VAT benefits

Under the terms of the duty on goods and services, the principle applies that each service should be considered separate and independent.

As a source of this principle, Article 1(2) Directive 2006/112 to 28 November 2006 on the common system of value added tax[1], and on the basis of the previous legislation Article 2(1) VI Directive 77/388 to 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax, uniform basis of assessment.

This position has also been confirmed by the Court of Justice of the European Union (hereinafter referred to as the EU) on several occasions.[2]. However, it should be pointed out that it did not give this principle of absolute character.

The lack of regulation at EU and national level, as well as the different practices of authorities and courts, causes many VAT problems to be encountered in the practical application of the concept of complex benefit.

1. Complicated benefit — General comments

Over time, the examination of cases pending before the EU Court of Justice raised doubts as to whether specific services covering several components should be shared in accordance with the principle of the separateness and independence of each benefit, or could be regarded as one compound benefit (one of the first substantial benefits judgments submitted were the judgment of the Court of Justice of 25 February 1999[3]). In its rulings, the Court advocated that there were cases where such a division would be artificial in nature and could lead to a distortion of the functionality of the VAT system, stressing that it is necessary to specify the criteria to establish that a complex service is involved.

At this point it is worth to draw attention to the judgment of the Court of Justice of 6 May 2010: „It should be recalled that these criteria, such as the expectation of the average consumer to which the Commission refers, aim to protect the functionality of the VAT system in the light of the differentiation of commercial transactions.

However, the Court itself found that the exhaustive the answer to this problem and stressed the need to take account of all the circumstances in which the transaction is being carried out.”[4]. Unfortunately, the problem of complex benefits has not been regulated either under Community or national rules.[5].

Consequently, the conditions for considering a given benefit as a composite benefit should continue to be sought in the case law of the TEU.

2. The concept of composite and ancillary benefits

Given the lack of a statutory definition of the term ‘composed certificate’[6] and failure to develop coherent terminology in practice[7], consideration should be given to whether there are specific features allowing the benefit to be considered as a composite benefit. In this respect, the Court’s jurisprudence is helpful.

On the basis of the judgments of the TEU, the following definition of a composite benefit can be formulated: this is a benefit consisting of two or more of the elements in which the main (essential) and ancillary (additional) benefits occur and where there is such a close link between at least two elements or actions that objectively create them one whole[8].

Ancillary/additional (you may also meet the term ‘by-product’) which is treated on the basis of VAT as well as a principal benefit, is considered to be such a benefit, which is not an objective for the customer in itself, but is used to make the best possible use of the main benefit.

In the light of the caselaw of the Court (regarding both the fact that each benefit should normally be regarded as separate and independent, and the fact that a transaction consisting of one of the economic benefits should not be artificially distributed in order not to impair the functionality of the VAT system) each time it is necessary to seek the elements specific to the activity in question in order to determine whether the benefits concerned constitute several separate benefits or a uniform benefit[9].

It must be stressed that, in the absence of an absolute rule concerning the determination of the scope of the VAT benefit in question, the circumstances in general need to be taken into account in order to establish it[10].

The Court has repeatedly stressed in its case law that in the framework of cooperation established on the basis of Article 267 Treaty on the Functioning of the European Union[11] it is for national courts to determine whether, in a particular case, the taxable person is carrying out one benefits and a comprehensive final assessment of the facts in this respect[12]. However, according to the case-law of the CJEU on the interpretation of Union law, the Court should provide the courts with all relevant guidance which may be useful in resolving the case before them.[13].

For example, such guidance to the national court to help ensure that benefits are properly qualified, In its judgment of 27 September 2012[14] in respect of the taxation of rental and the hire of ancillary services:

1) the lease of immovable property and the related lease of services may constitute one VAT benefit,
2) benefits obtained by tenant they do not matter to him without rental services and their acquisition does not seem to constitute an end in itself, but a means of making better use of the lease,
3) for occurrence one benefits are awarded landlord in the lease agreement, the possibility to terminate that contract where tenant does not pay additional rent fees (although the Court has acknowledged that this is not an absolute determining factor),
4) the fact that the provision of services, such as those at issue in the main proceedings, can in principle be performed by a person third, does not exclude the recognition of many of the benefits under consideration as a uniform service,

where different services (exempted from VAT or taxed) are performed for general remuneration, it is necessary to separate between the different services of the associated additional rent charges in order to determine the part of the charges in question which should be subject to VAT and the part which is exempt from that tax[15].

Example

The taxpayer is active in the rental of residential premises. It shall conclude rental agreements taking into account the above guidelines of the Court.

