7.3.4 Case 4

A foundation operates a public library, which lends books, CDs and DVDs . Customers have to pay a one-off entrance fee, a yearly subscription fee and, when they borrow books, CDs and/or DVDs, borrowing fees. Children have to register in the same way as adults and also have to pay an entrance fee. However, children do not have to pay a yearly subscription fee and borrowing fees. The foundation is financed by the entrance fees, the subscription fees, the borrowing fees (these fees cover approximately 60% of all costs) and a yearly municipal subsidy.

Although this case is currently ‘under discussion’, in my view, the foundation qualifies as a taxable person for the exploitation of the library as a whole, thus including the free lending to young people. All activities qualify as economic activities, including the free lending as they are part of the organizational unit that, as such, operates the library.

It is likely that all costs attributable to the free lending will qualify as ‘general costs’ and have, as such, a link with the business as a whole, meaning that the VAT on these costs is deductible according to the pro rata applicable to (this part of) the business.

In principle the subsidy will not be taxable.1 In the UK the loans of books are zero-rated.2

The costs of construction of acquired buildings will be standard-rated, unless the building is only used for ‘a relevant residential purpose or a relevant charitable purpose’.3 If this condition is met, the supply is zero-rated. This could be the reason for socio-cultural institutions, which are mainly financed by subsidies and to a lesser extent by fees charged for their economic activities, to argue that they do not have ‘business activities’. There are some favourable judgments for such institutions.4

Unlike the ferry transport services in the preceding case, the free lending of books to young people does not create a distinguishable non-economic activity, since the same goods and services are used for the lending for a fee as well as for the lending for free. Assuming that the subscription fee is not a membership fee, it will probably have to be considered to be a fee for providing the opportunity to borrow books. This is a standard-rated supply of services. The entrance fee is probably treated in the same way as the subscription fee.5 The subsidy is not taxable.6

Besides the fact that the foundation could be VAT exempt as a not-for-profit organization under certain conditions (if, for instance, the entrance and subscription fees are regarded as membership fees), the services of lending books, CDs and DVDs are not VAT exempt. The right to recover input VAT is not impaired by the free lending to children considering that the same books, etc. can be lent also for a consideration. The subsidies, being general, do not impact the VAT recovery position of the foundation.