The issue of principal and incidental transactions in VAT is not a new one, which is confirmed by the fact that the first judgments of the Court of Justice of the European Union on this issue date back to the last century (C-349/96 Card Protection Plan, C-173/88 Morten Henriksen). However, the question of principal and incidental supplies, or what is included in the VAT base, is still a source of confusion for taxpayers in practice and is often the subject of litigation. In this article, we summarise the main principles for assessing main and incidental supplies, mainly with reference to the case law of the Court of Justice of the European Union ("CJEU"), including practical examples.
However, it is necessary to mention at the outset that even case law does not always provide taxpayers with 100% certainty, as it always depends on the specific circumstances of each case and, I dare say, in some cases on the subjective point of view of experts.
A typical example to illustrate the issue of principal and incidental performance is the supply of goods with transport. The cost of transport or packaging for the supply of goods is an incidental supply to the main supply and therefore takes over the VAT regime according to the goods supplied.
This means that transport and packaging charges will "copy" the VAT rate according to the goods supplied. If goods are supplied at different rates of tax, the incidental expenses must also be apportioned and different rates applied according to the proportion of the value of the goods supplied.
However, it is not only the VAT rate that is taken over by the ancillary supply. If the supply, whether a service or goods, is assessed as an ancillary supply to the main supply, this ancillary supply takes over the VAT regime of the main supply completely. This means that the main supply determines whether the goods or services will be taxable or exempt, what rate of tax will be applied and also whether, for example, the reverse charge scheme will apply. In addition, the determination is also important for correct reporting, whether in the VAT return, the summary declaration (differentiation of goods vs. services) or, for example, in the Intrastat report. For these reasons, it is crucial to determine whether the supplies are separable, independent supplies with their own tax regime or, on the contrary, complex supplies where there is a main supply and one or more ancillary supplies.
The above-mentioned content is derived from Section 36 of the VAT Act, which is basically the only provision that the VAT Act provides on the question of what enters the tax base, and therefore what is considered an incidental supply to the main supply. However, this provision alone is insufficient for many cases in practice and it is therefore necessary to take into account case law. Some information from the GFD[1] may also be helpful. However, even this information tends to quote extracts from the relevant case law.
Below are some practical examples, including selected CJEU judgments.
Accommodation services included in the production classification code CZ-CPA 55 are subject to a reduced rate of 12 %. In addition to the accommodation itself, the services provided usually include cleaning, breakfast, parking or reception services. If all the services are provided by one entity, they are included in the price of the accommodation and can be used by each guest without distinction and without separate charges. These services are ancillary and the entire package (i.e. the whole package) will be subject to a 12% rate.
However, accommodation with half-board, full-board or even with a separately purchased breakfast can apparently no longer be regarded as an ancillary supply in view of the GFD Information on changes to VAT rates from 1 January 2024. According to the Information, the tax base must be divided so that the accommodation is subject to a 12% rate and the tax base for meals is divided according to the individual supply, i.e. the basic rate is applied to the supply of beverages and the reduced rate to the supply of meals. If such a split is not possible, the basic rate of tax must be applied to the entire supply, according to the information.
The CJEU ruled that the main purpose and objective of the transaction for the customer was to obtain insurance in case of loss or misuse of the credit card or other personal belongings. The other services were merely ancillary. Ultimately, the services provided by CPP were in the nature of insurance transactions and were therefore considered as a single supply of services (as a complex supply) exempt from VAT.
The questions put to the CJEU in this case were whether the additional charge constituted consideration for a supply by Everything Everywhere to its customers which was exempt from VAT and whether that supply was separate from the supply of mobile telephone services.
The court stated that the receipt and disposition of payment are inextricably linked to any provision of services for consideration. It is inherent that the provider should demand payment and make reasonable efforts to ensure that the customer can actually pay for the service provided. Here, the main service provided was telephone services and the method of payment was not an end in itself for the customer, but only a complement (means) to the use of the main supply of telecommunications services. The processing fee was an ancillary supply and should therefore not have been exempt from VAT.
The CJEU ruled that the provision of a gift in return for ordering magazine subscriptions constitutes an incidental transaction and cannot be regarded as a transfer of goods without consideration (a gift of small value). The tax authority was therefore entitled to charge VAT on the value of the tablets at the reduced VAT rate to which the supply of the magazine was subject. The main arguments of the Court in this decision were, in particular:
[1] E.g. Information of the GFD on the application of VAT to the rental of a grave site and the provision of related services; Information of the GFD on the application of VAT to insurance activities
Autor: Denisa Krocová
However, it is necessary to mention at the outset that even case law does not always provide taxpayers with 100% certainty, as it always depends on the specific circumstances of each case and, I dare say, in some cases on the subjective point of view of experts.
