VAT perspective on early termination of energy supplies

The Coordination Committee recently discussed the application of VAT upon the early termination of energy supplies (meaning heat, electricity, gas, etc.) or the failure to deliver an agreed quantity. The paper submitter outlined two possible situations to the Coordination Committee: the first was the simple termination of the contractual relationship by agreement between the provider and the customer and the failure to deliver the previously agreed energy at previously agreed fixed prices. The submitter had calculated the compensation for non-delivered energy as the product of the amount of non-delivered energy and the difference between the agreed and market price at the time of termination of the contractual relationship. This compensation reimburses for energy not supplied or taken and is subject to value added tax. It is considered as the provision of a service with a place of supply in the Czech Republic subject to the basic rate, as confirmed by the opinion of the GFD.

The second case involves a compression of contracts where a provider and their customer have entered into multiple opposite contractual relations for the same performance. Upon the subsequent termination, the receivables and payables of both parties are offset to the extent that they overlap, and thus cease to exist. The net differences, if any, constitute separate payables or receivables, which, according to the submitter, should not be subject to VAT. Compensation for the undelivered energy shall be calculated on the supply remaining after the compression of the contracts. The GFD disagreed with this conclusion and drew the same conclusion for the compression technique as in the first case discussed above, i.e., energy supply contracts are terminated and one of the contracting parties is entitled to compensation directly attributable to the undelivered supply: on these grounds, the GFD concluded that the second case also involved a provided service (a taxable supply).