On November 10, 2016 the Court of Justice of the European Union (CJEU) judged in Case C-432/15, Odvolací finanční ředitelství versus Pavlína Baštová (ECLI:EU:C:2016:855).
This request for a preliminary ruling concerns the interpretation of Article 2(1)(c) and Article 98 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1) (the ‘VAT Directive’) and of point 14 of Annex III thereto.
The request has been made in proceedings between the Odvolací finanční ředitelství (Appellate Tax Directorate, Czech Republic) and Ms Pavlína Baštová regarding the imposition of value added tax (VAT) on her operation of racing stables.
The dispute in the main proceedings and the questions referred for a preliminary ruling
· Ms Baštová is a taxable person for VAT purposes by virtue of an economic activity consisting in the operation of horse racing stables with a capacity of 25 places, in which she breeds and trains her own horses and those of other owners which have been entrusted to her to be prepared for races. In addition to the racehorses, Ms Baštová had in her stables two horses which she used for agrotourism and training young horses, and breeding mares and foals, from which she hoped to derive future income from participation in races or from sales.
· In connection with that activity, Ms Baštová earns two types of income, which constitute the subject matter of the main proceedings in the present case. The first type consists of prizes obtained by her own horses for being placed in races and the trainer’s share of prizes won in races by the horses of other third parties. The second type of income results from the operation of racing stables and consists in payments made by horse owners for training their horses for races, and payments made for stabling and feeding the horses.
· In her tax declaration for the fourth quarter of 2010, Ms Baštová claimed the right to full deduction of the input VAT in respect of the following supplies and costs: entrance fees and declaration fees for races, fees for the assistance of auxiliaries during races, the procurement of consumables for horses, their feed and equipment for the riders, veterinary services and purchase of medicines for the horses, consumption of electricity in the stables, consumption of fuel oil for the vehicles, the purchase of a harvester for the production of hay and forage and of tractor equipment and consultancy services in connection with the running of the stables. Those input supplies concerned both Ms Baštová’s horses and those of other owners.
· In addition, in the same tax declaration Ms Baštová also declared output VAT at the reduced rate of 10% on the service of ‘operation of racing stables’ which she supplied to the other horse owners.
· In its tax assessment of 26 September 2011, the Finanční úřad v Ostrově (Tax Office, Ostrov) did not accept Ms Baštová’s claim for full deduction of the VAT on the ground that she had used part of the taxable input transactions for the purposes of participation of the horses in races, which, in the view of the Ostrov Tax Office, did not constitute a taxable transaction giving rise to a right to deduct VAT. In addition, those authorities did not approve the application of the reduced rate of VAT to the service of ‘operation of racing stables’.
· Seised on appeal by Ms Baštová, the Finanční ředitelství v Plzni (Tax Directorate, Plzeň, Czech Republic) varied the decision of the Ostrov Tax Office by a decision of 6 June 2012, finding that Ms Baštová had the right to deduct the VAT for the sale of her own horses, the supply of publicity services and agrotourism. That directorate also granted her the right to deduct the VAT charged on the percentages, received in her capacity as a trainer, of the prizes received as a reward for places for other owners’ horses in races. However, like the Ostrov Tax Office, the Plzeň Tax Directorate did not grant Ms Baštová the right to deduct the VAT paid in respect of the input transactions for her own horses which had participated in races.
· Inasmuch as, during the tax period concerned, only some of the activities carried out by Ms Baštová were eligible for a VAT deduction, the Plzeň Tax Directorate found that she was entitled to only a partial deduction. The Plzeň Tax Directorate also confirmed the tax assessment of the Ostrov Tax Office, finding that the service of ‘operation of racing stables’ should be subject to VAT at the standard rate.
· Ms Baštová brought an appeal against that decision before the Krajský soud v Plzni (Plzeň Regional Court, Czech Republic) which, by a judgment of 6 November 2013, found, inter alia, that, so far as the prizes received for a horse being placed in a race are concerned, the owner of a horse provides the race organiser with a service for consideration and that this therefore constitutes a taxable transaction. Therefore Ms Baštová’s right to deduct VAT should not have been reduced.
· The Appellate Tax Directorate lodged an appeal on a point of law before the referring court.
· The referring court considers, first, that in order to determine whether Ms Baštová was entitled to the full VAT deduction, it is essential to ascertain whether the provision of a horse by its owner to the organiser of a race is to be regarded as a service for consideration, within the meaning of Article 2(1)(c) of the VAT Directive. If not, the question arises of whether that circumstance in itself is a ground for reducing the deduction of VAT paid as input tax or whether the costs pertaining to the services concerned are part of the general costs of the taxable person’s economic activity. Should the Court reply that the fact of preparing horses for races and the horses’ participation in the races is a component of Ms Baštová’s overall economic activity, it is still necessary to decide how to treat the sum which the horse owner receives by way of a prize depending on whether the horse is placed in a race. The referring court seeks, in particular, to ascertain whether that sum must be included in the taxable amount for output VAT or whether it constitutes income which does not affect the taxable amount for output VAT at all.
