Consideration paid after withdrawing from a contract for work
The Supreme Administrative Court (SAC) ruled (7 Afs 124/2016 – 35) on the VAT treatment of an amount that a customer paid to a contractor after withdrawing from a contract for work. The core of the dispute was whether the amount was a consideration for work carried out under the contract for work, and thus subject to VAT, or whether it was a financial supply with no relation to the work carried out, thus not subject to VAT.
In the case in question, the contractor had been contracted to build a production hall for the customer. The contractor carried out certain work under the contract for work, in the scope of approximately 95% of the contracted work. Subsequently, both the customer and the contractor withdrew from the contract. According to the International Court of Arbitration’s decision, after the withdrawal from the contract, the customer was obliged to pay to the contractor approximately CZK 50 million for the completed and not reimbursed work.
In the opinion of the contractor, the amount comprised the settlement of a relationship which had ensued from unjust enrichment and corresponded to the loss caused to the contractor or the gain of the customer, and as such was not subject to VAT. According to the SAC, some legal relationships ensuing from the unjust enrichment of one of the parties indeed do not fall under the scope of VAT; however, these are exclusively relationships not involving the delivery of goods or provision of services for consideration. Since, in the case in question, the contractor had built most of the production hall under the contract for work, and the hall had then passed into the ownership of the customer, it was undoubtable that the contractor had provided a service to the customer within the meaning of the VAT Act. As for the amount paid according to the decision of the International Court of Arbitration, the SAC ruled that it had been based on the contracted price and the volume of work carried out, therefore there was a direct proportion between the provision of services and the consideration. Hence, this was the case of a provision of services for a consideration, and the amount is subject to VAT.
As for the point of time of the taxable supply, according to the SAC, it was the day when both parties withdrew from the contract for work. After this point in time, the contractor no longer had any actual access to the work, and the right of disposal of the work had passed on to the customer, irrespective of the fact that the customer refused to sign a delivery and acceptance protocol.