VAT and instalment payments

The ECJ has held that a taxable person is not entitled to delay payment of output VAT on a supply of services where payment for those services is made in instalments over an extended period: Finanzamt B v X-Beteiligungsgesellschaft (Case C-324/20). The provisions allowing deferral of VAT accounting for successive payments was, in general, limited to the situation where those successive payments related to continuous supplies over the relevant period.

The decision is in line with the UK VAT rules on the time of supply and identification of the tax point.

Background

X made a supply of mediation services in 2012. A fee for those services was agreed at €1m to be paid in equal instalments of €200,000 over five years. At the due date for payment of the instalments, X issued an invoice for payment and accounted for output VAT on the amount of the instalment.

In 2016, however, following a tax audit visit from the German tax authority, the tax office took the view that VAT on the whole of the €1m fee was due in 2012, at the time the supply of services was completed. X appealed that decision arguing that the instalment payments fell within the scope of Article 64 of the Principal VAT Directive and the matter was referred to the ECJ.

Decision of the ECJ

The ECJ has unambiguously confirmed that output VAT was due on the full amount of the consideration at the time of the supply of the services in 2012.

The Court noted that Article 63 makes it clear that VAT becomes chargeable when the services are supplied and Article 64 states that “where it gives rise to successive payments… the supply of services shall be regarded as being completed on expiry of the periods to which such payments relate”.

The Court stated that the wording “supplies which give rise to successive payments” could be construed either as including one-off supplies for agreed consideration paid in instalments or as concerning only those supplies which justify payments over a period of time, namely those that are not performed on a single occasion but which are repeated or continuous. However, when read in the context of Article 63, it was clear that the purpose of Article 64 is limited it to continuous or successive supplies, and not single, one-off supplies of services. In particular, as the payments constitute the consideration for supplies, the provision implicitly requires that the supply be completed during those periods.

Furthermore, the Court rejected the argument that the taxpayer might be able to bring the instalment payments within the scope of Article 90 of the Directive. Article 90 provides for a reduction in the consideration for the purposes of accounting for VAT in the case of cancellation, refusal or total or part non-payment, where the price is reduced after the supply takes place. Payment in instalments does not fall within the scope of these concepts. In particular, the fact that an instalment is not due before its term cannot be regarded as a situation where a purchaser pays only part of what they owe. Non-payment only applies to situations where a purchase fails to make a payment of a debt which has become due.

Comment

As noted above, the decision is in line with UK treatment. The mere fact that payment for a supply is delayed or deferred to a time later than the basic time of supply or is made in a number of instalments is no reason in general to allow the supplier to delay accounting for VAT on the full consideration for the supply.

However, this can be a complex area and there are a number of specific provisions dealing with continuous supplies and, in particular, supplies in the construction industry. In addition, specific provision deals with retention payments pending full and satisfactory performance of a contract.

Indeed, in practice it may be difficult to identify the difference between a supply of services where the supply is completed and continuous supplies of services. This is particularly the case where the fee involves contingent consideration dependent on a future event. If consideration only became due on the condition of a certain event occurring then would the court have reached the same decision? How significant does that contingent event then need to be?

One area where this judgment could increase HMRC’s focus is in the area of out of court settlements. Settlements have been a hot topic in recent years concerning the principle of whether the settlement amount is subject to VAT or not. Out of court settlements are frequently for significant sums and therefore often subject to a payment plan. If the settlement amount is subject to VAT, it is likely that the entire amount will be subject to VAT at the point the settlement is agreed (or arguably earlier if in relation to services already provided) rather than in accordance with the payment plan.