Taxation and Customs Union

Exemptions without the right to deduct

Most exempt supplies are examples of ‘exemptions without the right to deduct’, i.e. supplies in respect of which the input VAT incurred in the prior production and distribution processes preparatory to making that supply cannot be deducted.

These exemptions can conveniently be divided into two classes:

Exemption for activities in the public interest

 

What is exempt?

EU countries must exempt certain transactions that are considered to be in the public interest.

They are mostly carried out by public bodies but exemption also extends to several of the same transactions when carried out in the public interest by bodies in the private or charitable sector.

Case 1 Postal services

Transaction exempt

Exceptions

A: Supply of services and incidental goods by the public postal services

B: Supply at face value of postage stamps, fiscal stamps and other similar stamps

Exemption does not apply to:

  • Passenger transport or
  • Telecommunications services
    (Article 132(1)(a) VAT Directive)
  • Postage stamps not valid for postal services within the territory of the EU country concerned
    (Article 135(1)(h) VAT Directive)

Case 2 Medical services

Transaction exempt

When carried out by

A: Hospital and medical care and closely related activities
  • Public bodies or

where carried out under comparable social conditions, also by:

  • Hospitals
  • Centres for medical treatment or diagnosis
  • Other similar duly recognised establishments
    (Article 132(1)(b) VAT Directive)
B: Medical care
  • The medical and paramedical professions (Article 132(1)(c) VAT Directive)
C: Supply of staff for the purposes of transactions under Point B with a view to spiritual welfare
  • A religious or philosophical institution (Article 132(1)(k) VAT Directive)

D: Supply of human organs, blood and milk

Case 3 Dental services

Transaction exempt

When carried out by

A: Dental technicians’ services
  • Dental technicians in their professional capacity

B: Supply of dental prostheses

Case 4 Welfare and social services

Transaction exempt

When carried out by

A: Services and goods closely linked to welfare and social security work

(including those supplied by old people’s homes)

  • Public bodies or
  • Other bodies recognised as being devoted to social wellbeing
    (Article 132(1)(g) VAT Directive)

B: Supply of staff for the purposes of transactions under Point A with a view to spiritual welfare

  • A religious or philosophical institution
    (Article 132(1)(k) VAT Directive)

Case 5 Children’s and young people’s services

Transaction exempt

When carried out by

A: Services and goods closely linked to the protection of children and young people

B: Supply of staff for the purposes of transactions under Point A with a view to spiritual welfare

  • Public bodies or
  • Other bodies recognised as being devoted to social wellbeing
    (Article 132(1)(h) VAT Directive)
  • A religious or philosophical institution
    (Article 132(1)(k) VAT Directive)

Case 6 Education

Transaction exempt

When carried out by

A: Providing education to children or young people
B: Providing school or university education
C: Providing vocational training or retraining

D: Services and goods closely related to A, B or C

  • Public bodies having this as their aim or
  • Other organisations recognised as having similar objects
    (Article 132(1)(i) VAT Directive)
E: Supply of staff for the purposes of transactions under Points A, B, C or D with a view to spiritual welfare
  • A religious or philosophical institution
    (Article 132(1)(k) VAT Directive)

F: Private tuition covering school or university education

Case 7 Sport and physical education

Transaction exempt

When carried out by

Services closely linked to sport or physical education supplied to persons taking part in those activities

Non-profit-making organisations (Article 132(1)(m) VAT Directive)

Case 8 Cultural activities

Transaction exempt

When carried out by

Cultural services and closely linked goods
  • Public bodies or
  • Other recognised cultural bodies
    (Article 132(1)(n) VAT Directive)

Case 9 Ambulances and similar transport

Transaction exempt

When carried out by

Transport services for the sick or injured in specially adapted vehicles

Bodies authorised for the purpose
(Article 132(1)(p) VAT Directive)

Case 10 Public broadcasting

Transaction exempt

When carried out by

Non-commercial activities

Public radio and television broadcasting organisations (Article 132(1)(q) VAT Directive)

