COVID-19: VAT consequences
The official measures to combat coronavirus lead to questions about the VAT-related consequences of these measures. Uncollectible amounts and rent reductions for business premises during the COVID-19 crisis also need to be treated correctly from a VAT perspective.
Compensation, cancellation fees, and frustrated expenditure
Many congresses, events, concerts, trips etc. had to be cancelled due to the current COVID-19 crisis and the resulting official measures, and many contracts could not be fulfilled. From a VAT perspective, questions arise regarding the treatment of obligatory payments, and whether there is a right to input tax deduction for frustrated expenditure.
Compensation payments may need to be made by a supplier or service provider on the basis of a contractually agreed obligation if the supply of goods or services was not possible and damages for non-performance are payable. A payment of this kind should be treated as compensation for damages, which is not subject to VAT, as there is no underlying taxable exchange of goods or services. Generally speaking, this applies both in cases of “force majeure”, e.g. in the case of cancellations due to official orders, and in cases of “precautionary” cancellations. The practical difference is that no compensation payment needs to be made in cases of force majeure. Whether a compensation payment due to non-performance constitutes VAT-taxable remuneration (where relevant, subject to mandatory VAT), or compensation for damages, which is not subject to VAT, always depends on the specific contractual agreement.
On the other hand, the recipient of the goods or service will in many cases be faced with cancellation fees and/or penalty clauses for (precautionary) cancellations at short notice of trips, flights, etc. In the current view of the Austrian authorities, fees which a recipient of goods or services has to pay due to cancellations of hotel reservations or flights at short-notice (only applies to flights within Austria, as international flights are VAT-exempt), usually constitute compensation for damages and are not subject to VAT. This would need to be verified on a case-by-case basis considering the applicable terms regarding cancellation, as CJEU case law states that payments which arise due to early termination of a contract may also be subject to a VAT obligation (e.g. for a so-called “no show”, when a flight tickets are forfeited in the absence of a passenger).
Finally, it should be noted that the right to input tax deduction applies even in relation to “frustrated expenditure”, if the supply was made for business purposes.
As a consequence of COVID-19, the importance of careful cash flow planning and liquidity planning has increased. Consequently, a reduction of VAT should take place immediately if receivables are actually uncollectible (if the receivable is merely doubtful, then a value adjustment is made without relevance for VAT). This must be checked on a case-by-case basis. VAT is also reduced if a supplier or service provider chooses to waive part of a payment owed. If (partial) payment is subsequently received after all, an additional payment for the previously adjusted VAT amount must be made to the tax office. In general, a VAT reduction always entails an obligation by the recipient of a supply to adjust the amount of input tax claimed.
Rent reductions for business premises
Due to the unexpected situation arising due to COVID-19, the lessee is entitled in certain cases to rent reductions or even termination of the rental contract. Please see our PwC Legal Newsletter on this topic, available at: https://blog.pwclegal.at/covid-19-auswirkungen-neuer-verordnungen-auf-rechte-von-mietern-und-vermietern-in-oesterreich/
From a VAT perspective, the ensuing rent reductions and/or increase in the vacancy rate may have consequences for the calculation of pro-rata rate of deductible input VAT of the lessor. In addition, if a rental contract is terminated and a new agreement is concluded when the circumstances are no longer given, it may no longer be possible to use the option to tax in relation to the lease.