CJEU: free-of-charge supply of heat subject to VAT
The Court of Justice of the EU (CJEU) has ruled that the supply of heat free of charge is subject to VAT whether or not the recipient uses it to carry out economic activities. To determine the taxable amount, the cost price must include both direct and indirect costs whether or not they have been subject to input tax.
A German biomass power and heat generation company supplies electricity to its customers through the grid. The production of electricity also generates heat, which is partly consumed in the production process and partly supplied to other companies, free of charge. The company did not regard such gratuitous supply as a gift subject to VAT. Neither the German tax authority nor the appellate authority agreed with this approach.
The company argued that the unconsumed heat would otherwise be wasted by releasing it into the air, and that the companies receiving the heat use it for their economic activities – drying wood and heating their asparagus fields.
Following the submission of preliminary questions by Germany, the CJEU held that a gratuitous supply of goods for which the taxpayer had claimed a VAT deduction is taxable regardless of the tax status of the recipient. It is irrelevant whether the recipient uses such a supply for purposes that entitle them to deduct VAT. If such a condition existed, according to the CJEU, the donor would have to make difficult enquiries to verify the recipient's use of the supply. Therefore, according to the CJEU, the free-of-charge supply of waste heat shall be treated as a supply of goods for consideration, and is subject to VAT.
Cost price should be as close as possible to the purchase price
Another point of the dispute was the determination of the taxable amount. In the tax authority’s opinion, it should be set in the amount of the total allocated production costs. The CJEU reiterated that the taxable amount is the purchase price or the price of similar goods. If that price cannot be determined, the taxable amount may be determined in the amount of the costs incurred. The preliminary question raised was whether the cost price must also include indirect costs (e.g., financing costs) and whether only costs subject to input VAT must be included in the calculation of that price.
The CJEU concluded that the cost price should reflect all relevant facts resulting from a detailed assessment of the factors affecting the price. According to the court, it does not follow from the directive that the cost price should be based only on direct costs or only on costs that were subject to tax on input. On the contrary: the price should also include indirect costs to be as close as possible to the purchase price.