Withdrawal from a Contract and VAT on Received Consideration in the Context of Judgment C-622/23
Dear Readers,
This article will inform you about a judgment of the Court of Justice of the European Union (C-622/23, the “CJEU”), which again dealt with a question of whether an amount paid upon withdrawal from a contract is subject to VAT.
Subject Matter of the CJEU’s Judgment
The contracting parties entered into a contract for work to implement a construction project. However, after the work had been initiated, the customer terminated the contract unilaterally and the contractor required the agreed price’s payment from the customer in a judicial proceeding. Lower courts dealt with a question of whether a payment for a work that has not been completed is subject to VAT. A first instance court ruled yes. However, a court of appeal changed that conclusion, which resulted in a preliminary question referred to the Court of Justice of the EU.
The Court of Justice was referred a preliminary question whether an amount, which must be paid by the work’s customer to the contractor, is subject to VAT even in case that the work fails to be completed but the contractor was willing to perform the work and was prevented from doing do by circumstances on the customer’s side. Hence, the CJEU addressed again a direct connection between a service provided to a recipient and an obtained consideration.
The CJEU believes that an equivalent (consideration) to an amount, which was paid by a customer, is the right to performance of obligations under the relevant contract. This right arises upon a contract’s formation and is not in any way prejudiced by the customer (at its own impulse) deciding to waive such right. What is of key importance is that the contractor had made steps to perform and materialise the agreed supply so that the customer can exercise its right.
As a consequence, the CJEU arrived at a conclusion that the amount, which needs to be paid once the service’s recipient had withdrawn from a validly formed contract for the service’s provision, which is subject to VAT and which the provider started to provide and was willing to complete, had to be considered a fee for the service’s provision for consideration subject to VAT.
If you want to have more information about this judgment, please feel free to contact us.
Stela Bartošová
bartosova@clarksonhyde.cz
