Dangerous Games in the VAT Field. Principal Activities and Ancillary Activities

On 18 February 2022, the Cluj Court of Appeal put an end to a 5-years old tax case and, at the same time, put an end to some dangerous VAT games, as regards the calculation of the annual turnover in cases where both principal and ancillary activities are performed.

In a nutshell, Mr. M., a lawyer with the Cluj Bar Association, was subject to a tax audit for the tax period 2013 – 2017. The tax inspectors verified not only his professional income (lawyer fees), but also income earned from the letting of premises (rental of an office). Although Mr. M. argued that the letting of premises was in no way connected to his professional activity, A.J.F.P. Cluj determined the VAT turnover by adding income from the letting of premises (obtained by Mr. M. personally) to income from the exercise of a liberal profession (obtained by the lawyer’s office, which owned a distinct tax code). Therefore tax inspectors alleged Mr. M. failed to account for VAT when overpassing the authorised exemption threshold for small enterprises (200,000 lei at the time of the facts) and issued a recovery decision for VAT, interest and penalties. A second similar decision was issued based on the same reasoning in 2021, for the subsequent tax period.

As early as 2017, Mr. M. was in the possesion of an official interpretation of the tax authority (D.G.R.F.P. Cluj-Napoca) as to the fact that ancillary activities were not to be taken in account when determining the annual turnover. However, another panel of the same tax office denied Mr. M. the benefit of such an approach and rejected his tax challenge.

On 8 July 2021, Cluj Tribunal also rejected Mr. M’s request for the annulment of the 2017 tax decision. The court failed to apply Court of Justice’s judgement of 9 July 2020 in case C-716/18, Bufan (CT), although the European Court provided all the necessary guidance [for a detailed account of the judgement in case C-716/18, please see C.F. Costaș, Despre o clarificare necesară a serviciilor prestate în cadrul activității profesionale obișnuite, ca urmare a hotărârii Curții de Justiție în cauza C-716/18, Bufan, in Cluj Tax Forum Journal no. 4/2020, p. 52-64].

Finally, by its decision no. 224 of 18 February 2022, the Cluj Court of Appeal overturned the judgment of the Cluj Tribunal and made the correct application of the European law in the field of VAT.

In our professional opinion, there are at least two points to be discussed at the end of a 5-years trial.

On one hand, it remains extremely difficult to understand why different panels or civil servants of the same tax office are providing divergent interpretations of the same rules. Although the Court of Justice explored similar matters in the Kostov and Posnania cases, Mr. M.’s case was clearly different and it was in no way acceptable that income obtained by two different legal entities (principal activity – a liberal profession; ancillary activity – letting of premises) is taken into account solely for determining that the turnover exceeded a certain ceiling. As we all know, the only purpose of such an addition was to make Mr. M. liable for VAT for his main activity, since the letting of premises was VAT exempt.

On the other hand, is was equally frustrating to see that simple arguments were ignored by the Cluj Tribunal even when they were confirmed by the Court of Justice of the European Union. In fact, Mr. M.’s defence team with Costaș, Negru & Asociații explained that although Mr. M. had just one patrimony, such a patrimony included different patrimonial items which entailed different rights and obligations. In connection with the Court of Justice’s explanation in par. 42 of the Bufan (CT) judgement, an economic activity cannot be classified as “incidental” if it constitutes the direct, permanent and necessary extension of the usual business activity of the enterprise concerned (as it was the case in the Bufan affair). But in Mr. M.’s case, the distinction was pretty clear: on one hand Mr. M. made money from his principal activity as a lawyer; on the other hand, he made a smaller amount from the letting of a previously inherited house.

On 18 february 2022, the Cluj Court of Appeal put an end to a very speculative game of the tax authority and applied European Law as interpreted by the Court of Justice. It also reversed an older case-law of the same Court of Appeal (2013) which stated differently.

It is with great pride that we saw this case through and contributed to the correct application of the European Law in the VAT field. A team of lawyers including Dr. Cosmin Flavius Costaș, Irina Galiș, Adrian Docoli and Bogdan Șuta made this possible.

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