A typical example to illustrate the issue of principal and incidental performance is the supply of goods with transport. The cost of transport or packaging for the supply of goods is an incidental supply to the main supply and therefore takes over the VAT regime according to the goods supplied.
This means that transport and packaging charges will "copy" the VAT rate according to the goods supplied. If goods are supplied at different rates of tax, the incidental expenses must also be apportioned and different rates applied according to the proportion of the value of the goods supplied.
However, it is not only the VAT rate that is taken over by the ancillary supply. If the supply, whether a service or goods, is assessed as an ancillary supply to the main supply, this ancillary supply takes over the VAT regime of the main supply completely. This means that the main supply determines whether the goods or services will be taxable or exempt, what rate of tax will be applied and also whether, for example, the reverse charge scheme will apply. In addition, the determination is also important for correct reporting, whether in the VAT return, the summary declaration (differentiation of goods vs. services) or, for example, in the Intrastat report. For these reasons, it is crucial to determine whether the supplies are separable, independent supplies with their own tax regime or, on the contrary, complex supplies where there is a main supply and one or more ancillary supplies.
Tax base according to the VAT Act
According to the VAT Act, the tax base includes everything received or to be received by the taxpayer as consideration for the taxable supply, including the amount for payment of excise duty. In addition to other taxes and charges or similar payments, incidental expenses such as packaging, transport, insurance or commissions are also included in the taxable amount. Similarly, materials directly related to the service provided enter into the taxable amount, including materials, machinery or equipment which are installed or incorporated in the building when the construction or assembly work is provided on the completed building or during construction.The above-mentioned content is derived from Section 36 of the VAT Act, which is basically the only provision that the VAT Act provides on the question of what enters the tax base, and therefore what is considered an incidental supply to the main supply. However, this provision alone is insufficient for many cases in practice and it is therefore necessary to take into account case law. Some information from the GFD[1] may also be helpful. However, even this information tends to quote extracts from the relevant case law.
Below are some practical examples, including selected CJEU judgments.
Practical examples and selected CJEU judgments
Renting a garage to park the tenant's vehicle
The rental of a parking space (garage) is itself subject to the standard rate of VAT. On the other hand, the rental of an apartment is exempt from VAT. However, if the use of the garage by the tenant were part of the contractual arrangement for the rental of the apartment, then the rental of the garage could be considered an ancillary supply closely related to the main supply, i.e. the rental of the apartment. In such a case, the rental of the flat including the garage would be exempt from tax. In this context, reference may be made to the long-standing judgment C-173/88 Morten Henriksen, where the CJEU held that the letting of a garage was closely linked to the letting of immovable property (a house) and that the two lettings therefore constituted a single economic transaction.
Accommodation with breakfast vs. accommodation with half board
Accommodation services included in the production classification code CZ-CPA 55 are subject to a reduced rate of 12 %. In addition to the accommodation itself, the services provided usually include cleaning, breakfast, parking or reception services. If all the services are provided by one entity, they are included in the price of the accommodation and can be used by each guest without distinction and without separate charges. These services are ancillary and the entire package (i.e. the whole package) will be subject to a 12% rate.However, accommodation with half-board, full-board or even with a separately purchased breakfast can apparently no longer be regarded as an ancillary supply in view of the GFD Information on changes to VAT rates from 1 January 2024. According to the Information, the tax base must be divided so that the accommodation is subject to a 12% rate and the tax base for meals is divided according to the individual supply, i.e. the basic rate is applied to the supply of beverages and the reduced rate to the supply of meals. If such a split is not possible, the basic rate of tax must be applied to the entire supply, according to the information.
