Determining the VAT liability associated with a unilateral rescindment of a work contract.
Is VAT due over remuneration received by a contractor, when an acquirer decides (unilaterally) to end a construction project? This is the question that the European Court of Justice (ECJ) was call upon to answer in Case C‑622/23 (“RHTB”), whose decision has finally been handed down, on the 21st November 2024.
It is undisputed that VAT must be charged over every onerous commercial transaction (i.e., the tax is to be levied on consideration, either in kind or in money, paid for the fulfilment of an acquisition of goods or services)[1].
However, the concept of consideration has been subject to a process of clarification, by the ECJ caselaw.
Firstly, it is essential to underline the fact that a supply is only provided for consideration if there is a legal relationship between the provider and the recipient[2].
Secondly, where a contract for the supply of services with a minimum commitment period is terminated early by the customer, the predetermined amount received by the provider (which corresponds to the amount that such provider would have received during that period in the absence of termination) must be regarded as consideration for a supply of services and, therefore, subject to VAT[3] (not being relevant, for the purposes of subjecting such an amount to VAT, the fact that said consideration is classified, for invoicing purposes, and in accordance with national law, as a penalty).
These criteria have now been once again tested, in said Case-C‑622/23 (“RHTB”), which concerned a construction contract, entered into by an Austrian company, for the completion of a project, and that was (unilaterally) terminated by said recipient.
Consequently, the contractor demanded the recipient, that he should pay the appropriate amount, on the basis of domestic rules and regulations, which stipulated that the Contractor was entitled to the agreed remuneration, if he was ready to perform the work and could not perform it, due to circumstances on the part of the recipient. Nonetheless, the contractor, in such a case, would have to account for what he saved, as a result of not performing the work.
After litigation, under a national court, the recipient was obliged to pay for the work that had not been completed, and the question arose, whether VAT should be charged over such an amount.
In view of the above facts, the ECJ stated that, in order to consider a given transaction as a supply of service for consideration, it is crucial to assess if there is a legal relationship between the parties, under which services are exchanged, and that this occurs, in particular, when there is a direct relationship between the service rendered and the consideration received[4].
The Court also confirmed its own previous conclusions, put forward in Case C-43/19 (“Vodafone Portugal — Comunicações Pessoais SA”), that a direct relationship exists if the customer has a right to enjoy the benefit, even if he does not exercise that right.
Therefore, the amount received in the event of early termination of the contract by the customer should be considered remuneration for the provision of services for a consideration[5].
This general understanding, that has been densified by the ECJ’s caselaw remains valid, in what concerns the facts of Case C‑622/23 (“RHTB”), given that the contractor had already performed part of the work and enabled the customer to benefit from the provision of the remainder.
Finally, the Court also noted: (i) that the amount due to that supplier, subject to taxation, corresponds to the sum contractually provided for the performance in full of the supply of services, after deduction of the amounts saved on account of the non-completion of the work; and (ii) that amount cannot, therefore, be regarded as constituting fixed compensation intended to compensate for loss suffered[6].
Pedro Costa Monteiro
December 2024
[1]Please refer to Article 73 of the VAT Directive.
[2] ECJ Case C-16/93 (“R. J. Tolsma”)
[3] ECJ Case C‑295/17 (“MEO — Serviços de Comunicações e Multimédia SA”)
[4] Please refer to No. 18 of Case C‑622/23 (“RHTB”).
[5] Please refer to No. 21 of Case C‑622/23 (“RHTB”).
[6] Please refer to No. 25 of Case C‑622/23 (“RHTB”).