NETHERLANDS: VAT Treatment of the training of sporthorses

Judgement of the Court of Justice of the European Communities of 1 April 2004, Case C-320/02, F?rvaltnings AB Stenholmen v Riksskatteverket (Sweden).
Gerechtshof ?s-Hertogenbosch (Netherlands), 16 February 2005, nr. 00/02881.

In the Stenholmen-case the Court of Justice has made clear that if an untrained young horse is after training sold as a riding horse, the rules of profit margin taxation (article 26a Sixth VAT Directive EC) can be applied. Recently, a Dutch court (Gerechtshof ?s-Hertogenbosch) has made reference to the Court of Justice for a preliminary ruling on the question if and under which circumstances the training of a horse that belongs to a customer may be considered as the making and production of a new article. Both issues are of great importance for trainers and owners of sporthorses.

Stenholmen; training and selling
Stenholmen bought young horses from private individuals in order to train them as riding horses and then sell them on. In the opinion of Stenholmen the horses were to be regarded as second-hand goods at the time of sale, so that the rules of profit margin taxation (article 26a Sixth VAT Directive) could be applied. The Skatter?ttsn?mnden (Revenue Law Commission) found that the sale of horses could not be classified as sales of second-hand goods: the term second-hand good is reserved for inanimate objects whereas living organisms continuously undergo changes during their life cycles and, moreover, the horses of Stenholmen had been endowed with skills as riding horses, which they did not have previously, or at least when Stenholmen acquired them, or did not have to the same extent as when they were sold on.

The Regeringsr?tten (Supreme Administrative Court) made reference to the Court of Justice for a preliminary ruling.
The Court of Justice decided:
1. Article 26a of the Sixth Directive must be interpreted as meaning that live animals may be considered to be second-hand goods within the meaning of that provision.
2. Thus an animal bought from a private individual (other than the breeder) which is sold on after training for a specific use may be considered to be second-hand goods.

This decision was based on the following arguments. Nothing in article 26a of the Sixth Directive indicates that the special arrangements applicable to the supply of second-hand goods do not apply to the supply of animals such of horses. On the contrary, to exclude those supplies from those special arrangements would be contrary to the express intention of the legislature to avoid double taxation. The common system of VAT aims in principle to tax the economic value added ad different stages in the production. It is clear that in a situation such as that at issue in the main proceedings, it would run contrary to this system to tax the entire sale price asked by the taxable dealer instead of only the economic value added when the animal was in his position.
Therefore Stenholmen could apply the rule of profit margin taxation on the sale of his horses after training them.

The case of J.: training (dressage-)horses.
J. is an international well known and professional trainer of dressage horses. He doesn?t buy and sell those horses, but he trains the horses at the request of the owners, his customers. The training starts with horses which are already suitable as riding horses. The purpose of the training is to reach the highest international level of dressage (Grand Prix). It takes years to reach this level.
J. paid VAT at the reduced rate of 6% charged under Dutch law for the situation that some specific goods (such as horses) are ?made? from materials entrusted to him by his customer. In the view of J the horses were changed completely as result of his training; he made ?new horses?. The Dutch tax authorities saw the training as the provision of services, to which the rate of 19% applied.
The reader may remember a (also Dutch) ECJ case of 20 years ago: the case of Van Dijk?s Boekhuis, judgment of the Court of Justice of 1 may 1985, case 139/84. The Court decided that the production of goods from customers? materials only takes place where a contractor produces a new article from the materials entrusted to him by his customer. A new article is produced when the work of the contractor results in an article whose function, according to generally accepted views, is different from that of the materials provided.

The Dutch Court (Gerechtshof ?s-Hertogenbosch) considered the case of Van Dijk?s Boekhuis, but also the above mentioned Stenholmen-case. To the Court, it seems possible to ?make a new horse? (Van Dijks Boekhuis) by training a horse to a higher level but on the other hand, does the Stenholmen-case mean that the training of a horse is always the training of a second-hand good instead of the making of a new horse? The Advocate General in the Stenholmen-case, Stix-Hackl, also considered in her Opinion the training of horses in relation to the case of Van Dijks Boekhuis, but did not give a clear statement.
For that reason, we can be glad that the Gerechtshof ?s-Hertogenbosch made reference to the Court of Justice for a preliminary ruling on the following questions:
1a.Can the training of an untrained horse to make it suitable for use be considered as the ?making? of a ?new good??
1b. Can the further training given to a horse that is already suitable for use be considered as the ?making? of a ?new good??
2. Is it relevant whether the results of the training can be measured objectively, for example the qualification to start in a higher class (of dressage)?
3. Is it relevant whether the horse in fact reaches the aimed level or ?falls out? because of sickness or other shortcoming?
4. What are the consequences for the answers on the questions 2 and 3 if any correction of the already paid VAT has to be made?

It is clear that not only the athletes will keep us busy, but the horses will as well.