In this situation, it is possible to recognise the rental and related ancillary services (such as the delivery of media or cleaning services) as a complex provision, resulting in the taxation of these ancillary services in the same way as the main provision (i.e. rental).

Consequently, in the case of rental for residential purposes, the whole benefit will benefit from VAT exemption.

3. Conditions for recognising several activities as a composite benefit

If the benefit includes two or more components, First, it must be considered whether it is one the provision, or several separate and independent benefits (each from the VAT point of view must be assessed separately). As mentioned above, In its rulings, the Court states that both the above-mentioned principle that each benefit should be treated as separate and independent as well as the fact that a benefit covering from an economic point of view one service should not be artificially shared[16].

The Court has repeatedly stressed that a single benefit takes place especially when one or more component parts shall be considered as a principal service, while other or other components shall be treated as ancillary services to which the same rules of taxation apply as regards the essential service[17].

In its rulings, the Court also pointed out that the economic (not legal or formal) point of view is essential when assessing whether a complex service is involved. For example, in the judgment of 27 September 2012[18] The Court found that a transaction consisting of one economic benefits should not be artificially distributed in order not to impair the functionality of the VAT system.

Therefore, from an economic point of view, services should not be shared for tax purposes when they create one a complex (complementary) service covering basic services and one or several additional benefits. However, if the service provided consists of activities which are not merely intended to perform the main (essential) activity but may also be of a spontaneous nature, then there is no basis for treating it as a component of the complex (complementary) service.

It is also apparent from the caselaw of the Court that, in certain circumstances, formally separate benefits which can be performed separately and thus lead to tax or exemption respectively, should be regarded as a uniform act where they are not independent[19].

In the light of the above, the following conditions may be set out:

1) the benefit covers several elements (benefits), but from an economic point of view constitutes a uniform benefit,
2) one or more of the benefits may be considered as constituting the principal benefit,
3) one or more of the benefits may be considered as ancillary services,
4) from the point of view of the consumer, understood as the average consumer, the elements of the benefit are so closely related that they objectively create in the economic aspect one the whole,
5) the separation of the benefit into its individual elements would be artificial.

Where a benefit consisting of several elements satisfies the above conditions, it should be treated as one compound benefit. Consequently, the same tax consequences as for the main benefit will apply to the ancillary (additional) benefits of the complex benefit.

As indicated above, when assessing whether we are dealing with a service complex for VAT purposes, it is important to analyse the economic nature of the transaction (the subject matter relates to the issue of recognising the subject of VAT as an economic phenomenon and analysing each transaction from an economic and not civil aspect).

Several manifestations of such a position can be mentioned. In particular, it should be stressed that the actual effects of the transaction need to be verified taking account of economic aspects. In other words, when examining a particular activity, the economic importance of its effects should be viewed. Only an economic perspective can indicate the interlinking of individual elements within a given activity.

Moreover, when carrying out an economic analysis of the nature of the transaction, it should be remembered that the subject matter of VAT is not contracts, but rather economic events. The value added tax system is not based on purely formal findings of the parties, but on economic events which are their effects.

In this economic analysis, it must also be borne in mind that the scope of taxation determines the economic needs of consumers. This means that when assessing a given transaction for VAT purposes it should be examined whether the consumer would have done it if it were divided into individual benefits or whether it intended to do so.

one comprehensive transactions.

4. Examples of structures with complex benefits

The institution of the complex benefit is widely used in the practice of economic turnover (due to the lack of a closed catalogue of these benefits, it is possible to create new complex benefits). However, for some economic activities, the use of this institution is more frequent than in others. For example, the following activities can be listed:

1) rental and related ancillary services (e.g. cleaning or media delivery),
2) sales of so-called publishing sets (i.e. magazines with gadgets) and medical and cosmetic kits (e.g. bandage plus cream),
3) marketing shares combined with the issuing of prizes,
4) IT services related to the supply of specialized software,
5) leasing of equipment with service or supplies of consumables,
6) comprehensive goods storage services.

As a general rule, the use of a complex benefit institution is a standard economic practice, but there are situations where the provision of such benefits can be considered to lead to fraud. This is due to the fact that not all purchasers of goods or services are interested in adding value added tax to the selling price (in particular where the purchaser carries out activities not giving rise to the deduction of input tax)[20].

Practical relevance and tax consequences of considering the benefit as a complex benefit

The classification of the VAT benefit as a complex benefit is essential for practical reasons. In particular, it may decide on the place of supply of the service or supply, the relevant VAT rate or the time when the tax obligation arises.

