The EU Court has determined that prize money received in horse racing competitions is not to be included in the taxation base for VAT. According to our assessment, this decision will have an impact also within other forms of sports and sporting events.
A Czech company undertakes operations comprised of stable services for racing horses. The company raises and trains its own horses for racing but also provides training for other horses. The company’s revenues are comprised of prize money received when their own horses which come in well in races, fees from the other horse owners for the training of their horses, for stable services and for the feeding of their horses, as well as being comprised of a portion of the prize money received if these horses having other owners come in well in the races in which they participate.
The Czech national court presented a number of questions to the EU Court. One question was if a horse owner providing a horse to take part in a race can be seen to be providing a service, and if this is the case, if this service is VAT liable. The purpose of the question was to assess whether there exists the right of deduction of input VAT on costs referring to the horse racing event.
The EU Court concluded that horse owners, generally speaking, pay registration and participation, or similar, fees to the entity organising the horse race. Consequently, a VAT liable provision of services can be seen to take place on behalf of the organiser of the horse race vis á vis the horse owner. The racing terms often stipulate that the horses showing positive results receive a pre-determined amount of prize money. As a result, the question is whether one can link this compensation to a service provided by the horse owner to the organiser of the race. The EU Court stated that this does not comprise compensation for a service provided by the horse owner to the organiser of the race as only those horse owners’ horses which succeed to take winning positions in the race receive compensation. If the organiser was to pay compensation which is independent of the horses’ results in the race, this would, on the other hand, be a matter of the receipt of compensation.
The actual decision can, at first hand, be experienced as rather limited in its effect. However, according to our understanding, the legal implications in a wider perspective can be more extensive as the EU Court’s statement addresses a broader principle. According to this decision, compensation which is paid out only on the basis of certain results does not comprise compensation for a service provided.
Prize money has, to date, been seen to be VAT liable from a Swedish point of view. The EU decision should imply that if a company only has revenues in the form of prize money, there are no VAT liable sales and, as a result, the company does not incur right of deduction for input VAT. Consequently, horse owners having no revenues other than prize money will not be able to deduct input VAT on the costs for the horses.
The Czech company undertaking stable operations could possibly incur right to VAT deduction on the costs for such operations if such costs can be seen to be related to VAT liable operations. The EU Court has allowed the national court to determine if the costs in question refer to horses intended to be sold or if there are objective reasons to claim that the racing is a means of supporting the economic operations (for example, by increasing the status of the stables and its reputation).
According to our assessment, the decision will also have an affect outside this industry. Sports men and women often receive prize money when they achieve positive results in sport competition. Today, VAT is to be reported on these payments. However, VAT has not been deductible for those arrangers who do not undertake VAT liable operations (for example, non-profit associations working for the public good). The EU Court’s decision can, in other words, have a positive effect on these associations.
We deem that the decision will imply a change in legal practice. Consequently, it is probable that the Tax Agency will issue a position paper on this matter. On the other hand, we believe that there will be a number of unanswered questions in this context in the near future. For example, how is prize money passed on by the individual sportsman or woman to their team to be handled? This takes place both within cycling and other types of sports. We believe that there will be reason to revert to these issues.
Those of you dealing with prize money, as a recipient or as the organiser of a competition, are welcome to contact our tax advisors at PwC for a review and assessment of your particular circumstances and of the effects this decision could have on your operations.