Case 11 Member services of non-profit-making organisations

Transaction exempt

When carried out by

Supply of services and closely related goods to their members in their common interest in return for a fixed subscription

Non-profit-making organisations of a:

  • Political
  • Trade-union
  • Religious
  • Philosophical
  • Philanthropic or
  • Civic nature

Provided that this is not likely to distort competition (Article 132(1)(l) VAT Directive)

Case 12 Fund-raising events

Transaction exempt

When carried out by

Supply of services and goods in connection with fund-raising events exclusively for their own benefit

Organisations whose activities are exempt by reason of Cases 2, 4, 5, 6, 7, 8 or 11

Provided that this is not likely to distort competition (Article 132(1)(o) VAT Directive)

Case 13 Cost sharing

Transaction exempt

When carried out by

Services rendered to their members and directly necessary for carrying out the activity concerned

Independent groups of persons carrying on:

  • an exempt activity or
  • One in relation to which they are not taxable persons
    • Provided that the group claims from the members only their exact share of the joint expenses and
    • Provided that this is not likely to distort competition

(Article 132(1)(f) VAT Directive)

 

May any of these exemptions be restricted any further?

Yes. EU countries may choose to impose further conditions in certain cases, as follows:

  • Case 12: Any restrictions they feel necessary, such as the number of fund-raising events or the amount of receipts from such events.
  • Cases 2, 4, 5, 6, 7, 8 and 11: Except as regards public bodies, exemption may be made dependent on one or more of the following conditions:
  • no systematic aim to make a profit;
  • management and administration on an essentially voluntary basis;
  • prices charged must be approved or lower than the going commercial rate;
  • the exemptions must not be likely to cause distortion of competition.

In addition, the supply of goods and services closely linked to these transactions must not be exempted where

  • it is not essential to the exempt transaction; or
  • where its basic purpose is to obtain additional income for the body concerned through transactions in direct competition with those of commercial enterprises subject to VAT.

For full details, see Articles 132(2), 133 and 134 VAT Directive.

Exemptions for other activities

Other supplies that must be exempt, without the right to deduct associated input VAT, are listed in Article 135VAT Directive and consist of a diverse range of transactions, many of which are associated with money and finance.

In these pages, we shall consider separately:

 

Financial and insurance services

The majority of financial and insurance services have historically been exempted from VAT, although the EU Commission has proposed simplifying and clarifying the scope of the exemption under this head.

 

What financial and insurance services are exempt?

Case 1 Insurance and reinsurance

Exempt transaction

Includes

Insurance and reinsurance transactions(Article 135(1)(a) VAT Directive)

Related services carried out by insurance brokers and insurance agents

Case 2 Granting and negotiation of credit

Exempt transaction

Includes

The granting and negotiation of credit(Article 135(1)(b) VAT Directive)

The management of credit by the person granting it

Case 3 Guarantees and security

Exempt transaction

Includes

The negotiation of or any dealings in:

  • Credit guarantees
  • Any other security for money

(Article 135(1)(c) VAT Directive)

The management of credit guarantees by the person granting the credit

Case 4 Cashless transactions

Exempt transaction

Includes

Excludes

Transactions concerning:

  • Deposit and current accounts
  • Payments and transfers
  • Debts
  • Cheques and other negotiable instruments
    (Article 135(1)(d) VAT Directive)
Negotiation of all of theseDebt collection

Case 5 Cash transactions

Exempt transaction

Includes

Excludes

Transactions (including negotiation) concerning:

  • Currency
  • Bank notes used as legal tender

Coins used as legal tender
(Article 135(1)(e) VAT Directive)

Negotiation of all of these

Collectors’ items, i.e.

