The CJEU has ruled that the transfer of land in lieu of the payment of tax was not a transaction subject to VAT. Is that right? asks Graham Elliott (City & Cambridge).
There’s a game you can play for your own amusement, which entails placing a sportsman’s bet on the decision of the CJEU having read the corresponding advocate general’s opinion. Will the court follow the AG or ignore (and disagree) with her? I placed my sportsman’s bet following AG Kokott’s opinion in Posnania (Case C-36/16) that she was wrong. I lost the bet, because the court agreed with her. But I don’t want to accept the result. I think the court is wrong as well.
I shall explain my impertinence.
The issue was whether a company paying its tax bill to the tax authorities in the form of a real asset (in this case a building) was ‘supplying’ the property to that authority for consideration (and I deliberately disregard the deemed supply possibility when considering the outcome of my wager), or was merely ‘paying tax’, with no supply implied. I think it is the former, but the court and AG think it is the latter.
The ratio decidendi was simple (and to borrow from Mencken – wrong), which is that tax is an imposition of the state and therefore payment of it cannot be a supply, nor the satisfied tax consideration for it, so transferring property to satisfy a tax demand cannot be a supply in consideration of the tax. The reason I think this is wrong is that it omits a stage in the reasoning, namely the stage between the setting of the tax liability and the means of meeting it.
Tax is to be paid in fiat currency, or some means acceptable to the authorities which ranks as fiat currency (such as another state’s currency). More simply stated, the tax is owed in money. There is no obligation on either the party that owes the tax, or the tax authority, to settle it in goods or services. It therefore follows that the tax liability itself is not settled in goods or services. That means of settling it requires a further ‘manoeuvre’, being the agreement of both parties to commute the liability to an exchange of assets. The tax authority used its free will to decide to accept a building in lieu of money. The taxpayer used its free will to put forward that possible solution. The agreement to settle the monetary demand by offset against goods was a ‘transaction’ that sits at one remove from the payment of tax per se. For that reason, it is not a settlement of tax, but a transaction that facilitates the settlement of tax.
Consider the economic position: Posnania could have chosen to sell the goods and pay the tax in cash, and this sale would have created a taxable supply. The tax authority can choose to sell the property, or rent it out, and apply the proceeds to settling Posnania’s tax. It could even use the goods directly and hypothecate the cost saving to the settlement of Posnania’s tax. If the tax authority sells the goods, is that a supply that is theoretically within the scope of VAT? Surely it is. And, thereafter, the goods are tradeable in the open market. Why should the goods have been deemed to leave that market merely because the tax authority happened to acquire them?
The court has failed to analyse the true position, but has simply lunged for an ostensibly credible, but shallow, analysis. It is a variant of the error of categorisation by name-tag. In this case, the tag is ‘tax’, and, blinded by nomenclature, the court has missed the underlying dynamic.
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Posnania: VAT and in kind payments
The CJEU has ruled that the transfer of land in lieu of the payment of tax was not a transaction subject to VAT. Is that right? asks Graham Elliott (City & Cambridge).
There’s a game you can play for your own amusement, which entails placing a sportsman’s bet on the decision of the CJEU having read the corresponding advocate general’s opinion. Will the court follow the AG or ignore (and disagree) with her? I placed my sportsman’s bet following AG Kokott’s opinion in Posnania (Case C-36/16) that she was wrong. I lost the bet, because the court agreed with her. But I don’t want to accept the result. I think the court is wrong as well.
I shall explain my impertinence.
The issue was whether a company paying its tax bill to the tax authorities in the form of a real asset (in this case a building) was ‘supplying’ the property to that authority for consideration (and I deliberately disregard the deemed supply possibility when considering the outcome of my wager), or was merely ‘paying tax’, with no supply implied. I think it is the former, but the court and AG think it is the latter.
The ratio decidendi was simple (and to borrow from Mencken – wrong), which is that tax is an imposition of the state and therefore payment of it cannot be a supply, nor the satisfied tax consideration for it, so transferring property to satisfy a tax demand cannot be a supply in consideration of the tax. The reason I think this is wrong is that it omits a stage in the reasoning, namely the stage between the setting of the tax liability and the means of meeting it.
Tax is to be paid in fiat currency, or some means acceptable to the authorities which ranks as fiat currency (such as another state’s currency). More simply stated, the tax is owed in money. There is no obligation on either the party that owes the tax, or the tax authority, to settle it in goods or services. It therefore follows that the tax liability itself is not settled in goods or services. That means of settling it requires a further ‘manoeuvre’, being the agreement of both parties to commute the liability to an exchange of assets. The tax authority used its free will to decide to accept a building in lieu of money. The taxpayer used its free will to put forward that possible solution. The agreement to settle the monetary demand by offset against goods was a ‘transaction’ that sits at one remove from the payment of tax per se. For that reason, it is not a settlement of tax, but a transaction that facilitates the settlement of tax.
Consider the economic position: Posnania could have chosen to sell the goods and pay the tax in cash, and this sale would have created a taxable supply. The tax authority can choose to sell the property, or rent it out, and apply the proceeds to settling Posnania’s tax. It could even use the goods directly and hypothecate the cost saving to the settlement of Posnania’s tax. If the tax authority sells the goods, is that a supply that is theoretically within the scope of VAT? Surely it is. And, thereafter, the goods are tradeable in the open market. Why should the goods have been deemed to leave that market merely because the tax authority happened to acquire them?
The court has failed to analyse the true position, but has simply lunged for an ostensibly credible, but shallow, analysis. It is a variant of the error of categorisation by name-tag. In this case, the tag is ‘tax’, and, blinded by nomenclature, the court has missed the underlying dynamic.
