VAT and activities of directors

Update: The CJEU has now confirmed the option of the AG. See our article: Directors fees are not subject to VAT

The AG has opined that a member of a board of directors does not carry out an economic activity independent of the company of which it is a board member and, accordingly, is not required to charge and account for VAT on their fees: TP v Administration de l'Enregistrement, des Domaines et de la TVA (Case C‑288/22). The AG has suggested this is the case even where the person also carries out a taxable activity (such as that as a lawyer, as in this case). This part of the opinion may call into question provision in the VATA 1994 treating supplies made by a person, who in the course or furtherance of a trade profession or vocation, accepts any office, as supplied in the course or furtherance of the trade, profession or vocation.

Background

The case notes that the question whether the remuneration of a member of a board of directors of a company for its activity as part of a body of a legal person constitutes remuneration for an independent economic activity in accordance with the VAT Directive is answered differently in different Member States. While the majority of Member States do not consider that remuneration to be remuneration for an independent economic activity, this is the case in six Member States under certain conditions and is usually the case, in particular, in Luxembourg since 2016, from where the particular referral to the CJEU arises.

Article 9(1) of the VAT Directive defines 'taxable persons' as "any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as "economic activity". The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity."

Article 10 notes that the requirement for an economic activity be conducted "independently" excludes employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

In Luxembourg, a member of the board of directors is required to charge and account for VAT. TP, a lawyer, was a member of the board of directors of several companies in Luxembourg. TP took the view that his remuneration as a member of the board of directors was not subject to VAT as his activity was not carried out independently, but as a member of the board. The Luxembourg tax authorities disagreed, leading to the dispute in this case.

AG opinion

The AG has noted that a member of a board of directors may be regarded as a taxable person only if they fall within the definition of Article 9(1). The second part of Article 9(1) of the VAT Directive specifies when an activity is to be regarded as an economic activity. And Article 10 merely clarifies that employed persons are not to be regarded simultaneously as taxable persons.

Given the difficulty of precisely defining an independent economic activity, the description of the necessary economic activity with typical occupational types ('producers, traders or persons supplying services' or 'mining and agricultural activities and activities of the professions') outlines the concept of a taxable person and the economic activity necessary to qualify as such. The AG notes that this is a form of typological description and whether a particular thing belongs to the type does not have to be determined by logical/abstract subsumption, but can be determined according to the degree of similarity to the prototype (pattern).

The AG also notes that recent CJEU case law in connection with Article 9(1) requires that all the circumstances in which the activity is supplied have to be examined and an assessment made, referring to the typical conduct of an active entrepreneur in the field concerned.

Applying this approach, the AG notes that the typical activity of an independent taxable person is characterised by the fact that they assume their own economic risk. A typical taxable person bears a risk of loss and profit personally. Typically, they, and not another person, decide on the scope of his activity. They are responsible for the success or failure and to that extent they use their own economic initiative. They decide which risks to take and how much time to invest in one project or another. That expenditure of time and the quality of the activity are, as a general rule, also reflected in the amount of remuneration. This is not the case, for example, with an employee since only the employer bears the economic risk and takes the economic initiative.

Whilst the final assessment of whether TP's activity as a director amounted to an independent economic activity would be for the assessment of the local courts, the AG notes that it seems unlikely in this case. First, TP receives his remuneration not for his own activities (for example as a lawyer), but as part of a collective body. Consequently, it is not he who is personally liable, but initially only the body to which he belongs. An independent assumption of risk therefore appears lacking. Secondly, the activities as part of a body cannot be carried out on the free market to other third parties, depending on the decision by TP, but can only benefit the company for which he was appointed as part of the board.

Nor was the remuneration determined by negotiation with the recipient of the service, as would be the case for a typical undertaking. Rather the fact that a natural person is dependent on the company to determine his remuneration is an indicator that he does not carry out an independent economic activity. Even if TP does not receive a fixed remuneration, but a variable one, or if the remuneration is based on the company's performance, this would not change the above finding. Participation in another's (profit) risk cannot be equated with bearing one's own (profit and loss) risk. Even an employee who, in addition to his fixed salary, receives variable remuneration based on the employer's performance does not, by virtue of that fact alone, carry out an independent economic activity. His employer continues to bear the economic risk, in which the employee participates in the event of success, but which he does not bear himself. The same seems to be true for TP, in so far as he should receive performance-related remuneration.

Whilst the case of TP did not involve the classic employee-employer relationship in accordance with Article 10 of the VAT Directive, that was not necessary. What mattered was not whether Article 10 of the VAT Directive applied, but whether the conditions of Article 9(1) of the VAT Directive were met.

Did TP's status as a taxable person acting as a lawyer change this analysis? Not according to the AG. In the present case, there are two separate activities, since one is an independent economic activity and the other is not an independent economic activity. One activity falls within the scope of VAT, the other does not.

Comment

Ultimately, each decision is fact specific and there may be cases where the tests for an independent economic activity may be met. However, recent decisions of the CJEU have emphasised the typical aspects of an independent economic activity, focussing in particular on the elements of risk and reward. However, it is not clear that all businesses typically follow this pattern and this could, in principle, call into the question the VAT treatment of persons such as consultants who regularly work for businesses but do not in practice take on the risk of financial losses.

In addition, it might be noted that the opinion of the AG may call into questions aspects of the UK's VAT provisions. In particular, under VATA 1994 section 94(4), where a person, in the course or furtherance of a trade profession or vocation, accepts any office, services supplied by him as the holder of that office are treated as supplied in the course or furtherance of the trade, profession or vocation. Whilst the AG opinion (and any subsequent CJEU decision) are not directly relevant in the UK at this stage, they do remain persuasive. And the suggestion by the AG that any separate taxable activity should not "infect" the activity of the individual as a board member seems to run counter to VATA 1994 s.94(4).