By Mario Spera - Principal of Bernoni Grant Thornton
An interesting in-depth analysis by the EU Court of Justice (hereinafter also CJEU) in judgement C-146/22 dated 5 October 2023, case YD, concerns the application of reduced VAT rates which, in the food & beverage sector in particular can differ for the same product depending on how it is marketed.
In the case under analysis, the matter concerned the application of VAT in Poland to a beverage prepared with milk and chocolate, to which different rates were applied based on whether the product was sold for retail or prepared on site and served hot for immediate consumption.
The CJEU focused its attention on the need to guarantee the VAT “neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain” (see clause 7 of VAT Directive 2006/112/EC). Thus the need of a correct classification of the beverage at stake “called ‘Classic Hot Chocolate’, in the form of hot chocolate prepared on the basis of milk and a chocolate sauce”.
Therefore, the referring court asked the CJEU first of all whether in compliance with the principles of fiscal neutrality, of fiscal legality and of legal certainty, it was possible to apply the reduced VAT rate of 5% provided in Poland for foodstuffs including beverages containing milk (heading 2202 of the CN), but not for beverages containing milk classified as food and beverage servicing services, which are instead subject to the reduced VAT rate of 8%.
Secondly, it wondered whether the domestic praxis providing for two different reduced VAT rates applicable to goods with the same objective characteristics and properties, depending on whether services consisting in the preparation and serving of such goods are involved, is consistent with the EU VAT Directive.
In its analysis, the Court of Justice assumes that, generally speaking, the same VAT rate - namely the standard one - applies to supplies of goods and services, whereas the reduced rate applies only to the transaction specifically indicated in Annex III of Directive 2006/112/EC (see points 31 and 32 of the judgement). For a more specific qualification and identification of the transactions to be subjected to the reduced VAT rate, Member States can use various methods, among which the combined nomenclature (which mainly has a customs application).
It is in any case important that the principle of fiscal neutrality be always complied with, without prejudice to the possibility for the domestic legislature to freely determine the method of classification of the transactions (under Annex III of the VAT Directive) to which a reduced rate applies.
In this respect, in point 42 of judgement C-703/19 dated 22 April 2021, case J.K, the CJEU, referring to further previous judgements, concluded that “the VAT Directive does not (…) preclude supplies of goods or services falling within the same category of Annex III to that directive from being subject to two different reduced rates of VAT”.
Since this statement may be conflicting with the contents of clause 7 of the VAT Directive on the need to apply the same VAT rate to the same goods and services, it is necessary to understand to which extent different rates can be applied to similar goods and services.
According to the CJEU, in order to apply different rates to similar products it is necessary to distinguish, as in the case under analysis, “between ready-to-drink dairy beverages which are marketed in shops, those being classified among the foodstuffs (…) to which a reduced VAT rate of 5% applies, and hot dairy beverages which, like the ‘Classic Hot Chocolate’ (…) are prepared by an employee of a coffeehouse at the request of a customer, in order to be consumed immediately”, and falling within the ‘food and beverage serving services’ taxed at a reduced VAT rate of 8% (see point 40 of judgement C-146/22).
The hypothesis that the goods under analysis may fall within the scope of the restaurant and catering services requires the examination of the contents of art. 6 of EU Implementing Regulation no. 282/2011, which, under paragraph 1, gives relevance to “support services allowing for immediate consumption” which accompany the “the supply of prepared or unprepared food or beverages or both, for human consumption”. The same paragraph also underlines that food and/or beverages are only one component of a complex provision in which “services shall predominate”.
Now, although in principle similar supplies of goods and services which can be in competition with each other must not be treated differently for VAT purposes, in order to identify a significant distinction justifying the application of different rates it is necessary to analyse the perception of the good or service from the point of view of the average consumer.
To this end, the fact cannot be overlooked that the preparation of a beverage (as in the case at stake) upon the customer request and its servicing hot actually imply an “immediate” consumption, which is not the case for ready-to-drink beverages marketed in shops. In this case, a substantial difference emerges, liable to “have a decisive influence on the choice of the consumer to purchase one or the other of those beverages, since that choice is not made in the same circumstances or with the same goal, and even less so if consumers can change the composition of the former beverages by ordering additional ingredients” (see point 53 of judgement C-146/22). It is actually the choice of the average consumer that influences the difference between products and justifies the application of different VAT rates.
Basing on these reasonings, the Court of Justice of the EU reached the conclusion that the application of different VAT rates for similar foodstuff is not in contrast with the EU regulations, provided that it can be ascertained that the same products, although sharing the same main ingredients, have different characteristics and accompanying support services, which significantly influence the average consumer’s choice to purchase one product over the other.
