Transfer of rights to enforce judgment subject to VAT

The ECJ has held that the transfer of a person’s rights to enforce a judgment debt for consideration amounts to a taxable supply: Paulo Nascimento Consulting v Autoridade Tributaria e Aduaneira (Case C-692/17) (ECJ, 17 October 2019).

The ECJ considered that the supply was a single supply of the person’s rights under the enforcement procedure and could not be considered as either an exempt supply of credit or an exempt transaction in respect of a debt.

Background

Paulo Nascimento Consulting (PNC) was a property agency which had a contract to advertise certain agricultural land. It brought an action to recover its fees of €125,000 in respect of that contract when they were not paid and obtained judgment for the unpaid amount plus interest. When the debtor failed to pay, PNC took enforcement action and obtained an attachment order in respect of property of the debtor.

PNC then entered into an agreement with a third party (Starplant) under which it transferred all its rights deriving from the enforcement proceedings in return for the payment of consideration of some €350,000. The Portuguese tax authorities sought to recover VAT from PNC on the basis that the €350,000 represented consideration for a taxable supply, whereas PNC only accounted for VAT on the original €125,000 fee.

ECJ decision

The ECJ has held that the agreement with Starplant gave rise to a taxable supply for a consideration of €350,000 and that VAT was due on the full consideration.

In the first place, it was clear that the activity of transferring rights under the enforcement procedure amounted to part of PNC’s economic activity. Whilst activities carried out on an occasional basis may fall outside the scope of VAT, it is clear that a taxable person for VAT purposes in respect of an economic activity which he carries out permanently must be regarded as a taxable person in respect of any other economic activity carried out occasionally where that other activity is connected to the main activity. It was clear in this case that the debt enforcement stemmed originally from PNC’s main activity as a property agency and so it was a direct extension of its main activity.

Secondly, the court considered that this must be regarded as a single supply. It could not be split into two supplies of services consisting of an assignment of debt and an assignment of a position in enforcement proceedings. Either way, the court rejected the argument that, given the specific situation in this case, that it could be treated in the same way as the supply of factoring in the GFKL case (Case C-93/10). That concerned the purchase of defaulted debts at a price below their face value. By contrast, the transaction at issue in the main proceedings consists in the assignment, to a third party, for remuneration, of all the rights and obligations deriving from a taxable person’s position in enforcement proceedings for recovery of a debt recognised by a judgment.

Finally, the court rejected the argument that the supply in this case could be considered to be an exempt supply of credit within Article 135(1)(b) or the exempt transfer of a debt under Article 135(1)(d).

Comment

The decision concerns an unusual set of facts, which make it of limited value for future decisions. In particular, the taxpayer had been given rights by the court over the property of the debtor and it was unclear to what extent therefore the supply in this case was actually a supply of goods (property) rather than simply one of services. As such, although it had been hoped that the decision might throw more light on the VAT treatment of factoring transactions, it seems likely to be one limited to its own unusual facts in the long run.