VAT control of permanently loss-making activities
March 2021 – Anyone who turns his hobby (which has become too big) into an independent activity to be able to deduct losses from other income must be careful. Thanks to the datamining, the tax authorities identify companies that are permanently in deficit and, after control, reduce the loss of the activity to zero. He is now also tackling the deduction of VAT.
Income tax
There is extensive case law concerning taxpayers who start up a riding school or horse breeding operation and deduct the costs related to this activity from their other income. After some time, it turns out that the tax authorities (often followed by the courts) qualify the activity as a hobby and reduce the deduction of the costs to zero.
Using datamining, the tax authorities examine companies that, five years or more after their start-up, have still not been able to show a positive result. The entrepreneur then receives a request for information stating that the tax authorities intend to reject the deduction of costs and thus reduce the result of the activity to zero.
VAT
The discussion is less frequent in VAT matters because the profitability of a business is not in fact a determining factor. At least according to some case law.
The Antwerp Court of Appeal is in any case on the side of the taxable person.
After almost twenty years, the taxman discovers that a company has not yet made a profit since its establishment. The company's corporate purpose is the breeding of sport horses and it is registered for VAT purposes as a "breeding station for horses".
Although there are many activities (breeding, training, sale of semen and the company registers for professional sports events), the taxman finds that the turnover is very low and that the company does not make any profit. The VAT administration therefore considers that the company cannot be qualified as a VAT taxable person, so that it loses the right to deduct VAT.
The case is brought before the Antwerp court, which finds in favour of the tax authorities: the company's operations are transactions without economic value, as the company is not used to actually generate sustainable income.
The Court of Appeal overturns this ruling. Rightly so, because VAT liability is not linked to making a profit, but to carrying on an economic activity.
Decision of the Court of Appeal
The company declares to the Court that it does indeed carry out an economic activity: the company was created for a specific purpose, it is registered with the Crossroads Bank for Enterprises and is subject to corporation tax.
Furthermore (and this is certainly no less important), the company also proves that it has the necessary authorisations and a professional infrastructure. It also employs staff and has a large number of horses and a sperm bank.
In addition, sales are actually carried out there.
The activity is certainly not profitable, but this situation is not relevant for VAT purposes.
The tax authorities are examining the definition of an economic activity. The existence of an economic activity is based on the analysis of a set of elements such as the nature of the operation, the method and context of acquisition, the income generated by the operation, the method of financing the activity, the presence or absence of active marketing operations, the operating conditions, the quality of the operator, the nature of the clientele, etc. The tax authorities will examine the definition of an economic activity.
The tax authorities note that the number of taxable operations carried out is limited, that the operations are almost exclusively entry operations, that the company suffers structural losses and that it is mainly financed via the manager's current account and by capital injections from related companies.
According to the tax authorities, the facts show that the company did not intend to enter the market as a professional horse breeder, but rather as a hobby. Therefore, he considers the company as the final consumer of the goods and services it has purchased and therefore considers that it should refund the VAT.
The Court relies on the definition of taxable person.
The Court first of all refutes the argument that the absence of an economic activity can be inferred from the fact that the company is permanently in deficit. It is sufficient that sustainable revenue is generated and not that a profit is made.
The Belgian Code even explicitly states that economic activity can be considered whether or not there is a profit motive.
There is also a question of sustainability since the company was created in 1997, whereas the discussion here is about the period 2014-2017.
The Court goes on to find that the company is well remunerated for its services (including the renting of stables) or for the semen it sells.
According to the Court, the activity exceeds the level of a hobby.
Shared case law
The Antwerp Court of Appeal therefore does not regard the activity as a hobby, unlike the court. A few similar cases have already been submitted to other courts, with varying outcomes. In this case, it seems above all that the activity was managed in a sufficiently professional manner, that it still generated some (albeit insufficient) income and for a relatively long period of time. Nevertheless, this is a delicate issue which sometimes - as in this case - can only be decided after years of discussion.
