If you have attended any of my webcasts or training seminars (I do this 6-8 times per year), you may remember that one of my “key” statements is to remember that VAT is due on everything that you get paid for.
VAT is an expenditure tax, not a tax on consumption. My professor indirect taxes back in the day (at Leiden University, if you’re Dutch you know who I mean!) always taught that if you buy a bottle of milk and drop it (i.e. not consume the milk), you won’t get a VAT refund.
This dogma has now finally been embraced by the European Court of Justice, in their Judgment in Joined Cases C-250/14 and C-289/14 Air France-KLM and Hop!-Brit Air v Ministère des Finances et des Comptes Publics.
The short and sweet of it is that if you sold and collected payment for a service or a good, you still have to account for VAT. Even if your buyer decides not to make use of the supply made.
In a previous ruling, the ECJ decided that compensation for damages is not taxable (Société Thermale d’Eugénie-les-Bains, C-277/05) (link to pdf). But that is not at all the case here – there are no damages, but simply no-shows in an airplane.
There are plenty of practical implications here. Think of hotels and restaurants that charge for no-shows, or telco companies that must charge VAT on unused balances.
Interestingly, the rules for unused gift cards are different – issuing gift cards is generally VAT free and VAT is due on the purchase of a good or service where the gift card is a “consideration”/payment.
The summary in the ECJ’s press release (link to pdf) states:
“The Court notes firstly that VAT is payable where, first, the sum paid by the customer to the airline company is directly linked with a service (in the present case, air transport) and, secondly, that service is performed.
However, the Court states that the consideration for the price of the ticket does not depend on the physical presence of the passenger at boarding, but that it consists of the passenger’s right to benefit from the performance of the transport service, regardless whether the passenger exercises that right. In other words, for VAT to be payable, it is sufficient that the airline company enables the passenger to benefit from the transport service. In that regard, the Court states that VAT becomes chargeable on receipt of payment of the ticket price.”
The entire ruling is here. Actually, I would recommend using this in VAT training and academic indirect tax classes. The ruling is a well-researched read with clear reasoning and step-by-step replies to the questions raised by the referring lower court.