VAT Alert
Different VAT rate for similar products
20 Jun 2024
Judgement of the Court of Justice of the EU C-146/22 dated 5 October 2023, case YD
By Mario Spera - Principal of Bernoni Grant Thornton
1. Foreword
An interesting in-depth analysis by the EU Court of Justice (hereinafter also CJEU) in judgement C-146/22 dated 5 October 2023, case YD, concerns the application of reduced VAT rates which, in the food & beverage sector in particular can differ for the same product depending on how it is marketed.
In the case under analysis, the matter concerned the application of VAT in Poland to a beverage prepared with milk and chocolate, to which different rates were applied based on whether the product was sold for retail or prepared on site and served hot for immediate consumption.
The CJEU focused its attention on the need to guarantee the VAT “neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain” (see clause 7 of VAT Directive 2006/112/EC). Thus the need of a correct classification of the beverage at stake “called ‘Classic Hot Chocolate’, in the form of hot chocolate prepared on the basis of milk and a chocolate sauce”.
Therefore, the referring court asked the CJEU first of all whether in compliance with the principles of fiscal neutrality, of fiscal legality and of legal certainty, it was possible to apply the reduced VAT rate of 5% provided in Poland for foodstuffs including beverages containing milk (heading 2202 of the CN), but not for beverages containing milk classified as food and beverage servicing services, which are instead subject to the reduced VAT rate of 8%.
Secondly, it wondered whether the domestic praxis providing for two different reduced VAT rates applicable to goods with the same objective characteristics and properties, depending on whether services consisting in the preparation and serving of such goods are involved, is consistent with the EU VAT Directive.
2. Different rates applied to the same product
In its analysis, the Court of Justice assumes that, generally speaking, the same VAT rate - namely the standard one - applies to supplies of goods and services, whereas the reduced rate applies only to the transaction specifically indicated in Annex III of Directive 2006/112/EC (see points 31 and 32 of the judgement). For a more specific qualification and identification of the transactions to be subjected to the reduced VAT rate, Member States can use various methods, among which the combined nomenclature (which mainly has a customs application).
It is in any case important that the principle of fiscal neutrality be always complied with, without prejudice to the possibility for the domestic legislature to freely determine the method of classification of the transactions (under Annex III of the VAT Directive) to which a reduced rate applies.
In this respect, in point 42 of judgement C-703/19 dated 22 April 2021, case J.K, the CJEU, referring to further previous judgements, concluded that “the VAT Directive does not (…) preclude supplies of goods or services falling within the same category of Annex III to that directive from being subject to two different reduced rates of VAT”.
Since this statement may be conflicting with the contents of clause 7 of the VAT Directive on the need to apply the same VAT rate to the same goods and services, it is necessary to understand to which extent different rates can be applied to similar goods and services.
3. The conclusions of judgement C-146/22
According to the CJEU, in order to apply different rates to similar products it is necessary to distinguish, as in the case under analysis, “between ready-to-drink dairy beverages which are marketed in shops, those being classified among the foodstuffs (…) to which a reduced VAT rate of 5% applies, and hot dairy beverages which, like the ‘Classic Hot Chocolate’ (…) are prepared by an employee of a coffeehouse at the request of a customer, in order to be consumed immediately”, and falling within the ‘food and beverage serving services’ taxed at a reduced VAT rate of 8% (see point 40 of judgement C-146/22).
The hypothesis that the goods under analysis may fall within the scope of the restaurant and catering services requires the examination of the contents of art. 6 of EU Implementing Regulation no. 282/2011, which, under paragraph 1, gives relevance to “support services allowing for immediate consumption” which accompany the “the supply of prepared or unprepared food or beverages or both, for human consumption”. The same paragraph also underlines that food and/or beverages are only one component of a complex provision in which “services shall predominate”.
Now, although in principle similar supplies of goods and services which can be in competition with each other must not be treated differently for VAT purposes, in order to identify a significant distinction justifying the application of different rates it is necessary to analyse the perception of the good or service from the point of view of the average consumer.
To this end, the fact cannot be overlooked that the preparation of a beverage (as in the case at stake) upon the customer request and its servicing hot actually imply an “immediate” consumption, which is not the case for ready-to-drink beverages marketed in shops. In this case, a substantial difference emerges, liable to “have a decisive influence on the choice of the consumer to purchase one or the other of those beverages, since that choice is not made in the same circumstances or with the same goal, and even less so if consumers can change the composition of the former beverages by ordering additional ingredients” (see point 53 of judgement C-146/22). It is actually the choice of the average consumer that influences the difference between products and justifies the application of different VAT rates.
Basing on these reasonings, the Court of Justice of the EU reached the conclusion that the application of different VAT rates for similar foodstuff is not in contrast with the EU regulations, provided that it can be ascertained that the same products, although sharing the same main ingredients, have different characteristics and accompanying support services, which significantly influence the average consumer’s choice to purchase one product over the other.