  • Gold, silver or other metal coins or
  • Bank notes

not normally used as legal tender, or

  • Coins of interest to numismatists (coin collectors)

Case 6 Transactions in shares etc

Exempt transaction

Includes

Excludes

Transactions in:

  • Shares
  • Other interests in companies or associations
  • Debentures and other securities

(Article 135(1)(f) VAT Directive)

Negotiation of all of these

Management of all of these and safekeeping
Transactions in:

  • Documents establishing title to goods
  • Rights in rem giving the holder a right of use over immovable property
  • Securities giving the holder legal or factual rights of ownership or possession over immovable property or a part of such property

(Articles 135(1)(f), 15(2) VAT Directive)

Case 7 Investment funds

Exempt transaction

Type of fund

The management of special investment funds
(Article 135(1)(g) VAT Directive

As defined by each EU country

 

Is there a right to deduct associated with transactions in Cases 1 to 7?

No. These are transactions without the right to deduct the associated input VAT.

But see The option to tax certain financial services.

 

The option to tax certain financial services

EU countries may choose to allow business to opt to tax the transactions mentioned in Cases 2 to 7.

 

What does the option to tax involve?

Because the transactions in Cases 2 to 7 (and also Case 1 ) are exempt without the right to deduct, financial and insurance institutions and other persons carrying out those transactions cannot recover VAT they incur on their purchases of associated goods or services.

EU countries choosing to allow the option will set the detailed rules for its application and restrictions relating to it. See further under Proposal for a Directive .

 

Is the option available for Case 1 transactions?

No.

 

Proposals for change

Proposed update of the legislation
In 2007 the Commission proposed a Directive to update the rules for financial and insurance services.
As there was no prospect of adoption by the EU Council, the Commission in 2016 withdrew this proposal.

Why update?
To modernise and simplify the rules (dating from 1977) and ensure they are consistently applied across the EU.

Current problems with the rules

  • Extra costs to business
    Because financial and insurance services are exempt without the right to deduct, financial and insurance institutions and other suppliers of such services cannot recover VAT on their purchases of services or goods (e.g. outsourced services or computers).
    They then pass on this cost to their customers, who also cannot recover it, so this ‘hidden VAT’ cascades through the system increasing operating costs for EU business.
  • Inconsistent application
    The exemption is not applied uniformly across EU countries and so frequently the Court of Justice has been asked to fill the legislative gap and clarify the correct interpretation.

Specifics of the proposal

  • Redefining what is exempt
    To reflect changes in the industry. A Regulation to this effect would apply directly in all EU countries.
    This would increase legal certainty for all concerned (business and national tax administrations) and reduce their administrative burden.
  • Option to tax (for banking & insurance companies, etc)
    This already exists in Article 137 of the VAT Directive but is currently at the discretion of national governments and not widely used.
    Making it mandatory would allow (i) firms to reduce their exposure to non-recoverable tax (in particular in B2B activities) and (ii) their clients to deduct the VAT they pay them.
  • VAT exemption on cost-sharing arrangements, including those with firms in other EU countries.
    This would enable firms to pool their operations and share costs between the group members without creating additional non-recoverable VAT.

Background

 

 

Transactions involving immovable property

A number of transactions involving land and buildings are exempt without the right to deduct, although it is open to EU countries to allow taxable persons (businesses) to choose to subject such transactions to tax.

 

Exempt transactions in immovable property

Case 1 Buildings and the land on which they stand

Exempt transaction

Exclusions

The supply of a building (or parts of a building) and the land on which it stands(Article 135(1)(j) VAT Directive)

Such supplies taking place before the building is first occupied (Articles 135(1)(j), 12(1)(a) VAT Directive)

Case 2 Land that has not been built on

Exempt transaction

Exclusions

The supply of land that has not been built on (Article 135(1)(k) VAT Directive)

The supply of building land (Articles 135(1)(k), 12(1)(b) VAT Directive)

Example 1

A developer sells vacant land with planning permission (the permission to construct e.g. an office building) to a builder.
This is a supply of building land, and is not exempt. The developer must charge VAT on the sale.

