Re-invoicing excluding VAT? Only when no ancillary supply is involved

The Supreme Administrative Court (SAC) recently agreed with the tax administrator that the re-invoicing of accident insurance is a supply ancillary to the lease of a motor vehicle and, consequently, should be liable to the same VAT regime as the principal supply. This relatively surprising decision significantly reduces the applicability of Section 36 (11) of the VAT Act, despite the financial administration’s information that is still in effect.

In this particular case (2 Afs 345/2016 – 34), the taxpayer operated as the lessor of racing cars and, simultaneously, provided accident insurance for these cars. The insurance was always re-invoiced to customers in compliance with contractual terms and conditions. Whereas the lessor invoiced payments for the lease of cars as taxable supplies including VAT, the lessor did not apply any VAT on the re-invoiced accident insurance, claiming to proceed pursuant to Section 36 (11) of the VAT Act and related Ministry of Finance’s Information Ref. No. 18/86 193/2008.

The SAC dealt in detail with the question whether the re-invoicing of accident insurance may be regarded as a separate supply or whether it is part of a principal supply (the lease of cars) that must be liable to VAT. According to the SAC, the re-invoiced accident insurance does not represent a separate service, as it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.

The court’s decision significantly restricts the practical applicability of Section 36 (11) of the VAT Act. Despite the fact that the Ministry of Finance’s information largely justifying the taxpayer’s approach is still available on the financial administration’s website, the SAC dismissed it out of hand, claiming that the methodology described in the information cannot be applied in this particular case. Consequently, Section 36 (11) of the VAT Act is only applicable where the re-invoiced supply does not have the nature of an ancillary supply.

The SAC’s decision will substantially affect a large group of taxpayers, not only lessors. We therefore recommend carefully evaluating individual re-invoiced supplies for their potential link to other provided supplies.

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