The recognition of a service as a complex service may also affect the assessment of whether the purchaser of the goods or services is entitled to deduct input tax.

Furthermore, it should be borne in mind that the incorrect classification of the benefit in question may expose the taxpayer to criminal-tax liability or lead to a question of the reliability of the documents it issues[21].

The question of the recognition of VAT benefits as complex benefits and their taxation also has a direct bearing on economic relations. The correct classification in this respect is relevant, inter alia, from the point of view of the final price of the benefit.

Such cases are dealt with by courts that resolve disputes relating to the application of public procurement rules, for example where one from the tendering entities offered a significantly lower price because of the lower VAT rate[22].

At this point, there are a number of examples of benefits whose VAT settlement involves a number of practical doubts, depending on whether these benefits are treated as complex benefits or not.

5.1. Applicable VAT rate

5.1.1. Rental and related services

With the rental for residential purposes, the classification of rental and media supply as a complex benefit will cause landlord will also be required to add these benefits to the tax base (i.e.

media) and the application of a uniform rate of tax applicable to the basic service (household rental is exempt from tax according to content Article 43(1)(36) Act on 11 March 2004 on tax on goods and services[23]). Otherwise, i.e.

when considering that the rent of immovable property and its associated supply of water, electricity, heat and the export of impurity must be considered to be several separate and independent benefits, that the exemption may only benefit from the rent fee, and that other benefits will in principle be subject to taxation at the rate applicable to them (e.g.

the supply of electricity – 23%, a water supply – 8%).

1.2. Sale of so-called sets – e.g. the magazine as the main service and the additive/gadget as an auxiliary service

If it is considered that the sale of the magazine together with the additional items attached to it does not constitute a composite benefit, we are dealing with a sale involving two separate goods, VAT-taxed on the terms specified for their subject matter.

In this situation, the sale of the magazine will be subject to taxation at a rate 8%, and the sale of the additive/gadget – the specific rate for this product (so it could be the rate 23%).

The goods attached to the journal remain with it in a genuine and permanent functional relationship, indicating that this allowance is to be used as an auxiliary to the journal; the set may be treated as a composite benefit subject to taxation at the rate applicable to the main benefit, i.e. journals (8%).

5.1.3. Supply of medical equipment and adaptation work related to its use

In its rulings, the NSA took the view that the provision consisting of a comprehensive adaptation of the hospital premises necessary for the proper operation of the purchased medical product constitutes a provision separate from the supply of medical equipment.

Consequently, each of these benefits is taxed at the VAT rate applicable to each other, i.e. the supply of a medical product benefits from a preferential tax rate 8%, and adaptation work should be taxed at the standard rate 23%24.

If a different position was taken to consider that there was a complex benefit, the entire benefit would be subject to the tax rate applicable to the main benefit, i.e. Rate 8% suitable for the supply of medical devices.

It should be stressed that the question of the possibility of applying a reduced rate of tax to the benefit as a whole may be particularly important for entities which, due to their business activities, do not have or have only limited right to deduct input tax.

5.2. Right to deduct input tax

5.2.1. Marketing activities combined with awards

For such benefits, the case-law has been amended following the judgment of the CJEU in the combined cases with 7 October 2010[25].

At present, the courts and tax authorities have taken the view that the marketing service and the purchase and transfer to persons third in the course of the marketing campaign, the prizes in the form of consumer goods or services are not so closely linked that they objectively create one an indivisible economic benefit, the separation of which would be artificial.

As a consequence, VAT is subject to separate marketing services as a service, and awards to persons third ‒ as a supply of goods (this should be reflected in the determination of the taxable amount for the remuneration due from the payer to the marketing entity).

This also translates into the right to deduct input tax from the invoice issued by the marketing share operator. If the marketing share combined with the award was treated as a composite benefit, then the purchaser should be entitled to deduct all VAT charged from the invoice.

In the light of the current position of the courts and authorities, the right to deduct input tax is granted to the purchaser only in respect of the remuneration paid in respect of the marketing service (the remuneration in the part concerning the issue of prizes is treated as paid by the purchaser for the supply of goods to entities third).

5.2.2. Organisation of conferences or training – sale of packages

It should be stressed that, in practice, there are many situations where a service provider offers a "package" of conference and training services (e.g. conference organisation services combined with dinner and artistic performances or training services with accommodation and spa treatments).

It cannot be excluded that, in cases where such a service is called into question as a complex service, there is a risk that the authorities may refuse the right to deduct input tax on certain benefits (e.g. spa treatments) due to the potential absence of any link between such expenditure and their business activity.

