© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
D6. Compensation and damages
Damages not liable to VAT
"[46] It should be added, in that regard, that if that amount were characterised as damages to make good the loss suffered by MEO, the nature of the consideration paid by the customer would be changed, depending on whether or not the customer decides to use the service in question during the period provided for in the contract." (MEO C-295/17)
- Deposit forfeiture that compensates for cancellation not consideration
"[32] Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client’s exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11).
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[35] Since, on the one hand, the deposit paid does not constitute the fee collected by a hotelier by way of genuine consideration for the supply of an independent and identifiable service to his client and, on the other hand, the retention of that deposit, following the client’s cancellation, is intended to offset the consequences of the non-performance of the contract, it must be held that neither the payment of the deposit, nor the retention of that deposit, nor the return of double its amount is covered by Article 2(1) of the Sixth Directive." (Société thermale C-277/05)
- Payment due upon termination is consideration for the supply of the right to benefit under the contract
“[18] In that regard, it should be added that, as is apparent from the case-law of the Court, a predetermined amount received by an economic operator where a contract for the supply of services for a certain period is terminated early by its customer, or for a reason attributable to the customer, which corresponds to the sum that that operator would have received for the remainder of that period in the absence of such termination, must be regarded as the remuneration for a supply of services for consideration and subject, as such, to VAT, even though that termination entailed, inter alia, the deactivation of the services referred to in that contract before the expiry of the agreed period (see, to that effect, judgment of 11 June 2020, Vodafone Portugal, C 43/19, EU:C:2020:465, paragraph 33 and the case-law cited).
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“[20] First, the consideration for the amount to be paid by the recipient of the supply of services is constituted by the recipient’s right to benefit from the fulfilment, by the supplier, of the obligations under the services contract, even if the recipient no longer wishes to avail itself of that right for a reason attributable to it (see, to that effect, judgment of 11 June 2020, Vodafone Portugal, C 43/19, EU:C:2020:465, paragraph 35).
[21] In a situation such as that at issue in the main proceedings, the supplier of services not only placed the customer in a position to benefit from the supply of services, within the meaning of the case-law cited in paragraph 17 above, but, since it had already begun the agreed works, actually provided part of that supply, it being noted that the supplier was prepared to perform that contract to completion.” (rhtb: projekt gmbh C-622/23)
- Early termination sum is consideration
"[48] Consequently, it must be held that the amount payable for non-compliance with the minimum commitment period is payment for the services provided by MEO, regardless of whether the customer exercises the right to benefit from those services until the end of the minimum commitment period.
[49] As to the requirement that the sums paid constitute actual consideration for an identifiable service, it should be noted that the service to be provided and the amount invoiced to the customer in the event of termination of the contract during the minimum commitment period are already identified at the time of conclusion of the contract." (MEO C-295/17)
- Cases where cancellation/default results in obligation to provide service being completely abrogated
"[32] This point is exemplified by the cancelled hotel booking cases to which we were referred in oral argument. Cancellation, like non-payment, only changes the services that a payment is to be made in return for, when it prevents those services ever being provided. Those cases demonstrate that the question of whether the deposit for a hotel booking is to be regarded as in consideration for the supply of services under the VAT Directive depended on the contract. If the deposit is expressed to be payable as part of the consideration for the first night's stay, then there is no adequate direct and immediate link between the payment and the service, if the room is cancelled. In that case, no accommodation will ever be provided. But if the deposit was paid as an administration fee, it would be paid in return for a service. Moreover, a person, who books a hotel room on terms that the deposit is part payment for the stay and then fails to show up, is also making the payment in return for a service, namely the hotel keeping a room available for the guest. See Société thermale d'Eugénie-les-Bains v. Ministère de l'Économie, des Finances et de l'Industrie (Case C-277/05) [2008] STC 2470, and Customs and Excise Commissioners v. Bass plc [1993] STC 42.
[33] The analogy between cancellation and payment default is not exact, but in both cases one analyses the contract when it was made, and it is only if the cancellation or default results in the obligation to provide the service being completely abrogated that a service is not supplied for the purposes of the VAT Directive. Thus, in our case, if Esporta were to terminate the membership for default in making a monthly payment and deny access, no service would ever be provided, because under no circumstances could the member ever gain access to the gym facilities as of right under the contract. Any claim by Esporta after termination for non-payment for, say, fees that would have been payable during the period of three months' notice that ought to have been given, would properly be recoverable as damages and not in return for a service." (Esporta Limited v. HMRC [2014] EWCA Civ 155)
- Customer who does not pay gym membership still being provided with same service: right of access provided they pay monthly fees
"[35] In my judgment, the contract provides for the member to be allowed access to the facilities in return for the monthly payments during the Commitment Period and thereafter until termination, but that access is conditional on the regular payments being kept up. The exclusion of members on non-payment does not mean that they are being provided with no services at all. They are being provided with the same services as before, namely the right to access to the facilities provided they pay the monthly fees.
[36] The fact that the conditions provide for a member's exclusion for non-payment does not put that member in the same position as any other member of the public or even a terminated member. The member of the public has no right to demand access to the facilities even on payment of fees. The club can choose if it wants to contract with him. The same position prevails if the club terminates the membership. In the case, however, of members whose membership contracts continue, they remain even after default entitled to access to the club's facilities provided they pay up what is due under their contracts." (Esporta Limited v. HMRC [2014] EWCA Civ 155)
- Parking in a carpark space without paying gives rise to legal relationship
"[28] In the present case, it must be noted that parking in a particular space in one of the car parks managed by Apcoa gives rise to a legal relationship between that company, as a service provider and manager of the car park concerned, and the motorist who used that space.
[29] In that regard, it is apparent from the documents available before the Court that, in the context of that legal relationship, the parties enjoy rights and assume obligations, in accordance with the general terms and conditions for use of the car parks concerned, which include, in particular, the provision of a parking space by Apcoa and the obligation on the motorist concerned to pay, in addition to the parking fees, where appropriate, in the event of failure to comply with those general terms and conditions, the amount corresponding to the control fees for parking in breach of the regulations, as indicated on the signs mentioned in paragraph 11 of the present judgment.
[30] Accordingly, in that context, with regard to, on the one hand, the condition relating to the existence of reciprocal performance, within the meaning of the case-law cited in paragraph 27 of the present judgment, it appears that that condition is fulfilled. The payment of parking fees and, where appropriate, of the amount corresponding to the control fees for parking in breach of the regulations constitutes consideration for the provision of a parking space.
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[43] Furthermore, it should be noted that, in the case which gave rise to the judgment of 18 July 2007, Société thermale d’Eugénie-les-Bains (C‑277/05, EU:C:2007:440), the services in question had not been supplied. In the case in the main proceedings, the service of providing a parking space was carried out." (Apcoa Parking Danmark C-90/20 - at least where it is a "regulated service" - see Cristian General Serv T-643/24)
- Statutory payments for use of copyrighted works without permission consideration for supply
"[40] The terms and conditions of the single and equitable remuneration, resulting in particular from point 3.12 of the methodology, cause that remuneration to vary from single to triple depending on whether or not the communication of the protected works was authorised by Credidam, which represents the holders of related rights ex lege, pursuant to Articles 145 and 146 of the Law on copyright and related rights (see paragraphs 11 and 12 above). Consequently, even if the communication of the protected works in question took place without a licence, the fact remains that the failure of the collective management organisation for copyright and related rights to grant a licence did not prevent the legal and regulatory framework governing the communication to the public of such works without a licence from applying, which it is for the referring court to verify." (Cristian General Serv T-643/24)