Case 3 Leasing or letting

Exempt transaction

Exclusions

The leasing or letting of immovable property (Article 135(1)(l) VAT Directive)

  • Hotel or similar accommodation
  • Accommodation in holiday camps
  • Accommodation on specially developed camping sites
  • Parking spaces (e.g. in a specially built car park or on open ground)
  • Letting permanently installed equipment and machinery
  • Safe hire
  • Other exclusions that EU countries may choose to add
    (Article 135(2) VAT Directive)

Example 2
A farmer allows holidaymakers to camp on an open field with no facilities in return for a charge of EUR 10 per night.
The field has not been developed for use as a camping site, so is not excluded from the exemption.
This is therefore an exempt supply and no VAT must be charged.

Example 3
A car-park operator charges EUR 25 per hour for parking in a car park with 24-hour security patrols.
This is the letting of a site for the parking of vehicles, which is excluded from the exemption by Article 135(2)(b) VAT Directive.
The charge includes VAT at the appropriate rate and the operator must include that VAT as part of his output tax.

Example 4
A property-management company leases an office suite in an office building on a 21-year lease to a firm of architects.
This is an exempt transaction and no VAT must be charged on the rent or any premium for granting the lease.
The identity of the lessee (tenant) is irrelevant. A lease of a flat in an apartment block to a private individual will also be exempt.

 

The option to tax transactions in immovable property

Because the transactions in Cases 1, 2 and 3 are exempt without the right to deduct, lessors, businesses and other persons carrying out those transactions cannot recover the VAT they incur in order to carry them out. This may in turn lead to increased costs for their customers as the suppliers may seek to compensate for this irrecoverable VAT.

With this in mind, the VAT Directive provides that EU countries may give taxable persons (businesses) the right to opt to tax all or certain Case 1, 2 and 3 transactions that would otherwise be exempt. This would have the result, for example, that VAT was charged on rents. If the customer is a business making taxed supplies, it should be able to deduct the VAT charged in this way and so not to have bear any extra cost as a result.

EU countries that allow for the option to tax may restrict the scope of the right as they choose and are responsible for setting the detailed rules governing the exercise of the option.

 

Gambling

The provision of betting, lotteries and other forms of gambling is a transaction that is exempt without the right to deduct.

It is up to individual EU countries to decide whether all forms of gambling are exempt or only some but the principle of fiscal neutrality must be respected. EU countries can set their own conditions and limitations on this exemption.

Example
A customer places a bet on Spain to win the football World Cup 2014 in a betting shop.
The bet is exempt from VAT.

Article 135(1)(i) VAT Directive.

 

Miscellaneous other exempt transactions

 

Miscellaneous other exemptions

The following are further examples of transactions that are exempt without the right to deduct.

Case 1 Goods used exclusively for exempt supplies

Exempt transaction

Exempt activities

The supply of goods used exclusively for the listed exempt activities
provided that the goods have not given rise to deductibility

(Article 136(a) VAT Directive)

  • Activities in the public interest (exempt under Article 132(1) VAT Directive)
  • Insurance and reinsurance transactions exempt under Article 135(1)(a) VAT Directive
  • Financial transactions exempt under Article 135(1)(b)-(g) VAT Directive
  • The supply of postage stamps etc at face value valid for postal services within the EU country concerned (exempt under Article 135(1)(h) VAT Directive)
  • Transactions in immovable property exempt under Article 135(1)(j)-(l) VAT Directive
  • Betting, lotteries and gambling exempt under Article 135(1)(i) VAT Directive
  • Transitional exemptions granted by derogations under Articles 371, 375-377, 378(2), 379(2) and 380-390c VAT Directive

Case 2 Goods on which VAT is not deductible

Exempt transaction

Reason for non-deduction

The supply of goods on the acquisition or application of which VAT is not deductible

(Article 136(b) VAT Directive)

  • Non-business expenditure, such as expenditure on luxuries, amusements or entertainments
  • Other expenditure on which VAT is declared not to be deductible
    (Articles 176, 177 VAT Directive)