4.1 Main rule for composite supplies: all elements of a transaction should be considered separately

As I explained in Chapter 2, the concept of ‘economic reality’ can be used for determining the VAT treatment of a transaction. Economic reality has been used by the CJEU as a concept in rulings that can be categorised in different groups, according to the actual issue that was referred to the CJEU. One of these categories are the cases about multiple-element transactions, where it uses the ‘economic viewpoint’ for determining whether a multiple-element supply comprises a single transaction that, from an economic point of view, should not be artificially split. The economic angle is, therefore, a relevant factor.

According to the CJEU, when considering multiple-element transaction, the ‘main rule’ is to regard every element of that transaction as distinct and independent. This means that, as a main rule every element must be considered separately. The CJEU formulated this as early as in 1986, when it stated that “(…) this view corresponds with the aim of the Sixth directive. (…) in order to render tax non-discriminatory from the point of view of competition, the Directive is intended to make separate taxable transactions which cannot be grouped together in a single transaction individually liable to VAT”.1

According to the CJEU, it follows from the EU VAT Directive that every supply must normally be regarded as distinct and independent and, second, that a supply which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. For this purpose, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.2 Even though I have not been able to find any explicit wording in either the Explanatory Memorandum to the Sixth EU VAT Directive3 or its predecessor, the Second Directive,4 in my view it makes sense that in order not to distort the functioning of the VAT system, every supply must normally be regarded as distinct and independent because the VAT treatment of a supply is determined by the nature of that supply. That is why the nature of each good supplied and service rendered must also be detailed on invoices for VAT purposes.5 Only if specific circumstances dictate this can two or more separate supplies be considered one single, composite supply, as I will explain in Section 4.2.

The fact that under the EU VAT rules, a special arrangement exists for services usually performed by tour operators (the tour operator margin scheme or TOMS) also confirms that, from an EU VAT perspective, every supply should be regarded as distinct and independent as a main rule.6 Under this TOMS-arrangement, the transactions made by a travel agent in respect of a journey shall be regarded as a single supply.7 This rule was set up specifically because the application of the normal VAT rules would, by reason of the multiplicity of services and the places in which they are provided, entail practical difficulties for those undertakings of such a nature as to obstruct their operations.8 In my view, this confirms that the ‘normal VAT rules’ require businesses to, as a main rule, consider each element of a multiple-element transaction separately.

As mentioned above, the aim of this section is to determine whether all elements of a composite supply are made for consideration. In order to determine whether a supply is made for consideration, the first step is to determine whether the supply is a separate, distinct supply and as such made for consideration, or whether the supply is part of a multiple-element transaction that is made for consideration.

If a supply is not part of a multiple-element transaction, it is easier to determine whether that single transaction was made for consideration or not, because if there is a consideration, it does not have to be allocated to different elements of the transaction. If no consideration is paid/received for the single supply, it is made for free.

However, if a supply is part of a multiple-element transaction, the second step is to determine whether the total consideration paid (or received) is attributable to each element of the composite/mixed supply. If no part of the total consideration paid/received for the multiple-element transaction can be (or should be) attributed to one or more elements of the supply, then this element/component is supplied free of charge.