I like skiing. My parents took me to Austria for the first time when I was 5 or 6 years old. I can only remember that it was cold, and, of course, I fell in love with the ski teacher, who’s name probably was Heidi, Astrid or Maria. In all the years that I have skied since, I was fortunate to never hurt myself, break a leg or something like that.
A friend of mine was not so lucky. He’s a good skier, but as these things go, he just had a very stupid moment, crossed his legs on a blue slope, fell and broke his leg. Badly. In the hospital they had to put a titanium pen through his knee and shin. Not necessary to say that his vacation was over.
These pens must be strong. They more or less replace the whole shinbone, and ensure that the patient can actually continue using his leg, often without even having to plaster it. That’s why these pens are specifically manufactured, by specialized companies, who supply those pens to hospitals.
One of these companies has been in a dispute with the German tax authorities about the classification of such pens and the screws with which the pens are attached to the bones. In this case (C-227/17) it concerns so-called “spinal fixation systems for the treatment of patients with degenerative disorders of the vertebral column and treatment of bone fractures”. But we would call them (titanium) screws, pins, plates and connectors.
The company classifies these products as ‘appliances to compensate for a defect or a disability which are worn or carried, or implanted in the body’, which, for German VAT purposes, is subject to the reduced VAT rate of 7%. The tax authorities disagree, and want to classify the products as ‘orthopaedic apparatus and other orthopaedic appliances, excluding parts and accessories’. What’s the difference, you say? Well, the tax authorities are of the opinion that the screws are ‘orthopaedic apparatus’, which are only used temporarily by the patient, and products with this classification are subject to the standard VAT rate of 19% in Germany. And because hospitals in general cannot recover any input VAT, this would mean an increase in the costs for the hospitals.
The company on the other hand argues that the screws and pins are not only used for bone fractures, but also for permanent implantation to help patients for example with their spine. Thus, the screws and pins should not be classified as ‘temporary aids’, but as permanent implants. Even though it could happen that the screws are replaced or taken out of the body again.
The European Court of Justice has been asked to give a decision in this case. To me, it makes sense to look at the purpose and use of the products. The VAT Directive allows EU countries to apply the reduced VAT rate to ‘medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled’.
All I know is that without the titanium pen in his leg, including the screws, my friend could not have walked, and would not have been able to do so as fast as he did without it. In fact, he was mountain biking again after only a few weeks.
And now I’m in doubt whether I like it that he’s beating me so fast again, or that I’d rather have had him struggling for a bit longer, because the pins would have been too expensive to put them in his leg if the high VAT rate would have been applied…
Bas de Koning is an independent tax advisor, specialised in indirect taxation. He’s available for VAT interim assignments, advice and training. You can find more information on www.simplyvat.nl