5.2.3. Place of taxation – comprehensive goods storage services

The treatment of a benefit as a composite benefit may also affect its place of taxation. For example, this issue has arisen with regard to comprehensive goods storage services.

In the judgment of 27 June 2013[26] The Court found that comprehensive storage services, including the taking of goods into storage, their placing on the relevant storage shelves, storage, packaging, issuing, unloading and loading are property-related services only where storage constitutes the main provision and services to recipients is granted the right to use all or a clearly defined part of the property.

In turn, in the event of non-compliance with the above-mentioned conditions, the storage service will be subject to taxation in accordance with the general principle of determining the place of taxation, i.e.

where the recipient of the service has a permanent establishment or permanent establishment or, in the absence of such establishment, a permanent residence or normal residence.

6. Summary

The lack of regulation at EU and national level and the different practices of authorities and courts mean that the practical application of the concept of complex benefit involves many VAT problems.

The question of the qualification of the benefit (as one of the benefits of a complex or a number of separate individual benefits) are important for the correct settlement of the tax because, in the case of a complex benefit, they are subject to the same tax treatment as the main benefit (e.g. the application will be one tax rate).

The lack of rules in this regard causes that there is no closed catalogue of such benefits. Therefore, in practice, it is possible to create new complex benefits for which the uniform tax rate will apply (a reduced tax rate can then be applied to the entire benefit). Consequently, the risk of instrumental application of this concept, which could lead to abuse and would be highly undesirable, cannot be excluded.

Instructions for the treatment of the occurrence of benefits which are or may be of the nature of claims submitted

The following instructions have been prepared in particular on the basis of the case-law of the Court of Justice of the EU on such benefits, since the benefits lodged are not regulated at Union or national level (there is no definition of the concept itself).

Formula

Instructions for the treatment of the occurrence of benefits which are, or may be, complex

This instruction is addressed to the person (or persons) responsible for tax settlements in the unit .................. (name of the unit). 1.

An analysis of whether a complex benefit is involved should be made where the benefit consists of two or more elements and simultaneously: 1) one the item (or more) of the benefit may be considered to be a principal benefit; and 2) one the item (or more elements) of the benefit may be considered to be an ancillary (additional) benefit, understood as a benefit that only constitutes a means for the buyer to make better use of the principal benefit or is necessary for its implementation.

For the purposes of the qualification of a given benefit as a composite benefit, it is important to analyse the total benefit from the perspective of the needs of the average consumer in relation to the following: 1) whether, from an economic and practical point of view, the separation of a given benefit would be artificial for the consumer due to the indissoluble relationship between individual benefits that they create one All in an economic sense?

2) whether the implementation of individual benefits is relevant and retains its value for the consumer (the purchaser) only if they are made together with the main benefit, i.e. Would a benefit treated as ancillary be of value to the consumer if it were made without the main benefit? 3.

The following may also be used as an indication of the classification of the benefit as a composite benefit: 1) the content of the contract between the purchaser and the supplier of the benefit (including the purpose pursued by the parties to the transaction); it should be borne in mind, however, that whether the benefit is to be taxed as a composite benefit is primarily governed by the provisions of tax law, so the parties cannot affect the mandatory provisions of tax law by virtue of contractual provisions; 2) the possibility for the supplier of the benefit to terminate the contract where the buyer does not pay the fee for the ancillary benefits; 3) there is no possibility on the part of the purchaser of free and independent choice of providers and of means of using ancillary services (e.g.

for rental services such as water and electricity supply). 4. Each case of potential occurrence of a complex benefit should be analysed separately and on the basis of all circumstances. There is no list of conditions which would definitely prejudge that the benefit is a complex benefit. 5.

The treatment of the benefit in question as a composite benefit requires a collection of arguments in support of this, in particular with a view to demonstrating from the consumer's perspective the indissoluble relationship between individual benefits and the lack of value of ancillary benefits provided without a primary benefit. 6.

If you consider that you are dealing with a complex benefit, you should apply the same tax consequences as the main benefit. In particular, this concerns the rate of tax, the point in time of the tax obligation or the place of the benefit.

______________________

1 Official Journal of the European Union L, No. 347, p. 1 as amended 2 Among other things in the judgments: 29 March 2007, Actiebolaget NN v.

Skatteverket, C-111/05, Legalis; of 19 November 2009, Don Bosco Onroerend Goed BV v Staatssecretaris van Financiën, C-461/08, Legalis; of 2 October 2010, Everything Everywhere Ltd v Commissioners for Her Majesty’s Revenue and Customs, C-276/09, Legalis.

