To become more competitive, businesses diversify their range of services and continuously seek to improve the customer experience. Often, goods and services are bundled together, resulting in a transaction that is composed of two or more goods or services. The big question for VAT purposes is whether those elements are considered separate taxable transactions or taken together as one taxable transaction.
The outcome of this analysis determines the place of taxation, who is liable to pay the VAT to the tax authority, whether an exemption or special scheme applies, and whether a reduced rate applies. Below, the VAT rules that apply to bundled supplies in the European Union are discussed.
Place of taxation and liability to pay VAT
When supplies are bundled, goods can become integrated into a service or vice versa, according to the 2012 Court of Justice of the European Union (CJEU) decision in BLV Wohn- und Gewerbebau GmbH v Finanzamt Lüdenscheid (case C-395/11, §29).
However, goods and services are subject to different place of taxation and VAT payment rules. Furthermore, there are specific rules for certain services such as restaurant and catering services, which are by their nature a bundle of services and goods.
Whether goods and services are bundled or not can also determine whether the supply is considered to be carried out by a fixed establishment or by the main place of business.
To be considered a fixed establishment, “an establishment must possess a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to carry out the transactions under consideration on an independent basis”, according to the CJEU (case C-323/12, §46). When goods and services are bundled, the establishment may no longer be able to carry out the supply on an independent basis.
Exemptions or special schemes
Most exemptions are defined by reference to the nature of the transactions (case C-315/00, §39). The exemptions are autonomous concepts of EU law which must be interpreted uniformly to avoid divergences in the application of the VAT system as between one Member State and another. By being bundled a good or service might enter in or fall out of the scope of an exemption.
A bundled supply of travel services will trigger the application of the tour operator margin scheme (TOMS). Travel agents and tour operators frequently purchase and supply services in countries where they are not established. The TOMS scheme has the objective to simplify the VAT rules for the travel industry by establishing a single place of taxation and using the profit margin as taxable amount to levy VAT.
Reduced rates
European member states can apply a reduced rate on certain categories of goods and services that are listed in the EU VAT Directive. When a good or service is bundled, it might fall under this category although it would, when supplied separately, be subject to the standard rate. Reduced rates are likely to become increasingly important as the EU looks at providing member states with more flexibility to implement reduced rates.
Multiple vs. Single supplies
As early as the 1980s, the CJEU ruled in the Kerrut judgment (case C-73/85) that multiple taxable transactions that cannot be combined into a single transaction must be treated separately for VAT. With this judgment, the court established the principle that every supply must be regarded as distinct and independent, but it also indicated that there are cases where goods and services form a bundle.
A bundled supply needs to be considered as a single taxable transaction. Although the goods and services composing the bundles can be supplied separately, they are, when combined, subject to the same VAT treatment because VAT is a tax on trade. A transaction that represents a bundled supply should not be artificially split (case C-231/19, §23).
There are two types of bundled supplies:
Main supply with ancillary supplies; and
Goods and services constituting a new single supply.
A supply is ancillary to a main supply when customers do not consider it an aim in itself, but a means to better enjoy the main supply. The customer seeks first and foremost to obtain the main supply. For example, a visit to a museum that is part of a guided tour is considered an ancillary supply (case C-463/16). Ancillary supplies follow the VAT treatment of the main supply.
When goods and services form a new supply, it is not possible to distinguish a main supply from ancillary supplies. Here, the elements are so closely connected that a whole new indivisible and unique supply is formed. One example would be the membership of a golf club which includes a wide range of additional services (case C-150/99). A management service is also typically a bundled supply where a single service is formed. When a new single supply is formed, its elements are not to be considered separately for VAT. They fall under the VAT treatment of the new single supply.
The court has provided some guidance to determine whether a supply is bundled:
Neither the contractual structure nor the pricing or invoicing are a determining factor. Even when these are separate, there can still be a bundled supply, and vice versa. All the circumstances of a transaction need to be considered, including the intention of the parties if the intention is supported by objective evidence. However, the value of the elements is an important circumstance to determine whether a supply is to be considered ancillary to a main supply (case C-581/19, §48).
Whether a supply is to be considered as ancillary to a main supply needs to be analysed from the perspective of a typical customer and not the individual recipient.
VAT exemptions or reduced VAT rates need to be interpreted restrictively, but the court has held that an ancillary supply that would be taxed as a standalone is exempt in the case that it is connected to an exempt main supply (case C-102/08). Meanwhile, a new single supply composed of various elements that would be taxed as a standalone supply might fall within the scope of an exemption (case C-18/12).
The same applies to reduced VAT rates, even in the case that it is possible to identify the elements subject to the standard rate (case C-463/16, §26-27). This raises the question of fairness, because supplies that are normally taxed might be bundled with other elements and then suddenly enjoy an exemption or reduced rate. The court has held that bundled supplies cannot be equated with non-bundled supplies, which means that they can be treated differently without going against the principle of fiscal neutrality (case C-117/11).
Conclusion
Bundled supplies are not regulated in the EU VAT Directive, and the doctrine of bundled supplies is fully developed by CJEU case law. The most recent case at the time of writing dates to March 4 2021 (case C-581/19).
VAT is a consumption tax on the trade of goods and services and therefore, what is regarded as a single supply on the market should not be considered differently for VAT. Supplies are bundled if they form an indivisible new unique supply that can only be artificially split, or if an ancillary supply is there only to allow a typical customer to better enjoy the main supply.
The consideration of bundled supplies as one supply from a VAT perspective can impact the place of taxation, liability to pay VAT, and special schemes, rates and exemptions. As such, it is important to understand the CJEU case law and apply it in each case to determine these questions.
