Should unlawful consumption of gas or electricity be subject to VAT?

Pursuant to today’s judgment of the CJEU in case C-677/21 Fluvius Antwerpen, unlawful consumption of electricity constitutes a supply of goods for consideration subject to VAT, and a distribution network operator (DSO) charging a fee of compensation on this account acts as a taxable person. In the aforementioned judgment, the CJEU stated that, in its opinion, the supply of electricity by the DSO, even if involuntary and the result of unlawful conduct on the part of a third party, constitutes a supply of goods for consideration entailing the transfer of the right to dispose of tangible property.

This is a decision that presents a completely opposite stance to the long-established Polish practice in this regard, which considers payments charged for unlawful gas or electricity consumption as a compensation not subject to VAT. Both Polish courts and tax authorities have so far indicated that such charges are levied for consumption agreed by energy companies, nor does it legalize previous breaches of the law in this respect. Moreover, they considered that charges were also intended to compensate for the damage suffered by the DSO and to deter others from committing such acts.

In the case pending before the CJEU, the fee for illegal consumption was charged because MX used the electricity at his residential address without previously concluding a contract with a commercial energy supplier and without having had such a contract terminated at that address by a (other) commercial energy supplier. At the same time, Belgian law obliged the DSO to supply MX with electricity, though it was also entitled to charge a compensation in the amount including the value of energy consumed, the costs of disconnection and reconnection, statutory interests and VAT.

One of the arguments raised by the CJEU was that the amount corresponding to the cost of the illegally consumed electricity was included in the amount claimed from MX. The CJEU also noted that the risk of loss as a result of theft, in this case bearing the expenses of electricity lost as a result of the unlawful consumption by a third party, constituted a inherent entrepreneurial risk of an economic activity, here on the part of the DSO.

The position of the CJEU raises doubts as to whether it may trigger a change in the current practice of settling these payments by energy companies that consider them as not subject to VAT. Moreover, it is somewhat natural to ask whether it implies the need for retrospective adjustment. However, it seems that retrospective adjustment should not apply to DSOs who obtained their own individual tax rulings.

It can be also pointed out that the CJEU judgment concerned only an unlawful consumption of electricity without having a contract concluded. Meanwhile, the Energy Law stipulates that an unlawful consumption of gas or energy can take three forms:

• without concluding a contract,
• with complete or partial omission of the metering and billing system,
• by interfering with this system which distorts the measurements made by the metering and billing system.

It remains therefore unclear whether in the cases where energy is collected by omitting measuring devices or tampering with them should be treated in the same way.

Although it is currently unknown whether the CJEU judgment in Case C-677/21 Fluvius Antwerpen will be applied in the jurisprudential practice of administrative courts and tax authorities, it seems that the specificity of the Belgian electricity supply regulation is not insignificant. The Belgian law provides that if an energy supplier terminates a contract with a household consumer (e.g., due to arrears in payments) and this consumer does not conclude a new contract with another energy supplier, the energy is supplied to him by the distribution system operator.

Therefore, a number of circumstances indicate that the issue of taxation or unlawful consumption of gas or electricity will be re-examined by tax authorities and administrative courts, and a state of uncertainty will arise for at least some distribution companies as to the correct VAT settlement on this account. The situation of such taxpayers will vary and will depend on whether, e.g., they have obtained an individual tax ruling. Nevertheless, the judgment in question will probably have significant impact for the past and future settlements of DSOs who have so far applied an approach different from that of the CJEU.

It is also possible that the judgment in question will raise similar doubts in relation to water companies collecting payments charged for illegal water abstraction and sewage disposal or for heat suppliers.