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“Hospitality industry may be paying tens of millions too much VAT” headlined the press recently. What is going on?
The reason for the headline quoted above is the announcement of a (trial) proceeding. In it, the position will be taken that the provision of alcoholic beverages is part of a more comprehensive supply. The essence of that supply is the provision of foodstuffs, taxable in its entirety with VAT at the reduced rate (6%). We explain this in the second part of this note.
(Pro)forma objection
Entrepreneurs wishing to benefit from a positive outcome of these proceedings should secure their rights by lodging (pro forma) objections to the VAT they remit. This can be done for remittances/refunds for which the objection period is still open. The objection period is 6 weeks, effective:
- on the day after the day on which the VAT was paid to the Inland Revenue[1] or;
- on the day following the date of the decision on which VAT is recovered from the Inland Revenue.
To our knowledge, no (trial) procedure is currently running. Anyone who files an objection may therefore be forced by the Tax Administration to complete the objection procedure. In that case, a simple (cheap) note will not suffice, but the objection must be fully justified and may also have to go to the tax court.
The chances of success of a (test) procedure are unfortunately difficult to estimate for the time being. What is certain is that it should be taken into account that it will not be clear until several years from now whether the (test) procedure has a positive outcome for the entrepreneur.
Of course, making an objection only makes sense if the services provided lend themselves to the claim that the provision of the alcoholic beverages merges into the restaurant service. This will concern, for example, arrangements in which the provision of food is combined with the provision of the alcoholic beverages (all-in arrangements).
Of course, where possible, business operations can be adapted, by adopting such arrangements or adapting existing ones, in order to make the most of any positive outcome of the proceedings. To what extent this is useful and convenient, each entrepreneur must obviously weigh up for himself. After all, not only the possible VAT implications are important for this.
In view of the risk of penalties, it is very unwise to anticipate a positive outcome of the proceedings already in the VAT returns. We strongly recommend continuing to split off part of the fee for alcoholic beverages provided in an arrangement and remitting VAT on them at the standard rate (21%). A sufficiently pleading position does not, in our opinion, exist at this stage.
Reduced VAT rate
The aim of the proceedings is thus to bring the provision of alcoholic beverages under the reduced VAT rate. Many of the services provided in the hospitality industry are subject to the reduced VAT rate of 6%:
1. food supply;
2. the service consisting of providing food (also referred to as: restaurant service).
Food
The term food includes all food and drink normally used for human consumption and all products intended for the preparation thereof or as a supplement thereto.
Explicitly excluded from the concept of food are alcoholic beverages. According to the policy rules, this occurs when the alcohol content is at least:
- 0.5 for beer (including mixtures of beer with wine or lemonade);
- 1.2 for drinks such as wine, port, sherry and spirits.
The decision on the application of the reduced VAT rate[2] obviously explains this in more detail.
Edibles containing alcoholic substances (e.g. chocolates) do not fall under the concept of alcoholic beverages, but are subject to the reduced VAT rate as foodstuffs.
Supply or service
The crux of the substantiation of the positions to be taken in the proceedings stems from the interpretation of the distinction between food supply and restaurant service. In the Netherlands, this distinction does not matter. After all, both supplies are taxed at the reduced VAT rate. In other EU member states, however, the distinction does matter, so there was a reason to bring it before the court.
The Luxembourg Court of Justice in its judgment Faaborg-Geltin Linien (1996) ruled that a restaurant service exists when the provision of the food and beverages is the result of a series of services in which an infrastructure is made available to the customer.
By extension, in 2011, the Court ruled in five German cases that there is no restaurant service (but the provision of the foodstuffs) when the services associated with the provision of the food and drink are not predominant.
Partly in response to the 1996 ruling, a European VAT implementing regulation also stipulates that restaurant services are a combination of provision of food and beverages with sufficient ancillary services.
Both the courts and the (European) legislator are thus of the opinion that a restaurant service consists of a combination of services. To the extent that this includes the provision of alcoholic beverages, it could be argued that it merges into the service, which should be taxed with VAT at the reduced rate.
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[1] REMEMBER: it is about the time of payment, not the time of filing the VAT return.
[2] Decree of 4 September 2014, no BLKB2014/123M.
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The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWGNijhof accountants and tax consultants is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.