Supreme Court: no VAT exemption for a profit-seeking debt counsellor

Extending the social exemption to commercial providers is, according to the Supreme Court, contrary to the Act. A painful outcome, which the State Secretary moved quickly to repair.

The Dutch VAT Act contains an exemption for designated supplies of a social nature, provided the supplier does not seek profit and the exemption does not distort competition with suppliers who do. That designation is worked out in the implementing decree.

Under one heading, supplies by institutions for social and occupational social work are exempt. Another does the same for supplies by debt counselling institutions, other than acting as administrator under the statutory debt restructuring scheme. A general note to the annex states that the businesses named in those headings may apply the exemption even where they do seek profit.

The Supreme Court

The Dutch Tax Administration's policy was that the exemption for debt counselling applies only to work aimed at resolving a problematic debt situation. Work as a budget manager, protective administrator or guardian was, in its view, subject to 21% VAT. That policy became public in March 2016 following a freedom of information request. The lower courts differed on the strict reading: the Court of Appeal in Arnhem-Leeuwarden upheld it, while the Court of Appeal in The Hague held that protective administration could also be covered.

The Supreme Court held, however, that extending the exemption to commercial providers in the implementing decree conflicts with the VAT Act and must therefore be disapplied. A commercial business, such as a sole trader or private limited company, therefore has no right to the social exemption at all. According to the Court, the principle of legitimate expectations does not help, because it applies only to statements by an administrative authority.

The Court did, by way of obiter comment, explain the headings themselves. Debt counselling also covers work aimed at preventing problematic debt, even where the person concerned has not previously had such debts, so preventive help is included. Protective administration and guardianship do not fall under debt counselling, but are closely linked to social work and therefore fall under the other heading, provided the institution shows lasting social commitment.

A gap in legal protection

The galling part for the businesses concerned is that they are told the tax authorities applied too strict a reading, yet still lose because of an error by the legislature.

We have difficulty with that decision. One of the Supreme Court's core tasks is to provide legal protection, and here it declines to protect against a legislative error, although in our view it could have done so. The policy published in 2016 states that the exemption also applies to businesses seeking profit, and the tax authorities' website says expressly that the no-profit condition does not apply to these institutions. On the basis of that policy and guidance, protection could have been given under the principle of legitimate expectations.

The principle of legal certainty offered the same possibility. Under it the Supreme Court protects a business where the Court itself departs from earlier case law to that business's detriment: it may then rely on the older, more favourable reading up to and including the period in which the change occurs. That a judgment is a statement by a court rather than an administrative authority has not previously stood in the way. Why a statement by the legislature could not found similar protection is unclear to us.

The repair

Fortunately the State Secretary responded quickly with a decree allowing the commercial businesses named in the general note to continue applying the exemption. It states that the past will not be reopened, which removes the risk of assessments from 2018 onwards. The legislature will have to amend the VAT Act so that the implementing decree no longer conflicts with it.

Businesses that do not wish to apply the exemption can charge 21% VAT in line with the judgment. For commercial debt counsellors, applying the exemption will normally be more favourable: there is then no right to deduct, but the non-deductible VAT will usually be less than 21% VAT on turnover.

What should you do?

If you are a commercial debt counselling business and want to apply the exemption, first map out which of your activities qualify on the Supreme Court's reading.

Note that applying it can trigger corrections of VAT previously deducted on capital goods such as cars or computers, or on other goods and services whose adjustment period has not yet expired. If you rent premises with VAT, that letting becomes exempt. Under the terms agreed with the landlord that will normally lead to a rent increase, because the landlord loses its right to deduct and may have to correct part of the VAT already deducted. That increase can be substantial.

These examples show how important it is to take proper advice before choosing.