Payments among members of energy clusters: the VAT perspective

We also discussed briefly what an energy cluster was and why it was an attractive option.

This article discusses purchases for the common interest of cluster members and the payments among them. We are looking at the VAT aspects of those payments.

Assuming that an energy cluster is not a stand-alone taxable person, it is worthwhile wondering how the members should account for expenses incurred for the general operations of the energy cluster.

An energy cluster agreement is usually structured so that one entity takes the role of a coordinator. That entity in its capacity of the coordinator represents the cluster’s interests in outside dealings and often buys services for the cluster’s purposes which are shared among the cluster members. 

An invoice for services is usually issued to the ordering party, that is most often the coordinator. 

The question then is how the other members should treat such purchase in terms of VAT. 

In view of the VAT Act’s provisions, we should consider two main options:

As the energy clusters are just beginning to gain popularity, the revenue authorities have not considered their VAT treatment too often yet. There is no firmly established case law on this matter. 

For a service to be subject to VAT, it must be supplied against payment. For a supply to be considered made against payment there must be a legal relationship between the service provider and the recipient, and a consideration (fee) should be paid for the service performed.

In option 1, the coordinator follows Article 8(2a) of the VAT Act, i.e. it participates in the supply of services acting on its own behalf but for the benefit of a third party. The coordinator is, therefore, deemed to have received and provided the purchased services. The service is then considered made against payment and we are dealing with recharges. 

In option 2, transfers of expenses to other energy cluster members cannot be treated as supplies of services in the meaning of the VAT Act. Here we would have to assume that reimbursement of expenses from the other members remains outside the scope of VAT, and the coordinator does not act for the benefit of third parties when it buys services. Consequently, the transfer of expenses should be documented by means of a debit note.

 

The line between the two options is thin. They are not interchangeable (at the taxable person’s discretion), but the problem is that errors are easy to make when the taxable person assesses the approach on its own.

Similar deliberations circled around VAT treatment of payments among members of consortium agreements. Consortium agreements usually put together several entities to work on a specific task (project). As such, it is a collaboration agreement between at least two entities so that they can carry out a specific project together. As part of that collaboration, one entity often buys services that benefit all other consortium members. 

Revenue authorities have often expressed their opinions on payments among consortium members whose situation is somewhat similar.

 

However, their opinions described in advance tax rulings are inconsistent.

 

For example:

Please be mindful that the payments under consideration are often for different services and follow different rules of collaboration agreed between the parties. That is why the revenue authorities’ conclusions may vary depending on the specific facts and circumstances. 

When we transpose the above deliberations onto the payments among members of energy clusters, we can see that the splitting of expenses among the members is not clear.

 

The problem gets even more complicated when you realise that cluster members may include non-exempt VAT payers and exempt VAT payers or even non-taxable entities, as well as entities that carry out taxable activities, tax-exempt activities as well as non-taxable activities.

Bear in mind also that an energy cluster agreement may be formulated in lots of different ways. It is necessary to examine the coordinator’s role in the specific agreement. It is important to check its scope of liability and risks incurred. It is worth thinking over how the participants will share expenses already at the time of drafting the agreement. 

Some issues and risks may be mitigated at that time. 

The risk may also be curtailed by obtaining an advance tax ruling on the specific solutions adopted by the cluster.

Summing up, it is necessary to look at each situation separately and secure the adopted approach to cost sharing.

Let us have a look at the right to deduct VAT on operating expenses of the energy cluster. 

The approach to the right to deduct VAT may vary depending on the entity’s role in the agreement and what the expenses are for.

It is worth considering the taxable person’s objective of participating in an energy cluster agreement and purposes of the expenses.

For instance, if the member’s main objective is to take care of the reputation and use the participation in the energy cluster to build brand or pursue environmental objectives, revenue authorities may claim that this is not connected to taxable activities enough and, therefore, may challenge the right to deduct VAT on expenses related to the membership in the energy cluster (see a somewhat similar e.g. advance tax ruling of the Head of the National Revenue Information Service of 20 May 2019, no. 0111-KDIB3-2.4012.81.2018.3.AZ or the ruling of 20 May 2019, no. 0111-KDIB3-2.4012.81.209.3.AZ). 

However, if the cluster’s activities affect the member’s VATable activities, the right to deduct should be very much available.

Summing up, the VAT treatment of payments within an energy cluster remains unclear. In view of opaque regulations and multitude of available accounting models among the members, each situation requires a separate and in-depth analysis.

If you belong to an energy cluster and have doubts about the tax accounting within the cluster, our experts would be glad to look at your situation.

The generally adopted market practice shows that the invoice is usually issued to the coordinator who places the order.

Depending on the adopted approach, the cluster coordinator will issue to the other cluster members either invoices (known as recharges) or debit notes. 

The right approach depends on: 

Be mindful that the line between these two concepts is thin. They are not interchangeable (at the taxable person’s discretion), but the problem is that errors are easy to make when the taxable person assesses the approach on its own.

Unfortunately, it is impossible to give a clear answer, especially as there are still discrepancies in the interpretation, e.g. when it comes to payments among member of consortia.

The settlement of mutual accounts should be regulated at the time of drafting the agreement. 

Tax implications may be secured e.g. by an advance tax ruling issued to all cluster members together.

If the purchase is related to the cluster member’s taxable activity, the deduction should be available indeed. For instance, if the cluster’s activity for which the expense is made is relevant for the member’s taxable activity.

However, if the member’s main objective is to take care of the reputation or build brand or pursue environmental objectives, revenue authorities may claim that this is not connected to taxable activities enough and, therefore, may challenge the right to deduct VAT.

Each case must be assessed on its own facts.​