VAT, hidden consideration and barter transactions

The ECJ has held that where a supplier of services obtains from the customer goods of value to that supplier in the course of providing those services, then that amounts to a barter transaction, such that the value of the supply is a combination of the price charged and the value of the goods obtained: A oy (Case C410/17). It makes no difference to the analysis that the value of those goods was not dealt with in the services contract or that the customer does not know the value ascribed to the goods by the supplier.

The decision emphasises the importance of the subjective approach of the recipient in valuing the barter elements, but, in doing so, highlights the possible problems for the other party in such a barter transaction in complying with its VAT obligations.

Background

A, a Finnish company, provided both (1) demolition services and (2) supplies involving dismantling and purchasing goods. When A provided demolition services under a demolition contract, it would typically also agree as part of those services to remove and dispose of the waste. Where that waste included valuable materials, such as scrap metal, A would typically (internally) estimate the expected value likely to be achieved by reselling such waste and factor that into the price quoted for the demolition services to ensure that they were as competitive as possible. However, the estimated reselling price of waste was not something that was discussed with the client or fixed in the demolition contract.

Where A entered into a contract to dismantle and purchase goods (such as old machinery), it would again estimate the likely costs of disposing of the waste and factor these into the contract price. These contracts generally required A to purchase buildings and constructions to ground level, including the equipment, and to dismantle and remove those goods. There would often be penalty clauses for failure to clear the relevant site in a specified period. Again the costs of dismantling and waste disposal were not, however, discussed by the parties or expressly included in the contract.

Decision of the ECJ

In relation to the demolition contracts, the question was whether the consideration for those supplies was merely the price charged under the demolition contract or whether the value of the scrap metal received by A was additional consideration (by way of barter) for its supplies. The ECJ considered that it was clear that A received supplies of goods pursuant to the demolition contract, so the main issue was whether there was any consideration for the supply of goods. On that point, it was clear that where the value was not monetary (as here), it must be the value which the recipient of the supply attributes to the supply. It seems clear in this case that A did indeed subjectively attribute a value to the scrap metal is received by taking this into account in setting the price of the supply of its demolition services. The ECJ stated that the fact that the quantity and value of the scrap metal contained in the demolition waste was not agreed in the demolition contract did not affect this analysis. Equally, it did not matter that there may be difficult to determine the amount of consideration for the scrap metal.

Accordingly, the court indicated that the supplies of demolition services were made in consideration of the price paid by the customer plus the value of the goods received from the customer by A. Equally, the customer would, in principle, be making a taxable supply of goods to A based on the value attributed to the scrap metal by A and the corresponding reduction in the price charged under the demolition contract.

In relation to the contracts under which A agreed to purchase and dismantle equipment, the question was whether the supply of goods by the customer was only for the agreed price or for the price plus the services to be provided by A in clearing and removing the waste from the site. Those services would, of course, generally reduce the amount that A was willing to pay for the goods, due to the costs incurred by A in dismantling, clearing and disposing of the waste. Again, the ECJ has held that where the purchaser of the goods (A) attributes a value to the services that it provides in disposing of waste and factors that into the price it quotes, then those services are performed for a consideration.

In those circumstances, the supply of goods must be for a combined consideration of the price paid and the services supplied. The court reiterated the fact that it makes no difference that the seller does not know the costs factored into the calculation of the purchase price or that the value is difficult to ascertain. There is a barter transaction under which the customer sells goods for a price plus the value of the clearance services and A provides clearance services in return for a reduction in the price of the goods.

Comment

From a VAT perspective, it can be tempting to see barter transactions wherever you look. Reciprocal terms in contracts can all too easily take on the form of a phantom barter. Distinguishing between the situation where a true barter exists and simple reciprocal rights and obligation under a contract can be difficult. In this case, the ECJ has highlighted the importance of the need for the recipient of the supply to attribute value to it and it was clearly important in this case that A did estimate a monetary value in each case and, in the dismantle and purchase contracts, was under obligations to remove the waste generally.

However, the ECJ’s analysis is not without its problems. In the demolition contracts, the court emphasised the importance that the recipient of the supply subjectively placed value on the scrap metal in order for the receipt of it to amount to a taxable barter transaction. Yet, in the dismantle/purchase contract, the court talks of “purchaser” under the contract attributing value to the supplies of waste disposal services where it attributes a value and factors that value into the price it pays for the goods. However, in this situation, A is in fact the supplier of the services and, accordingly, it is arguably more important to ask whether the seller of the goods attributed value to those services as the recipient of them. (Of course, in a barter transaction, a party is both a supplier and a recipient of different elements.)

Indeed, in both scenarios, the subjective intention of the recipient of the supply appears to have the capacity to affect the VAT position of the supplier according to the ECJ’s judgment. It matters not whether the supplier (of the scrap metal or the equipment) had any knowledge of the valuation placed on those items by the other party. This seems surprising as such situations are generally regarded as contrary to the very essence of the VAT system, which requires both parties to a transaction to be taxed on the transaction in the same way. It may be that in both cases the other party should have objectively realised that there was additional, “hidden” consideration, though the court does not say as much. However, the court did emphasise that the valuation placed on the “hidden” elements would be subject to an “economic and commercial reality” test to ensure that there was no issue of abuse.