No VAT-taxable supply when the costs serve one's own interests – BFH decision XI R 12/20

The facts

A slaughterhouse bought animals intended for slaughter from farmers or purchasing cooperatives. It deducted the transport costs actually incurred and other "preliminary costs" from the agreed purchase price derived from the quality grade and weight. The "preliminary costs" were costs for quality management, auditing the production sites of the slaughterhouse's customers, complying with the increased hygiene regulations, and ensuring the traceability of the animals.

The slaughterhouse's general terms and conditions stipulated that the price included the delivery to the slaughterhouse and that the transfer of ownership and risk took place when the statutory antemortem inspection at the slaughterhouse was completed and the animals were released. 

The slaughterhouse regarded the transport costs as payment for a transport service it had provided to the animal suppliers, and there was apparently no dispute about this. However, the slaughterhouse treated the "preliminary costs" as a reduction in the remuneration for the supply of animals and deducted these costs from the price paid for the supply of animals, which it settled via self-billing.

The tax office, on the other hand, classified the "preliminary costs" as remuneration for supplies rendered by the slaughterhouse to the animal suppliers.

Financial Court:  There was no supply because costs were incurred after the supply of the animals

The tax court called upon by the slaughterhouse argued that the "preliminary costs" concerned the slaughterhouse’s own internal processes and that the slaughterhouse had consistently fulfilled its own contractual and legal obligations resulting above all from consumer protection and animal welfare obligations. The slaughterhouse had therefore not conferred any consumable economic advantage on the suppliers and the "preliminary costs" were consequently a cost factor of the slaughterhouse's activities, which the latter took into account by reducing the price when purchasing.

Moreover, it could make no difference for VAT purposes whether the slaughterhouse set the price for the animals lower from the outset, taking into account their "preliminary costs", or whether it only showed the "preliminary costs" later as a price-reducing offsetting item in the credit notes.

Another argument against the slaughterhouse providing a supply to the animal suppliers was that there was no corresponding separate agreement on a specified supply.

The tax court also considered whether the time of transfer of ownership and risk were factors to be considered in this question. Based on the tax court’s ruling, it appears that the tax office had apparently argued that, according to the general terms and conditions, the risk had only passed to the slaughterhouse after the preliminary costs had been incurred, which would indicate that the preliminary costs belonged to the animal suppliers and that there was therefore a supply by the slaughterhouse.

The tax court, on the other hand, argued that the time of transfer of ownership and risk was not decisive for the time of supply of the animals; rather, the supply had already taken place when the animals were unloaded, because at this point whatever happened to the animals was beyond the control of the suppliers.

Federal Fiscal Court:  There was no supply, and the time when the animals were supplied is not a factor

The BFH confirms the result of the tax court's decision.  How contractual agreements are to be interpreted is part of the tax court's findings of fact, which the BFH may only review to a limited extent on appeal pursuant to § 118 (2) FGO (the law on fiscal court procedures). As the tax court's interpretation of the contract is possible and does not violate either the laws of reasoning or the laws of experience, the BFH is bound by it. However, it clarifies that the time of supply of the animals to the slaughterhouse is unimportant. The only decisive factor was that the slaughterhouse had received the supplies that led to the "preliminary costs" that served its own interests.

Practical implications

What is interesting about this case is the role played by the transfer of ownership and risk, and the time of supply – which, in the opinion of the BFH, play no role at all.

According to EU law, a supply of goods is deemed to have taken place when the recipient can de facto dispose of the delivery item as if they were its owner.  In its established case law, the BFH considers the moment of transfer of substance, value and yield to be decisive, without deviating from ECJ case law.  That the tax court has indicated that it will not consider the moment of transfer of ownership agreed in the general terms and conditions when determining the time of supply is therefore thoroughly understandable.

However, in our view,  it is important to keep in mind that the present case involves a moving supply, for which § 3 (6) UStG (German VAT Code) stipulates that the place of supply is at the beginning of the transport. According to BFH case law, which the BMF follows in section 3.12, paragraph 7 UStAE (administrative guidelines), § 3 (6)UStG also regulates the time of supply. Accordingly, the supply would have taken place at the beginning of the transport and not when the animals were later unloaded at the slaughterhouse, as the tax court argued.

The BFH, on the other hand, does not attach any importance to the time of supply and focuses exclusively on whose interest the slaughterhouse's actions served which resulted in the "preliminary costs". It could therefore leave open the question of when the power of disposal was transferred in this case.

If the buyer of a delivery charges for the costs, it is therefore irrelevant who legally owned the goods in question at the time these costs were incurred or who had the power of disposal for VAT purposes, and the only question is whether the activities that led to the costs resulted in a consumable economic benefit for the supplier. This cannot be generalised and depends on the individual case.

Dated: 13 March 2023