Second ECJ judgement on indoor playground

Background

P-GmbH, operator of an indoor playground, had taxed its services at the standard Austrian VAT rate of 20%, although the reduced VAT rate of 13% would have applied. The ECJ ruled that P-GmbH did not owe the excess VAT shown on its invoices under Article 203 of the VAT Directive since the customers in question were exclusively final consumers who were not entitled to deduct input VAT, and therefore tax revenue was not at risk (Judgment of 8 December 2022 (C-378/21)).

However, in its subsequent decision, the Austrian Federal Finance Court adjusted the facts of the case. Since the possibility could not be ruled out that taxable persons entitled to deduct input VAT were also among the visitors to the indoor playground, the Court estimated this proportion at 0.5%. The tax authority then appealed to the Austrian Supreme Administrative Court, which referred the case back to the ECJ because this aspect had not been taken into account.

Second ECJ ruling

If visitors include taxable persons, there is no "contagion effect" such that VAT is payable on all invoices pursuant to Article 203 of the VAT Directive. Each invoice must be assessed on its own merits.

The principle that no VAT liability arises in the absence of a risk of loss of tax revenue applies only to invoices issued to non-taxable persons, but not to taxable persons who receive a supply in a personal capacity or for purposes precluding input VAT deduction.

An estimate of the proportion of taxable persons in the case of simplified invoices in bulk transactions (where the recipient is not known by name or status) is permissible, but certain requirements must be met for the estimate. An estimate must be:

• Based on objective, current and verifiable data;
• Based on specific indicators, such as the type of supply, conditions under which it is provided, statistical information, customer base; and
• Rebuttable by the business operator.

Analysis

In response to the first ECJ ruling, the German Federal Ministry of Finance (BMF) issued a Circular on 27 February 2024 (see here) in which it set out, inter alia, a number of restrictions on applicability. The provisions were incorporated into the German VAT Application Decree (UStAE). In this context, the following positions in the Circular are problematic:

• Taxable persons who purchase a supply in a personal capacity or for a non-economic activity are also to be considered final consumers. The ECJ has now expressly ruled this out.
• Exclusion from VAT liability under Art. 203 (in Germany: VAT liability under § 14c of the VAT Act (UStG)) does not apply if it is not possible to determine with certainty whether the invoice recipient acted as a taxable person or as a final consumer. An estimate is not permissible. The ECJ now expressly permits estimates.

The Federal Ministry of Finance will be required to amend the German VAT Application Decree accordingly.

Unfortunately, the referring Austrian court did not ask whether taxable persons whose activities consist entirely of transactions precluding input VAT deduction can be treated as final consumers. The ECJ does not therefore comment on this. It justifies the exclusion of taxable persons who acquire a supply in a personal capacity or for non-business purposes on the grounds that the tax authorities could "miss" unjustified input VAT deductions in these particular instances. In the case of taxable persons whose activities consist entirely of VAT-exempt transactions, it could be argued that this risk is far less pronounced and that equal treatment with final consumers could therefore be justified. If such a case were to be brought before a tax court in the future, this would justify a further referral to the ECJ. Until then, the question remains open.

Author: Nadia Schulte