On 10 January 2019, the European Court of Justice gave its judgment in case C‑410/17 (A Oy), regarding the question the performance of demolition services and if the simultaneous receipt of waste materials is a single supply of services or if two supplies must be distinguished.
A Oy, established in Finland, is a company specialised in environmental services in the industrial and construction sector. It operates in various industrial sectors in real estate and construction and provides environmental services in Finland and Sweden. Its business activities include industrial and real estate services, demolition services and recycling and waste processing services.
In the course of its activities, A Oy performed demolition services for its clients, pursuant to a demolition contract (‘the demolition contract’). Based on this contract, A Oy undertakes to demolish the buildings of its client’s old factory and to be the main contractor with responsibility for site services and works management. According to the standard contractual terms for construction services, the company’s responsibilities also include the proper disposal and processing of materials and waste.
Part of the materials and waste are composed of scrap metal and waste materials, on the sale of which liability for VAT is shifted to the buyer under the VAT reverse charge mechanism. That waste consists partly of goods that A Oy may resell to companies who purchase recyclable scrap metal.
A Oy tried to estimate in advance the quantity of such goods and the price likely to be obtained on their resale, and that price is factored in to the calculation of the price when preparing the quote for the demolition services, so that the price of the demolition services contract proposed to the client is as competitive as possible. However, the estimated price of those goods is not discussed or fixed with the client under the demolition contract, as the client is quoted a price which covers all the demolition services.
In addition, in the course of its business, A Oy purchases from its clients old machines and equipment that it is responsible for dismantling and removing from the premises or the site of the establishment of the client concerned and disposition of the resulting waste. A typical example of such a contract concerns the purchase of certain specified buildings on a factory site. That contract provides that A Oy is to purchase the buildings and constructions to ground level situated on the site and the machines, equipment and other movable goods, and that A Oy is to dismantle and remove the goods that it has purchased.
Taking account of the nature of the goods purchased, the dismantling, the proper disposal and processing of those goods, and the disposal of the resulting waste, generates costs for A Oy that it tries to estimate in advance and to factor in to the price it quotes, as a means of reducing the purchase price. However, the parties to the contract do not discuss those costs in their negotiations and do not specify the amount of those costs in the contract, the aim being not to communicate that amount to the seller at any time.
A Oy requested a preliminary decision from the Finnish tax authority concerning the calculation of the amount of VAT due under the demolition contract for the supply of demolition services and, under the purchase contract for dismantling, for the purchase of scrap metal and metal waste.
The Finnish tax authority, first, declared that under the demolition contract A Oy must be regarded as selling demolition services to its client and as purchasing scrap metal from it. The tax authority concluded from that, that A Oy must pay VAT on the services it supplies to its client and, under the reverse charge mechanism, on the scrap metal that it purchases from its client.
Second, the tax authority declared that, as regards the purchase contract for dismantling, A Oy must be regarded as supplying demolition services to its client and as purchasing scrap metal from it. Also, the tax authority concluded that A Oy must pay VAT on the supply of the services to its client and, under the reverse charge mechanism, on the scrap A purchases from its client.
Also, the Finnish National Court decided that in both the demolition contract and the purchase contract for dismantling, A Oy must be regarded as having concluded a barter agreement with its client, pursuant to which it provides demolition services and purchases scrap metal and, therefore, it is liable to pay VAT both on the services it provides to the client and on the scrap metal that it purchases from the client.
A Oy did not agree with this approach, and the case ended up with the Finnish Supreme Administrative Court.
This court asked the following questions to the European Court of Justice:
– Are demolition services carried out by a company whose business includes the performance of demolition works, one single transaction where, under the terms of the contract between it and the client, the demolition company is required to dispose of the demolition waste and where the demolition company may, if the demolition waste contains metal scrap, sell it to companies which buy recyclable scrap metal?
– Or is such a contract for demolition works to be interpreted as comprising two transactions: first, a supply of services by the demolition company to the client of demolition works and, second, the purchase of the metal scrap from the client for resale by the demolition company?
The ECJ rules:
- Where, pursuant to a demolition contract, the service provider (demolition company), is required to carry out demolition works and may resell any scrap metal, that contract consists of a supply of services (i.e. the performance of demolition works), and also a supply of goods (i.e. the supply of the scrap metal), if the demolition company attributes a value to that supply of goods, which it factors in when calculating the price quoted for the performance of the demolition works, but only if that supply of goods is made by a taxable person acting as such.
- Where, pursuant to a purchase contract for dismantling, the purchaser (demolition company) purchases goods to be dismantled and undertakes to demolish or dismantle and dispose of those goods and to dispose of the waste, that contract consists of a supply of goods (i.e., the supply of goods to be dismantled), which is subject to VAT only if it is made by a taxable person acting as such, which is for the referring court to ascertain.
In so far as the purchaser is required to demolish or dismantle and dispose of those goods and to dispose of the resulting waste, thereby specifically meeting the needs of the seller, which is for the referring court to ascertain, that contract also includes a supply of services for consideration (i.e. the performance of demolition works or dismantling and waste disposal), if that purchaser attributes a value to that supply of goods which it factors in to the price quoted as a factor reducing the purchase price of the goods to be dismantled, which is for the referring court to ascertain.