The importance of the contract for VAT purpose
A business considers that its provision of services is exempt from VAT. Therefore, the price agreed, invoiced and also paid by the client is a price exclusive of VAT. Some time later, it turns out that the exemption was wrongly applied.
Can the service provider reclaim VAT from his client? What if the parties to the contracts have not made any provision for VAT when they set the price of the goods or services to be sold? Is the amount agreed gross or net?
The company is in the business of selling vitamins and minerals by mail order (e-commerce). It uses the services of a postal operator (Royal Mail) to deliver the sales to its customers. The postal operator charges the company for its transport services without VAT. The VAT exemption is allowed on the basis of national legislation and guidelines issued by the tax authorities.
A few years later, it turns out that the VAT exemption was wrongly applied by virtue of an erroneous interpretation of the law by the tax authorities themselves. For this reason, the tax authorities magnanimously agreed not to regularise the past and therefore did not claim the VAT payment from the Post Office.
The case in a nutshell
The VAT dispute
The e-tailer, having heard about the case, then tried a poker game by claiming that the payments made to the postal operator should be considered, retrospectively, as including VAT. On this basis, he files a refund claim to recover this VAT.
These claims are rejected by the tax authorities. It has to be said that in this case, the tax authorities are playing for big bucks since the total value of the claims potentially made against them is between 575 million and 1.15 billion euros!
The case therefore escalated, took a judicial turn and ended up before the Court of Justice.
The Court of Justice's response
The Court first recalled its previous case law: when the price of a good has been established by the parties without any mention of VAT and the supplier of that good is the person liable for the VAT due on the taxed transaction, the agreed price must be regarded as already including VAT in the case where the supplier does not have the possibility of recovering the VAT claimed by the tax authorities from the purchaser.
The Court then rejected the company's arguments:
- The contract concluded between the parties explicitly provides that the price of the service is expressed exclusive of VAT and that, if VAT were nevertheless due, the company would have to bear the cost.
- The postal operator was not legally unable to recover the wrongly omitted VAT from the company. It had only refrained from doing so in view of the red tape and costs that this would have entailed and, above all, because the tax administration had itself decided to waive recovery of the VAT against it.
The Court then concluded that the price invoiced by the postal operator was a price exclusive of VAT and that the company could not claim to deduct an amount of VAT which had not been invoiced to it and which it had therefore not passed on to the final consumer.
The expert's eye
This case is interesting because it is a reminder of the crucial importance of systematically including a paragraph on VAT in contracts.
Otherwise, the question of whether the price agreed between the parties is a price without or including VAT is bound to lead to commercial disputes.