VAT liability of the protective mask lump sum

Facts (simplified)

In an early phase of the coronavirus pandemic, members of a risk group were entitled to three free protective masks, to be obtained from a pharmacy, under the Coronavirus Protective Masks Ordinance (SchutzmV),. The pharmacies received a one-off sum of money from the healthcare fund's liquidity reserve, paid out by the German Pharmacists' Association. The association issued a notice to the pharmacies stating that the payment was for the procurement of the protective masks to be dispensed. The pharmacies did not have to prove that they actually dispensed masks, nor how many.

The assessment included a VAT component. One pharmacy initially accepted this, but then objected to this tax statement and argued that the pharmacy had not provided a supply against payment, but had received a non-taxable subsidy. It argued, among other things, that the members of the risk group had no legal entitlement to the masks because the pharmacies were only obliged to provide them as long as they were available. The fact that the payment was a lump sum and not dependent on the number of masks dispensed also argued against a paid supply. Even if a pharmacy had not dispensed any masks at all, it had received the payment.

BFH decision

The lower tax court had come to the conclusion that the principle of benefits in kind, according to which those with statutory health insurance receive benefits in kind from the health insurance funds when they redeem a prescription, was applicable in this case. However, the BFH ruled that the principle of benefits in kind did not apply here. This was not a case of prescription drugs being dispensed on the basis of framework agreements between the statutory health insurance fund and the pharmacies, meaning that a link to individual health insurance funds was not recognisable and therefore the recipient of the supply could not be identified. There is no basis for extending the scope of the principle of benefits in kind to circumstances that are not subject to this principle. Therefore, only a supply provided by the pharmacy directly to the members of the risk group can be considered.

The fact that there was a legal relationship in the present case, which resulted in a direct connection between the supply of the masks and a consideration as payment, was established by the tax court in a manner that could not be criticised on appeal. This is binding on the Senate as a finding of fact – unlike the finding of the recipient of the supply.

This finding is supported on the one hand by the wording of § 5 (1) of the Corona Protection Masks Ordinance, according to which the pharmacy received the lump sum "for the supply of protective masks". The justification for the payment notice (according to which the payment serves to procure the protective masks to be supplied) also proves that the service is remunerated.

The fact that the payment was a lump sum, and independent of the number of masks dispensed, was not relevant because the payment did not have to correspond to the value of the supply in order for it to be remunerated. Whether the pharmacies would have received a lump sum even if they had not dispensed any protective masks at all to entitled persons in the accounting period was irrelevant for the Senate because, according to the findings of the tax court, this had not occurred. However, a lump sum that is paid irrespective of whether or to what extent a supply is rendered could not generally eliminate the chargeable nature of the supply, as lump sum prices could then be used to circumvent taxability. The fact that the beneficiaries had no legal claim against the pharmacies also does not remove the direct link between the payment and the dispensing of the masks.

Payments from a public fund may be non-taxable subsidies. However, the payment must then serve to benefit the recipient of the payment in general. Contrary to what the plaintiff had argued, however, the payment from the liquidity reserve was not made exclusively for health policy reasons and did not serve to support pharmacies in general, but rather to quickly supply vulnerable groups with protective masks.

As a result, the supply of protective masks by a pharmacy to eligible persons was therefore judged to be a taxable supply that was remunerated by a third party.

Impacts

The course is set in this case with the determination of the recipient of the supply, i.e. the question of where the relevant legal relationships lie. This is a complex issue under social security law, i.e. a non-tax issue.

It is interesting that the BFH would also assume a supply for consideration if no protective masks had been issued at all. If the pharmacies had been obliged to keep certain quantities of masks in stock, one could probably refer to the ECJ case law on unredeemed airline tickets, in which the ECJ argues that the supply is not the carriage of passengers on the aircraft, but the possibility of using it. However, as the pharmacies were only obliged to provide protective masks within the scope of availability, it is difficult to argue that the supply here consisted of the opportunity to make use of it.

Author: Nadia Schulte