VAT audit of continuously loss-making activities
When you transfer your hobby (that went out of hand) to an independent activity in order to be able to deduct the losses from other income, you should watch out. Through datamining the tax authorities trace companies with continuous losses and after an audit the losses are put at zero. Now the tax authorities also go after the VAT deduction.
There is a lot of case law concerning tax payers starting a stable and horse breeding and by doing so deduct a number of expenses of the activity from their other income. After some time the tax authorities (often followed by the courts) qualify this activity as a hobby and the expense deduction is reduced to zero.
Through datamining the tax authorities screen companies which during 5 years or more after the start of their activity can still not provide positive results. The entrepreneur receives an information request mentioning that it is the intention to reject the expense deduction and bring the result of the activity to zero.
This discussion occurs not so often in VAT matters, since the profitable character of the business is as such not decisive. At least according to some case law. The Antwerp Court of Appeal is already on the side of the taxpayer.
After almost 20 years the tax authorities discover a company which did not make any profit since its incorporation. The company's goal is breeding sport horses and is registered for VAT purposes under 'breeding station for horses'.
There are a number of activities (breeding, training, sale of semen and the company also registers for professional sport events).
But the tax authorities establish that there is very little turnover and absolutely no profit. Therefore the VAT authorities are of the opinion that the company does not qualify as a VAT payer whereby it looses all VAT deduction.
The case is brought before the Antwerp tribunal which agrees with the tax authorities: the transactions of the company are of no economic value, since they are not used to obtain real sustainable income.
The Court of Appeal annuls this judgment. Which is justified, since the capacity of VAT payer is not linked to making profit, but to an economic activity.
Judgment of the Court of Appeal
Before the court the company states that it does have an economic activity: the company was established with a specific goal, is registered in the Crossroad Bank for Enterprises and is subject to corporate tax.
Furthermore (and not less important) the company shows that it has the necessary licenses and that there is a professional infrastructure. There is also staff and the company has a large horses and sperm database.
Actual sales are made.
The activity is not profitable, but this is not relevant for VAT purposes.
The tax authorities look at the definition of economic activity. In order to have an economic activity, a number of elements have to be taken into consideration such as the nature of the business, how business is acquired, the income generated by this business, the way it is funded, whether or not there are active commercial actions, operational conditions, the professional capacity, the nature of the clients, ...
The tax authorities determine that only a limited number of taxable transactions are made, that there are almost only purchase transactions, there are structural losses and the company is funded through the director's current account and capital injections of linked companies.
According to the tax authorities the company did not have the intention to be on the market as a professional horse breeder, but it concerns a hobby. Therefore it considers the company as the final consumer of the goods and services it acquired and it should refund the deducted VAT.
The court turns to the definition of VAT payer.
The court counters in the first place the argument that the fact that the company is permanently loss-making, this would mean that there is no economic activity. It is sufficient that sustainable income is generated. Not that profit should be made.
In the Belgian VAT Code it is even explicitly mentioned that an economic activity may exist, irrespective whether or not there is a profit motive.
There is also sustainability since the company was established in 1997, while the current discussion deals with the era 2014-2017.
The court finally decides that the company indeed receives a compensation for its services (a.o. the renting of stables) or for sale of sperm.
According to the court, this activity exceeds the level of a hobby.
Divided case law
The Antwerp Court of Appeal does not see a hobby, while the first court did so. Also before other courts similar cases were tried with varying results. In this case it seems that the activity was sufficiently professionally organized, with some income (be it insufficient) and over a longer period. But it is a delicate discussion which -like in this case- can only be settled after several years of discussion.