3 Judgment of the Court of Justice of 25 February 1999, Card Protection Plan Ltd (CPP) v Commissioners of Customs & Excise, C-349/96, Legalis. 4 Judgment of the Court of Justice of 6 May 2010, European Commission v French Republic, C-94/09, Legalis. 5 Cf. J. Matarewicz, Benefits filed as justification for fraud, [in:] I.

Ozhóg (red), Carousel offences and other VAT frauds, Warsaw 2017, p. 205. 6 The Polish administrative courts clearly indicate that the concept of ‘composed certificate’ is a non-statutory term (such as the WSA in Rzeszów in the judgment of 15 January 2015, reference no. I SA/Rz 994/14, Legalis).

7 There is no standard terminology for transactions consisting of several elements. The English concept of composite supply, which the TEU uses in its rulings, is essentially translated in Polish doctrine and case law as a ‘composed certificate’ or ‘complementary certificate’ (these concepts can be used interchangeably).

8 Judgments of the Court of Justice: 25 February 1999, C-349/96, op.

cit., Legalis; 27 October 2005, Levob Verzekeringen BV and OV Bank NV v Staatssecretaris van Financiën, C-41/04, Legalis; of 11 June 2009, RLRE Tellmer Property sro v Finanční ředitelství v Ústí nad Labem, C-572/07, Legalis; of 27 September 2012, Field Fisher Waterhouse LLP v Commissioners for Her Majesty’s Revenue and Customs, C-392/11, Legalis.

9 Similarly, the judgments of the Court of Justice: of 25 February 1999, C-349/96, op. cit., Legalis; 27 October 2005, C-41/04, op. cit., Legalis; 29 March 2007, op. cit., C-111/05, Legalis; of 2 December 2010, Everything Everywhere Ltd v Commissioners for Her Majesty’s Revenue and Customs, C-276/09, Legalis. 10 Cf.

Judgment of the Court of Justice of 25 February 1999, C-349/96, op. cit., Legalis. 11 Consolidated version: https://eur-lex.europa.eu/legal-content/PL/TXT/PDF/?uri=CELEX :12012E/TXT&From=PL. 12 Cf. Judgment of the Court of Justice of 25 February 1999, C-349/96, op.

cit., Legalis and C-425/06, and the decision to 19 January 2012, Purple Parking Ltd and Airparks Services Ltd v The Commissioners for Her Majesty’s Revenue & Customs, C-117/11, Legalis. 13 Judgment of the Court of Justice of 27 October 2005,C-41/04, op. cit. Legalis. 14 Judgment of the Court of Justice of 27 September 2012, C-392/11, op.

cit., Legalis. 15 In addition, an indication of the classification of benefits should also be the content of the lease agreement, understood as the subject of the lease agreement in the context of its conclusion — see M. Ignasiak, Commentary on the TS judgment of 27 September 2012 on C-392/11 Field Fisher Waterhouse LLP v.

Commissioners for Her Majesty’s Revenue and Customs, [in:] W. Nikiel, A. Zalasiński (red), The case law of the Court of Justice of the European Union in tax matters, Warsaw 2014, p. 1437. 16 Judgment of the Court of Justice of 25 February 1999, C-349/96, op. cit., Legalis. 17 Ibid.

18 Judgment of the Court of Justice of 27 September 2012, C-392/11, op. cit., Legalis. 19 Judgment of the Court of Justice of 21 February 2008, Ministero dell’Economia e delle Finanze v Part Service Srl., C-425/06, Legalis. 20 Cf. J. Matarewicz, Benefits filed as a justification for abuse, [in]: Carousel offences and other VAT fraud, ed.

scientific I. Pork, p. 203; Wolters Kluwer, Warsaw 2017. 21 Ibid. 22 Ibid., p. 205. 23 i.e. Journal of Laws of 2018, item 2174, Come on. the VAT Act 24 See, inter alia, judgments: from 1 June 2011, reference no. I FSK 869/10, Legalis; of 28 June 2011, reference no. I FSK 959/10, Legalis; of 30 October 2014, reference no. I FSK 1578/13.

25 Judgment of the Court of Justice of 7 October 2010 in Joined Cases Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK Ltd, C-53/09, Legalis and C-55/09, Legalis. 26 Judgment of the Court of Justice of 27 June 2013, Minister of Finance v RR Donnelley Global Turkey Solutions Poland sp. z o.o., C-155/12, Legalis.