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Case Law updates

Indirect Tax Matters | May 2023

Euler Hermes: VAT bad debt relief following assignment of bad debts – CJEU

Euler Hermes was a Hungarian insurance company that paid compensation to its policyholders in the event of non-payment by those policyholders’ customers. The decision of the CJEU in Euler Hermes (Case C-482/21) that an insurer which indemnified bad debts, including a proportion of the VAT on those bad debts, was not entitled to recover input VAT (“bad debt relief”) on its payments will not be surprising. There was simply no basis for the insurer to claim the input VAT as its own input VAT. The Court held that payment by the insurer amounted to third-party consideration such that the debts were not unpaid to that extent.

Although the Court refers to the service in this case as insurance, the arrangements appear very similar to debt factoring. The VAT treatment of debt factoring is a complex area. In the UK, HMRC guidance in Notice 701/49 states that, “A factor cannot claim bad debt relief for debts assigned to him by his client. The client cannot claim bad debt relief for a debt assigned to a factor but can do so if the factor re-assigns the debt to him”.

More generally, the analysis of the CJEU that the payment of an amount by an insurer under such arrangements amounts to third party consideration does not appear in line with the UK position. For example, the VAT Bad Debt Relief Manual states that, “If a business takes out an insurance or similar policy to pay out in the event of their customer’s debt going bad, this does not constitute a payment for the purposes of establishing whether it can claim bad debt relief.”

Fenix: online platform deemed to be acting as principal – CJEU

Fenix International Ltd operates the OnlyFans social media platform where creators upload and publish content, such as photos, videos and messages, which fans can pay to access.

Fenix retained 20% of the payments and accounted for VAT on its commission element only. HMRC argued that Fenix should have treated itself as both recipient and supplier of the creators’ content and accounted for VAT on the full amount received from fans, but Fenix disagreed. The issue revolved around Article 28 of the EU Principal VAT Directive and Article 9a of Implementing Regulation 282/2011.

Fenix argued that Article 9a was invalid, but the CJEU ruled that it was valid and clarified that when a taxable person takes part in the supply of digital services and has the power to unilaterally define essential elements of the supply, they must be regarded as the supplier of the services, pursuant to Article 28 of the VAT Directive.

Promo 54: first occupation of property development – CJEU

Promo 54 and Immo 2020 concluded a cooperation agreement under which Immo 2020, the owner of land in Belgium on which a former school was established, entrusted Promo 54 with the task of turning the former school on their respective Belgian property into apartments and offices before selling them.

Two distinct contracts were involved in the selling of those apartments: (i) one with Immo 2020 for the converted portion of the building (as well as the land on which it was constructed); and (ii) one with Promo 54 for the renovation work. The Belgian tax authorities considered that the transaction was artificially split: it was a single supply of new apartments (VAT at 21%), not a sale of a building/land, followed by a renovation (VAT at 6%).

Promo 54, on the other hand, believed that a refurbished building that had already been occupied before it was converted is not subject to VAT, only new buildings, that is, those that have not yet been occupied. The CJEU noted that the criterion of the ‘first occupation’ of a building corresponds to the first use of the immovable property by its owner or tenant.

EU Member States are entitled, under Article 12(2) of the EU Principal VAT Directive, to lay down detailed rules applying the criterion of ‘first occupation’ to conversions of buildings. The exemption of those transformed buildings is unaffected directly by the absence of any such regulations in Belgium. The CJEU consequently concluded that the exemption was in effect in this instance.

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