 

This is not a small, technical adjustment but a significant change in the legal framework. FTT believes this could undermine the EU VAT Directive's original intent in Article 28 and past European Court of Justice (ECJ) judgments. With this uncertainty, the FTT paused the proceedings and requested a preliminary ruling from the ECJ.

Main Questions from Request For Ruling

The main question that the FTT set in its request for a preliminary ruling is whether Article 9a might be invalid as it seems to exceed the authority given to the European Council by Article 397 of the VAT Directive. The FTT was unsure if the Council went beyond its jurisdiction. Instead of simply clarifying a particular article from the EU VAT Directive, it introduced new rules and changes to Article 28 of the EU VAT Directive.

Applicable EU VAT Directive Article

Several articles from the EU VAT Directive relate to this case. The two most apparent are Articles 28 and 397. Article 28 states that from a VAT perspective, taxable persons are treated as if they provided services to consumers, even though they are working on behalf of another business, the principal supplier.

On the other hand, Article 397 allows the Council to act on a proposal from the Commission and adopt necessary measures to help implement the EU VAT Directive.

However, Recitals 61 to 64 of the EU VAT Directive are also crucial for this case, as they state that VAT rules must be applied consistently across all EU countries and that it is up to the Council to create the so-called implementing measures as additional rules to help clarify and standardize VAT application. Another reason for this authorization delegated to the Council is to prevent double taxation in cross-border transactions.

Finally, the main article related to this case is Article 9a(1) of the Implementing Regulation No. 282/2011, which applies to online marketplaces, digital platforms, or interfaces that supply electronic services, such as apps or digital content. Under this article, digital platforms are considered suppliers from a VAT point of view, with an exemption when the actual provider is clearly identified in documents and agreements.

United Kingdom National VAT Rules 

The request for a preliminary ruling and the ECJ decision did not refer to UK national VAT rules and regulations. The main issues in this case were related to applying the rules underlined in the EU VAT Directive and Implementing Regulation.

Importance of the Case for Taxable Persons

This so-called OnlyFans case is vital for VAT-taxable persons as it clarifies EU VAT rules and VAT responsibilities for digital platforms. Moreover, this case impacts digital platforms by stating in which situations and for which transactions they are considered suppliers for VAT purposes as intermediaries in supply. 

As the digital age and online digital platforms increasingly impact everyday life, this case marks the importance of interpreting and applying EU VAT rules on online marketplaces and digital platforms and a consistent approach to implementing these E-wide rules. 

Analysis of the Court Findings

The ECJ determined that while Member States are responsible for implementing EU VAT regulations, the Council can adopt necessary measures to ensure consistent application of the EU VAT Directive at the EU level. However, this power has limits.

The line for exercising this power is drawn so that the Council can only specify the non-essential details relating to the legislation by implementing measures. This means that the EU VAT Directive defines all essential rules, and implementing measures cannot introduce any new or essential rules that might contradict or redefine those from the EU VAT Directive.

With this in mind, the ECJ concluded that the Council acted within the given rights and powers, and disputed provisions only clarified the application of VAT rules for electronically supplied services. The ECJ determined that implementing measures complement the essential regulations stated in the EU VAT Directive, specifically Article 28, without amending or supplementing it.

Moreover, the ECJ added that this implementing measure was necessary to secure the uniform application of VAT rules and regulations across the EU, such as rules relating to the taxation of the provision of electronically supplied services to consumers. Furthermore, implementation measures adopted by the Council prevent the double-taxation of provided services.

Courts Final Decision

After careful examination and deliberate fact-checking, the ECJ found no reason to believe that Article 9a(1) of the Implementing Regulation conflicts with other EU rules and regulations, thus confirming that it is legally sound.

Conclusion

The ECJ ruling has had groundbreaking effects on many industries and companies supplying digital services through online marketplaces or platforms. This case cements the responsibility and liability of digital platforms to collect and pay VAT as deemed suppliers.

Additionally, the decision explains the limits of the implementing power given to the Council. It underlines that regarding Article 28 of the EU VAT Directive and Article 9a(1) of the Implementing Regulation, the Council did not exceed those powers but acted within its rights.

Source: Case No. C‑695/20 - Fenix International Limited v Commissioners for Her Majesty's Revenue and Customs, EU VAT Directive, Implementing Regulation No. 282/2011, Curia - Opinion of Advocate General