Classic: Gemeente Borsele

The 2016 Gemeente Borsele judgment has had a significant effect on the VAT position of municipalities and other bodies governed by public law. At its heart was the deduction on school transport for which parents paid a small contribution.

The facts

Under a statutory duty, the municipality of Borsele organised transport for pupils within its area. It engaged transport companies which invoiced it with VAT. The municipality charged parents a contribution and reclaimed the VAT on those costs in its return, taking the view that it was acting as a taxable person in supplying the transport. The Dutch Tax Administration refused the refund, and the case eventually reached the Court of Justice.

The Court of Justice

The Court had to decide whether organising this school transport was an economic activity, so that the municipality was a taxable person with a right to deduct.

The first question was whether the transport was a supply for consideration. About one third of parents paid a contribution, and the contributions together covered only 3% of the costs. Whether a contribution was payable depended on parental income, and it was not calculated by reference to the actual costs. That a service is supplied at a price above or below cost is, however, irrelevant to whether it is supplied for consideration. The fact that about a third of parents paid was enough for the Court to answer that question in the affirmative.

The Court then considered whether the municipality was acting as a taxable person. It was not. The circumstances in which the municipality provided the transport differed from those in which passenger transport is normally supplied. The municipality did not offer transport services on the general passenger transport market, as taxi firms do. As part of its public task it bought in services from businesses and made them available to parents for a small charge. That the charge covered only 3% of the costs, with the balance funded from general revenue, underlined for the Court that the municipality was not acting as a taxable person.

In practice

The judgment has had important consequences for the VAT treatment of services supplied by public authorities. It is now clear that an economic activity is less readily found. The mere fact that a municipality or other body governed by public law makes supplies on a continuing basis for a low charge is not enough. It must also participate in the market in a way comparable to an ordinary business. Whether it does so has to be assessed case by case. What the judgment does show is that an asymmetry between the costs and the revenue of an activity is an indication that the body is not acting as a taxable person.