In Shophold (Mauritius) Ltd v The Assessment Revenue Committee [2016] UKPC 12 the Privy Council allowed the taxpayer’s appeal against the finding of the Supreme Court of Mauritius that the taxpayer was obliged to pay VAT where it waived the enforcement of a contractual right to be paid for services that it provided and neither issued an invoice nor received payment for those services. The decision looks at the meaning of “consideration” in the context of VAT.

The taxpayer had entered into a management services agreement with a related entity in March 2003. In May 2003 the taxpayer resolved to waive its right to be paid the management fee until such time that the entity was in a sufficient profit making position. The management services agreement was not amended to reflect the waiver and the taxpayer continued to provide management services to the entity, albeit at a reduced level. In December 2007 the taxpayer resolved  that the management fee be reinstated. During the period in which the waiver was in effect, the taxpayer did not issue any invoice in respect of its management services or receive any payment for those services.

The Revenue contended that the taxpayer had made taxable supplies by providing the services, whether or not it had submitted invoices or had been paid for the services.

The Supreme Court agreed with the Revenue. In substance, the Supreme Court held that because the taxpayer had only waived its entitlement to receive the Management Fee and had not agreed a variation of the Agreement, the contractual obligation to pay the Management Fee remained. That contractual obligation was the consideration given for the management services, and as a result the services were taxable supplies subject to VAT. Accordingly, the taxpayer ought to have received payment for the service at the end of each month during the relevant period and was liable to VAT as if it had.

The appeal

The Revenue contended that the fundamental error in the taxpayer’s case was that the assumption that because there had been no payment, no consideration passed from the related entity to the taxpayer. The Revenue contended that the continuing contractual obligation to pay the management fee, even if not enforced by the taxpayer, provided the necessary “consideration” to found a taxable supply.

The Privy Council did not agree, observing that the concept of “consideration” in the VAT legislation is quite different from the contractual concept of consideration. In the law of VAT, “consideration” refers to “reciprocal performance”, referring to the following statement of the Court of Justice in Tolsma v Inspector der Omzetbelasting Leewarden [1994] STC 509 (para 14):

…a supply of services is effected ‘for consideration’ …, and hence is taxable only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

The Privy Council considered that when the Court of Justice was looking at the matter from the perspective of the supplier. This requires that under the legal arrangement the supplier receives or is to receive remuneration for the service that it has performed, either from the recipient of the service or a third party. That is not the same as the meaning of “consideration” in contract law.

Comment

The approach of the Privy Council is similar to the position in Australia. In Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 the majority of the High Court (at [14]) stated that the phrase “the supply for consideration” in the definition of “taxable supply” in s 9-5(a) does not adopt contractual principles, but requires a connection or relationship between supply and consideration. In my view, that connection will likely involve some form of “reciprocal performance”.

It is also interesting to consider this set of facts in light of the decision of the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49. In that case the Court found that an executory contract will generally give rise to at least two supplies, a supply on entry into the contract and a further supply on performance of the contract. In this context, the management services agreement would involve a supply by the taxpayer on its execution and further supplies of the provision of management services. These further supplies would be made “for” the management fee. Accordingly, during the period that the taxpayer had waived the right to recover payment it could be said that the supply of management services were not “supplies for consideration”.