Furniture delivery including assembly
The supply of freestanding furniture (e.g. desks and office chairs) is subject to the standard VAT regime. However, built-in or fitted furniture such as built-in wardrobes or built-in appliances are part of the construction and installation work on the construction/completed building, which is subject to the reverse charge regime, and the built-in goods are also part of the taxable amount. In the case of supply of both built-in and freestanding pieces of furniture by a single entity, these items have to be viewed as separable transactions with their own tax regime, as it cannot be determined that either of the transactions is the main transaction and the other is incidental even with regard to the price or the predominant number of pieces of furniture in question. It should be noted that the transport of furniture (as an ancillary supply) will also be subject to the standard regime in the case of desks and chairs and to the reverse charge regime in the case of built-in wardrobes.C-349/96 Card Protection Plan
The UK company Card Protection Plan ("CPP") provided credit card holders with a package of assistance in the event of loss of personal belongings, primarily credit cards, keys and personal documents. CPP also provided insurance benefits for fraudulent use of cards and other forms of assistance, such as medical assistance when the loss occurred outside the customer's home or assistance in reporting the loss or damage. The insurance service itself was supplied by a third party. CPP assessed the service as an insurance service and exempted the benefit. However, the UK tax authorities treated the supplies as taxable.The CJEU ruled that the main purpose and objective of the transaction for the customer was to obtain insurance in case of loss or misuse of the credit card or other personal belongings. The other services were merely ancillary. Ultimately, the services provided by CPP were in the nature of insurance transactions and were therefore considered as a single supply of services (as a complex supply) exempt from VAT.
C-276/09 Everything Everywhere
The telecoms provider, Everything Everywhere, charged additional fees to customers who chose a payment method for mobile phone services other than direct debit or BACS (Bankers' Automated Clearing System) transfer. That is, if a customer paid by card, cash or cheque, for example, they had to pay an additional fee. The company considered the charge to be a payment processing service performed for consideration and therefore a VAT exempt supply.The questions put to the CJEU in this case were whether the additional charge constituted consideration for a supply by Everything Everywhere to its customers which was exempt from VAT and whether that supply was separate from the supply of mobile telephone services.
The court stated that the receipt and disposition of payment are inextricably linked to any provision of services for consideration. It is inherent that the provider should demand payment and make reasonable efforts to ensure that the customer can actually pay for the service provided. Here, the main service provided was telephone services and the method of payment was not an end in itself for the customer, but only a complement (means) to the use of the main supply of telecommunications services. The processing fee was an ancillary supply and should therefore not have been exempt from VAT.
C-505/22, Deco Proteste - Editores Lda.
The Portuguese magazine publisher, Deco Proteste, offered a free subscription to its magazine (a tablet worth €50 - the threshold for small value gifts in Portugal) to new subscribers. The Portuguese tax authorities argued that Deco Proteste should pay VAT on the value of the gifts in addition to the VAT on the subscription. The question before the CJEU was whether the free gifts constituted a separate taxable supply in the form of a small-value gift (which is not considered a supply of goods for consideration) or an ancillary supply to the main supply (the magazine subscription).The CJEU ruled that the provision of a gift in return for ordering magazine subscriptions constitutes an incidental transaction and cannot be regarded as a transfer of goods without consideration (a gift of small value). The tax authority was therefore entitled to charge VAT on the value of the tablets at the reduced VAT rate to which the supply of the magazine was subject. The main arguments of the Court in this decision were, in particular:
- the gift (tablet) with the subscription allowed new subscribers to use the provider's main service (reading magazines in digital version) under the best possible conditions,
- the provision of gifts in the case of new subscriptions is an integral part of the company's business strategy (its aim is only to increase the number of subscribers and therefore increase profits),
- the provision of a gift constitutes an incentive to subscribe,
- the provision of the said gift has no independent purpose from the point of view of the average consumer who agrees to pay at least a monthly subscription fee in order to receive the said gift.
In conclusion, I summarise the principles for assessing the question of principal and ancillary benefits arising mainly from the case-law of the CJEU:
- Each supply of a service should a priori be regarded as separate and independent, but on the other hand, the supply of a supply consisting economically of one service should not be artificially divided.
- The secondary performance is not an end in itself for the customer, it is not its goal, but only a means to use the main performance under the most optimal conditions.
- Transactions are incidental if they are so closely connected that they objectively constitute a single indivisible economic transaction, the division of which would be artificial.
- A single service is particularly relevant where one or more elements are considered to constitute the main service, while one or more elements are considered to be ancillary services.
- The fact that only one price is invoiced does not necessarily mean that it is a comprehensive performance.
- Contractual arrangements must be taken into account, but at the same time, the primacy of "substance over form", or the primacy of substance over formal arrangements, applies.
- The principle of principal and incidental supplies needs to be addressed comprehensively according to the subject matter of the activity and the predominant supplies of the payer, there is no uniform guidance.
[1] E.g. Information of the GFD on the application of VAT to the rental of a grave site and the provision of related services; Information of the GFD on the application of VAT to insurance activities
Autor: Denisa Krocová