ECJ VAT Cases MAY/JUNE 2007 - empcom.gov.in

ECJ VAT Cases
ing the relevance of the third exemption mentioned
under “legal background”, i.e. the exemption laid down
by Art. 13(A)(1)(k) of the Sixth Directive, she focused on
services “closely related to education”, which are exempt
under the exemption for educational services. 3
One of the basic principles of VAT is that all supplies
made by taxable persons are subject to VAT, unless the
legislation specifically provides otherwise and, if the
VAT legislation provides for an exemption, it must be
interpreted strictly because it is an exception to the rule
that all supplies are subject to VAT. Another basic principle
is that, unless the legislation specifically provides
otherwise, VAT exemptions and special regimes apply to
certain supplies of goods and services, regardless of the
status of the service provider, for example, the exemption
for insurance transactions may apply to supplies
made by an institution not authorized as an “insurance
company”, the exemption for financial services may
apply to institutions other than banks, the margin
scheme applicable to the services of travel agents may
apply to hotels, etc.
On the basis of those principles and following the Advocate
General’s plausible view that the secondment of
teachers is not the provision of education, the results are
as follows. Horizon College undoubtedly qualified as a
taxable person for VAT purposes, which means that, in
principle, all its supplies were subject to VAT. However,
its educational services were exempt from VAT. Secondment
of staff however could only be exempt if that
transaction is covered by another exemption.
Under the Sixth Directive, a specific exemption applied
to the secondment of staff. Under Art. 13(A)(1)(k), 4 certain
supplies of staff by religious or philosophical institutions
for the purpose of, inter alia, exempt educational
services and with a view to spiritual welfare, were
exempt from VAT. 5 That provision clearly implies that
other supplies (secondment) of staff cannot possibly be
exempt from VAT. It is undoubtedly true that the secondment
of staff by Horizon College was made for the
purposes of the educational services provided by the
hiring-in institutions but it cannot reasonably be maintained
that Horizon College was a religious or philosophical
institution and that the secondment of staff
took place with a view to spiritual welfare. Non-fulfilment
of those conditions should have led to the conclusion
that Horizon College’s secondment of staff was subject
to VAT.
Instead of drawing that straightforward conclusion, the
Advocate General examined whether or not Horizon
College’s secondment of staff could be exempt on the
ground that it is a supply of goods and services “closely
related” to the educational services rendered by Horizon
College. 6
Subsequently, the Advocate General examined the
restrictions applicable to the exemption for educational
services rendered by bodies other than those governed
by public law. Apart from the optional restrictions to be
set by the individual Member States7 , those restrictions
are that the exemption for, in this case, educational services
and closely related supplies does not apply to private
entities, firstly, where the supply of goods and service is
not essential to the exempt transactions8 and, secondly,
where its basic purpose is to obtain additional income9 for the organization by carrying out transactions which
are in direct competition with those of commercial
enterprises liable for VAT. Although it is obvious that, in
order to qualify as “closely related”, the supply must be
made by the person who makes the principal exempt
supply and that also the above restrictions must apply to
the “closely related” supplies made by the supplier of the
exempt educational services (Horizon College), the
Advocate General made the remarkable manoeuvre of
interpreting the concept of closely related supplies and
the first restriction as applying to the transactions carried
out by Horizon College’s customers. 10 In other
words, Horizon College is supposed to determine
whether or not its supply (secondment of staff) is
exempt from VAT on the basis of an assessment of
whether or not that secondment is essential to its customers’
educational services. It is logical that Horizon
College took that view because it had no other plausible
arguments in support of its claim that the secondment of
staff was exempt from VAT but it is, to say the least,
remarkable that the Commission supported it.
If the new11 policy becomes that taxable persons must
apply exemptions on the basis of criteria that are beyond
their horizon, VAT has truly become a highly complex
tax.
3. See note 1, phrase highlighted in italics. The “closely related” supplies
include, for example, provision of educational materials or field trips, for consideration.
4. Art. 132(1)(k) of Directive 2006/112.
5. That exemption continues to apply under Art. 132(1)(k) of Directive
2006/112.
6. The expression “thereto” in “closely related thereto” clearly refers to the
service provider’s exempt educational services.
7. Those conditions are laid down by Art. 13(A)(2)(a) of the Sixth Directive
(Art. 133 of Directive 2006/112) and include non-profit-making aims,
voluntary management, approved maximum prices, and not resulting in distortion
of competition.
8. It is highly doubtful that it can reasonably be maintained that the
secondment of teachers by Horizon College was essential to its educational
services.
9. The relationship between that restriction (see Art. 134(b)) and
Art. 13(A)(1)(o) of the Sixth Directive (Art. 132(1)(o) of Directive 2006/112),
which provides for a separate exemption for fund-raising events organized by
institutions, including educational institutions whose supplies are covered by
specific exemptions, is not entirely clear.
10. The Advocate General noted that, if students are receiving education or
vocational training from an educational institution, and that institution suffers
a temporary shortage of qualified teachers or instructors, then the benefit
of the education or training received will be greatly enhanced by the secondment
of qualified staff from another such institution. It is true that that view is
obviously correct, as a matter of common sense, but it is equally obvious that
the benefit derived by the customer from a certain supply has nothing to do
with the relationship between that supply and the supplier’s other supplies.
11. That policy would not be entirely new because in its judgment of 9 February
2006 in Stichting Kinderopvang Enschede v. Staatssecretaris van Financiën,
Case C-415/04, [2006] ECR I-1385, the ECJ followed a similar approach.
Regardless of the results, that line of reasoning should not have been adopted.
224 INTERNATIONAL VAT MONITOR MAY/JUNE 2007 © IBFD