JUDGEMENT OF THE COURT OF

JUSTICE OF THE EUROPEAN

UNION (NINTH CHAMBER) OF 11
JUNE 2020 IN CASE C 43/19,
VODAFONE PORTUGAL.
 Vodafone Background

◆ Vodafone Portugal is a subsidiary of the Vodafone Group and is the

second mobile operator in Portugal.
◆It is based in Lisbon and founded in 1992.
◆The object of Vodafone is the supply of electronic communications
services, fixed telephone, and wireless internet access (“service
contracts”).

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 Facts - Vodafone’s products

◆ In exchange for the service contracts, some of which include special promotions, customers
are required to be tied up for a predetermined minimum period (“the tie-in period”).
◆ customers must maintain a contractual relationship;
◆  the tie-in period and price may vary;
◆ enable Vodafone to recover some of its investment on equipment and
infrastructure and costs related to service contracts and special benefits to
customers; and
◆ If customers fail to comply with the tie-in period, they are obliged to pay an
amount stated in the contract.

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 Facts - Failure to comply with tie-in period

◆ Sometime in 2016, Vodafone received VAT assessments.

◆ Under the Law on electronic communications, the amount to be paid in these cases
should be based on the guidelines. Vodafone began to calculate using these:
◆ Payment must be made in the event of non-compliance;
◆ Must be in proportion to the completed part of the tie-in period;
◆ based on the benefits granted to the customer under the contract that identified
and quantified therein;
◆ This amount may not exceed the costs incurred by Vodafone Portugal to install the
service.

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 Timeline

VAT assessments Vodafone filed a

were issued. complaint with Complaint was
Vodafone paid
Vodafone began Department of dismissed by the
the State 2.7 M
calculating using Major Taxpayers tax and customs
National Law Euros. challenging the authority
guidelines. self-assessment.

August 2016 January 2017 October 2017 January 2018

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 Timeline

Case was stayed

for the decision
Appealed with the
in the MEO- Decision referred
Tribunal Arbitral
Servicos de to ECJ.
Tributario.
Comunicacoes e
Multimedia Case.

January 2018 Nov 2018 Nov 2018

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 ISSUES:

Must amounts received by Vodafone in the event of early termination of a services contract, be
considered to constitute the consideration for a supply of services subject to VAT?

A. even if the operator no longer supplies services to the customer and the fact that no specific
act of consumption has occurred since the contract’s termination?
B. if the operator and its former customers specified in advance, as required by law, in a
standard-form contract, the formula for calculating the amount which former customers
must pay if they fail to comply with the tie-in period?
C. when the amount at issue does not reflect the amount which the operator would have
received during the remainder of the tie-in period if the contract had not been terminated?’

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 ECJ Decision

◆ YES, the ECJ held that the termination payment amounts to consideration for the
supply of services and although payments are not outstanding amounts due
under the contract did not detract from that position.

◆ In the MEO case, the ECJ stated that there must be a direct link between the
service supplied and the payment received for it to amount to consideration from a
VAT perspective.

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 ECJ Decision

◆ In the instant case, the test was met in relation to a predetermined amount received by
supplier where a contract is terminated early:

a. Vodafone puts the customer in a position to benefit from the supply of services;
b. Vodafone’s customers commit to paying the monthly;
c. Those termination payments reflect the recovery of some of the costs.

The ECJ concluded that, “from the perspective of economic reality,” the amount due -> operator
a minimum contractual remuneration for services

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 ECJ Decision

◆ The ECJ also rejected Vodafone’s arguments:

◆ First, the Court noted that argument ran counter to the position of the Law on
electronic communications since, under that law, a supplier was not able to charge to
its customer sums by way of compensation or indemnification, in the event of early
termination.
◆ Its argument runs contrary to the economic reality of the case.
◆ Thus, payments received by a business from a customer for early termination of a contract
with a minimum tie-in period constitute consideration for a supply of services by that
business.

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 Analysis- The issue of VAT treatment in relation contractual termination
payments – has long been a problematic issue.

◆ In the UK, in various decisions, different tribunals reached opposite conclusions on the VAT
treatment of the same payment under a contract for early termination of a hotel management
agreement.
◆ In the MEO case, the ECJ adopted an approach based on the commercial and economic
reality to conclude that a provider receiving exactly the same payment from the pre-
termination is considered as consideration for its services.
◆ The Vodafone Portugal decision takes this analysis one step further and may suggest that any
fixed contractual termination payment should be seen as the part of the price agreed by
the customer for the services it receives under that contract

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 Analysis- The issue of VAT treatment in relation contractual termination
payments – has long been a problematic issue.

◆ Consistent with Eugénie-Les-Bains case, the Court clearly denied that such an amount would be
would be intended to compensate the operator if the client terminated the contract.
◆ Moreover, the VAT qualification is not bound by the national civil law and the legal qualification
referred to by the parties in the agreements.

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 Effect on HRMC Policy

◆ The decisions in MEO and Vodafone Portugal brought about a change of policy as shown in
HMRC’s Revenue & Customs Brief 12/2020 in relation to payments contractual
termination payments or by way of liquidated damages - payments will now be subject to
VAT; regardless of whether the original contract has a right to terminate or the payment is
described as compensation or damages.
◆ HMRC has also made it clear that early upgrade fees are included.
◆ HMRC’s policy applies to all business sectors and more widely, to all payments made on
termination.
◆ HMRC’s view now is that only in very limited circumstances, where there is no direct link
between a payment and an underlying supply of goods or services, will such a payment be
outside the scope of VAT.
◆ Moreover, HRMC’s Brief 12/2020 recommends that a business should correct errors for the
last four years unless it “had a specific ruling from HMRC saying that such fees are outside
the scope of VAT”.

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 Implications

◆ Following the Vodafone decision, it is recommended to timely conduct a brief VAT check on non-
compliance / early termination clauses in commercial agreements.
◆ Further, it is opined that the retrospective treatment of the HRMC as a result of the Vodafone decision is
harsh for other businesses and questions the whole approach of tax advisers using HMRC’s manuals to help
make decisions
◆ Will other jurisdictions follow the precedent set by HMRC policy?
◆ Thus, it is necessary to assess each case individually. It is recommended that businesses with similar
contractual tie-in periods to analyze and, if the case, to correct the VAT treatment applied to the amounts
invoiced to clients further to the early termination of contracts.
 

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 THANK YOU!

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