· Secondly, the referring court raises the issue of whether VAT at the standard rate must be applied to the service of ‘operation of racing stables’ in its entirety, or whether that service falls within the concept of ‘use of sporting facilities’ to which a reduced rate of VAT may be applied under point 14 of Annex III to the VAT Directive. In that context, it must be ascertained whether the services relating to the operation of racing stables, inter alia training the horses, the use of sporting facilities, stabling, feeding and other care of the horses, must be regarded as a single transaction for VAT purposes sharing the same tax treatment. Taking the view that those services undoubtedly constitute a single whole, the referring court seeks on the other hand to determine the criteria on the basis of which it could ascertain whether the components of a supply are of equal status, or whether they are supplies in the relationship of a principal and an ancillary service.
· In those circumstances the Nejvyšší správní soud (Supreme Administrative Court, Czech Republic) decided to stay the proceedings and to refer to the Court the following questions for a preliminary ruling:
‘1(a) Is the supply of a horse by its owner (who is a taxable person) to the organiser of a race for the purpose of the horse’s running in a race a supply of services for consideration within the meaning of Article 2(1)(c) of [the VAT Directive] and thus a transaction subject to VAT?
1(b) If the answer is in the affirmative, must the prize money obtained in the race (which not every horse taking part in the race obtains, however), or the acquisition of the service consisting in the opportunity for the horse to run in the race which the organiser of the race provides to the owner of the horse, or some other consideration, be regarded as the consideration?
1(c) If the answer is in the negative, is that circumstance in itself a ground for reducing the deduction of input VAT on the taxable supplies acquired and used for the preparation of the breeder/trainer’s own horses for races, or must the running of a horse in a race be regarded as a component of the economic activity of a person who operates in the field of breeding and training his own and other owners’ racehorses, and the expense of breeding his own horses and running them in races be included in the overheads associated with that person’s economic activity? If the answer to that part of the question is in the affirmative, must prize money be included in the taxable amount and output VAT accounted for, or is this income which does not affect the taxable amount for VAT at all?
2(a) If for VAT purposes it is necessary to regard several part services as a single transaction, what are the criteria for determining their mutual relationship, that is, for determining whether they are supplies of equal status with each other or supplies in the relationship of a principal and an ancillary service? Does any hierarchy exist between those criteria as regards their ranking and weight?
2(b) Must Article 98 of [the VAT Directive] in conjunction with Annex III to that directive be interpreted as precluding the classification of a service under the reduced rate if it is composed of two part supplies which must be regarded for VAT purposes as a single supply and those supplies are of equal status with each other, and one of them may not in itself be classified in any of the categories set out in Annex III to [the VAT Directive]?
2(c) If the answer to Question 2b is in the affirmative, does the combination of the part service of the right to use sports facilities and the part service of a trainer of racehorses, in circumstances such as those of the present proceedings, preclude the classification of that service as a whole under the reduced rate of VAT mentioned in point 14 of Annex III to [the VAT Directive]?
2(d) If the application of the reduced rate of tax is not excluded on the basis of the answer to Question 2c, what influence on the classification under the relevant rate of VAT does the fact have that the taxable person provides, in addition to the service of the use of sports facilities and the service of a trainer, also stabling, feeding and other care of a horse? Must all those part supplies be regarded for VAT purposes as a single whole sharing the same tax treatment?’
The CJEU judged as follows:
1. Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted to the effect that the supply of a horse by its owner, who is a taxable person for value added tax purposes, to the organiser of a horse race for the purpose of the horse’s participation in that race does not constitute a supply of services for consideration within the meaning of that provision where it does not give rise to a payment awarded for participation or any other direct remuneration and where only the owners of horses which are placed in the race receive a prize, even if that prize is determined in advance. On the other hand, such a supply of a horse for the purposes of its participation in the race constitutes a supply of services for consideration where it gives rise to the payment, by the organiser, of remuneration irrespective of whether or not the horse in question is placed in the race.
2. Directive 2006/112 must be interpreted to the effect that a taxable person, who breeds and trains his own race horses and those of other owners, has the right to deduct input value added tax on the transactions relating to the preparation for horse races of his own horses and the participation of his own horses in races, on the ground that the costs pertaining to those transactions are part of the general costs linked to his economic activity, provided that the costs incurred in each of those transactions have a direct and immediate link with that overall activity. That may be the case if the costs thus incurred pertain to race horses actually intended for sale or if the participation of those horses in races is, from an objective point of view, a means of promoting the economic activity, this being a matter for the referring court to determine.
In a situation where such a right to deduct exists, any prize won by the taxable person on account of the placing of one of his horses in a race is not to be included in the taxable amount for value added tax purposes.
3. Article 98 of the Directive 2006/112, read in conjunction with point 14 of Annex III thereto, must be interpreted to the effect that the reduced rate of value added tax may not be applied to a single composite supply of services, made up of several components relating, inter alia, to the training of horses, the use of sporting facilities and the stabling, feeding and other care provided to the horses where the use of the sporting facilities, within the meaning of point 14 of Annex III to that directive, and the training of the horses constitute two components of that composite supply having equal status or where the training of the horses constitutes the main component of that supply, this being a matter for the referring court to assess.
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The Opinion in this case as delivered by Advocate General Wahl on June 14, 2016 can be found here.
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