Dutch Court Denies Input VAT Deduction for Olympic Equestrian Project Without Taxable Supplies

• A Dutch court denied input VAT deductions claimed on purchases, training, care and stabling of horses where the company declared no taxable turnover and failed to demonstrate taxable supplies for consideration. More than EUR 10 million had reportedly been received, with nearly EUR 9 million recorded as share premium. [vatupdate.com]
• The payments were not shown to constitute direct consideration for identifiable services supplied to the foreign equestrian federation. No relevant invoices had been issued in 2013, and the accounting treatment as share premium undermined the claim that the payments remunerated taxable sponsorship or other commercial services. [vatupdate.com]
• Sports, sponsorship and investment structures should establish contracts, reciprocal obligations, pricing, invoicing and taxable business intent before substantial expenditure is incurred. Later invoices, backdated descriptions or accounting reclassifications cannot by themselves establish the direct and immediate link between input costs and taxable transactions required for VAT deduction.

Extended article

A Dutch court has upheld a VAT reassessment involving a company established in connection with an equestrian federation’s Olympic ambitions.

The company acquired horses and incurred substantial expenditure on training, care, stabling and related facilities. It claimed input VAT on those costs but reported no taxable turnover for the relevant period.

The company had received more than EUR 10 million from the foreign equestrian federation. Nearly EUR 9 million was reportedly recorded as share premium rather than as consideration for services. [vatupdate.com]

Right to deduct input VAT

An input VAT deduction generally requires the taxable person to use the acquired goods or services for transactions carrying a right to deduct.

The required connection may arise where the costs:

• are directly linked to a specific taxable output transaction; or
• form part of the taxable person’s general costs and are incorporated in the prices of its taxable activities.

Preparatory expenditure may qualify where objective evidence demonstrates a genuine intention to carry on taxable economic activity. That intention must be supported by contemporaneous facts rather than asserted only after the deduction is challenged.

No established supply for consideration

A taxable supply for consideration generally requires:

• a legal relationship between supplier and recipient;
• reciprocal obligations;
• an identifiable service or supply;
• consideration received in return for that service; and
• a direct link between the service and payment.

The court was not satisfied that the federation’s payments were consideration for identifiable services supplied by the company.

The accounting treatment was important. Recording the payments as share premium suggested a capital contribution rather than remuneration for services. Accounting treatment is not decisive by itself, but it forms part of the factual evidence.

Sponsorship and funding

Sponsorship may constitute a taxable service where the recipient receives identifiable promotional, advertising or commercial rights.

Relevant deliverables may include:

• display of the sponsor’s name or logo;
• media exposure;
• event participation;
• hospitality;
• naming rights;
• promotional appearances;
• access to athletes or horses; and
• exclusive commercial rights.

A donation or capital contribution without reciprocal performance is different. It may fall outside the scope of VAT because there is no supply for consideration.

The decisive issue is not the label “sponsorship,” but whether the payment is directly linked to enforceable services.

Later or backdated invoices

A later invoice cannot on its own create a taxable relationship that did not exist when the expenditure and payments arose.

A valid invoice documents a transaction. It does not substitute for the underlying agreement, consideration and actual performance.

Where a business seeks to demonstrate preparatory taxable activity, useful evidence may include:

• signed commercial contracts;
• board-approved business plans;
• pricing models;
• customer negotiations;
• marketing activity;
• correspondence describing deliverables;
• contemporaneous invoices;
• evidence that services were performed; and
• forecasts of taxable revenue.

Horse acquisition and use

Equestrian structures frequently combine several possible activities:

• horse trading;
• breeding;
• training;
• competition participation;
• sponsorship;
• prize money;
• private or recreational use; and
• asset appreciation.

Each activity may have a different VAT treatment. Input VAT on a horse acquired for resale may have a clearer relationship with taxable business activity than expenditure principally connected with sporting ambitions or private enjoyment.

Mixed-use expenditure may require attribution, restriction or adjustment.

Recommended actions

Sports and equestrian structures should:

1. Define the taxable business before costs are incurred.
2. Execute written contracts with funders and sponsors.
3. Specify reciprocal deliverables.
4. Price and invoice services contemporaneously.
5. Distinguish capital contributions from service revenue.
6. Record private, sporting and commercial use separately.
7. Maintain objective evidence of intended taxable activity.
8. Review deduction entitlement for each cost category.
9. Apply adjustment rules where use changes.

External sources and further reading

• Case summary: equestrian federation payments and input VAT
• EUR-Lex: VAT Directive 2006/112/EC
• Dutch judiciary judgments database
• Dutch Tax Administration: VAT treatment of sports organisations
• Dutch Tax Administration: VAT on admission to sporting events