The ECJ has confirmed that in purchasing a portfolio of defaulted receivables, at its own risk, for a price below their face value the transferee, GFKL, was not making a supply of services for consideration. The transaction was therefore outside the scope of VAT. This decision retains the VAT position for these transactions as was generally understood and will be welcomed by participants in the secondary debt trading markets, particularly in Germany where the authorities had taken an unhelpful view of the earlier MKG case.
No taxable debt collection or factoring service
Following the MKG judgment, the German Government argued that the transferee of receivables should be treated as making a taxable supply of debt collection or factoring services. The Advocate General in GFKL was also of the opinion that there was a supply of services here as the role of GFKL was more complex than a mere transferee of an assignment of receivables, and the selling bank was obtaining an advantage that went beyond receiving a price for the debts reflecting their current value, i.e. that it no longer had the administrative task of collecting the receivables. The view that there is a supply in these circumstances had caused some concern, even though the Advocate General had come to the conclusion that this supply was nonetheless not taxable as it was not linked with any direct consideration.
However, the ECJ did not discuss the Advocate General's line of reasoning, stating merely that there was no supply of services for consideration, nor any economic activity carried out where the difference between the face value of the receivables and the price paid represented the economic value of the receivables at the time purchased.
No consideration paid for any service
The ECJ noted that the receivables were being purchased at a discount to their face value but was clear that this difference did not constitute any direct remuneration, instead being a reflection of the actual economic value, taking into account the risk of purchasing the defaulted receivables and the likelihood of recovery. This contrasted with the MKG case in which MKG received a factoring commission and a specific fee for its factoring services.
The application of the MKG case has therefore been helpfully restricted although it is still not clear whether there are circumstances in which, despite no specific fee being paid, a supply will nonetheless be held to have been made.
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