© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
A13. Economic reality
A fundamental criterion​
​
- Economic and commercial realities are a fundamental criterion for the application of VAT
"[48] To answer that question, it must be borne in mind, first of all, that, under the Court’s settled case-law, consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT (judgment of 22 November 2018, MEO – Serviços de Comunicações e Multimédia, C‑295/17, EU:C:2018:942, paragraph 43 and the case-law cited)." (ITH Comercial C-734/19)
​
Contracts​
​
- Contract starting point for economic reality
"[43] As regards the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case-law of the Court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT (see, to that effect, judgment of 20 June 2013, Newey, C‑653/11, EU:C:2013:409, paragraph 42 and the case-law cited)." (MEO C-295/17)
​
- Termination of contract by customer does not affect economic reality
"[44] Inasmuch as MEO has a right under the agreements at issue in the main proceedings, in the event of failure to observe the minimum commitment period, to payment of the same amount as it would have received as payment for services which it undertook to supply in the event that the customer had not terminated his contract, a matter which it is for the referring court to ascertain if necessary, the early termination of the contract by the customer, or its termination for a reason attributable to that customer, does not alter the economic reality of the relationship between MEO and its customer." (MEO C-295/17)
​
- Economic reality confirming that assignment of right to 50% of horse's future winnings was consideration
"[53] As the referring court also observes, with regard to the value of contractual stipulations for the purposes of classifying a transaction as taxable, consideration of the economic and commercial reality is a fundamental criterion for the application of the common VAT system (judgment of 22 November 2018, MEO – Serviços de Comunicações e Multimédia, C-295/17, EU:C:2018:942, paragraph 43 and the case-law cited therein). In this light, the economics of the contracts concluded between the applicant in the main proceedings and the horse owners, as described in the order for reference, corroborates the conclusion that the assignment of receivables at issue in the main proceedings has a direct link with all the services comprising the single supply provided by the applicant in the main proceedings." (HAS C-713/21)
​
- Economic reality overriding contract: maintenance supplies received by trucker hirer
"[63] It follows from the above that we prefer the Respondents' contractual analysis to the contractual analysis proposed by the Appellant. On this contractual analysis, when the Appellant entered into the AS24 Contract and the contracts with the repairs and maintenance providers, even though each of those contracts was entered into by the Appellant and the relevant provider of goods or services on a bilateral basis and ROBO was not a party to the relevant contract, the terms of the relevant contract were such that the Appellant was contracting with the provider in question not to provide goods or services to the Appellant itself but instead to provide goods or services to ROBO on terms that the Appellant would meet the cost of those goods or services.
...
[67] However, in our view, taking into account all of the facts in this case, that was not the economic and commercial reality of the arrangement at all. On the contrary, that economic and commercial reality was that ROBO made its trucks available to the Appellant in return for the fixed payments and on the basis that the Appellant would continue to use the trucks in the course of its business in exactly the same way as it was doing before the arrangement with ROBO began (and would have continued to do if it had continued to own the trucks and have its own goods vehicle operator's licence.)" (D Nuttall UK Limited v. HMRC [2025] UKFTT 1600 (TC), Judge Beare)
​