7.3.3 Case 3

A local authority operates a local public transport system, with metro, tram, bus and ferry services. People who use the public transport have to pay a fare, except for the ferry transport, which is free. Apart from the income which is generated by the fares received for the transport services (by metro, tram and bus), the local authority receives a big state subsidy, which accounts for nearly 20% of the total income. What are the consequences of the free ferry transport for the extent to which the local authority qualifies as a taxable person and for the deduction of input VAT?

According to a decision of the Supreme Court taken long ago, the local authority qualifies as a taxable person for the exploitation of ‘the local transport system’ as a whole, thus including the free ferries. All activities qualify as economic activities, including the free ferries since they are part of the organizational unit that, as such, forms the local transport system.

It is likely that all costs attributable to the ferries will qualify as ‘general costs’ and therefore have 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.

Passenger transport is zero-rated in the UK.1 The state subsidy would not lead to an input tax restriction for transport operators as a general rule.2 With regard to the input VAT to non-business activities of local authorities the UK has a special recovery regime described in art. 33 VAT Act. The question whether certain supplies qualify as business or non-business activities of a local authority is not relevant for the question whether the local authority is entitled to deduction/ recovery of input VAT as in this instance even if the activity is non-business, the local authority would still be entitled to deduction. A private supplier of public transport will only offer free (subsidized) transport if this is commercially justified within the whole of his economic activity. The costs (and the input VAT) attributable to the free transport will therefore easily qualify as overheads.

Metro, tram and bus transport would be taxable activities of the local authority, but ferry transport would be excluded (it does not generate revenue, does not fall within the scope of corporation tax and is, therefore, not a business for VAT purposes)3 and the input VAT attributable to the ferry services would not be deductible. The subsidy is not paid for any specific type of transport (e.g. school transport), but as a general subsidy, and thus is not part of the tax base.4

Public transport is organised in various ways in France. Should the local authority provide the service, it would be in business for VAT purposes and have to collect VAT on the service. The taxable basis includes the subsidy if the subsidy covers the consideration of the transport which is not paid by the users.5 However, the general subsidy would be disregarded for the determination of the VAT recovery position.6 The local authority could therefore deduct the total input VAT relating to the public transport activity.