The transfer of ownership of land by a taxable person, in settlement of tax arrears, does not constitute a taxable supply for VAT purposes
Court of Justice of the European Union, C36/16 Posnania Investment SA
On 11 May 2017, the Court of Justice of the European Union (CJEU) released its decision in this Polish referral asking whether the transfer of ownership of land by a taxable person to the Government or a local authority, in settlement of tax arrears, constitutes a taxable supply for VAT purposes.
Posnania Investment SA's (PI) business consisted, inter alia, of dealing with real estate and in order to settle tax arears it entered into an agreement with the relevant municipality for the transfer of ownership of a plot of unbuilt land. This resulted in a partial discharge of PI's tax debt. The Ministry of Finance concluded that the transfer of ownership constituted a supply, which in principle should be subject to VAT. The Regional Administrative Court allowed PI's appeal, holding that VAT may be due on the transfer of ownership in property on condition that such a transfer is effected in return for consideration. As that was not the position in the present case, the Court held that the transfer was not a transaction subject to VAT. The Ministry of Finance appealed to the Supreme Administrative Court which referred the case to the CJEU for further consideration.
In agreement with Advocate General (AG) Kokott the CJEU accepted that PI had the status of a taxable person for VAT purposes and entered in a contract with the municipality which resulted in the transfer of ownership of immoveable property in Poland. However, in determining whether the transfer could be deemed to have been made for consideration, the Court noted that a supply is made for consideration within the meaning of Article 2(1)(a) of the VAT Directive, only if there is a legal relationship between the supplier and purchaser entailing reciprocal performance. Whilst there was a legal relationship between PI and the municipality as debtor and creditor it was unilateral in nature in as much as the payment of the tax, albeit by the transfer of the property, resulted only in a statutory discharge of a tax debt. As tax is a compulsory charge for services in the public interest, such a charge does not result in a legal relationship entailing reciprocal performance and therefore cannot be subject to VAT.
Also in agreement with the AG the Court held that whilst a supply in these circumstances does not constitute a supply of goods for consideration that is subject to VAT, where a deduction of input tax has been made in relation to the transferred property, this must be corrected in accordance with Article 16 of the VAT Directive which imposes an output tax charge on a ‘deemed supply’.
Comment: This case concerns a procedure allowed under Polish law. HMRC has the power to “take control of goods” to settle tax debts and indeed has reported that it seized assets to recover £42.6m of outstanding debt in 2016. These powers are generally enforcement actions to collect taxes that are owed, rather than agreements to transfer assets in lieu of tax due. On that basis this scenario is unlikely to arise in the UK but any businesses which may have settled taxes in the form of an asset transfer may wish to consider the implications of the CJEU judgment.