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Legal aspects of functional sales under scrutiny


A research group led by Jan Kellgren of the Division for Commercial and Business Law is to examine the legal aspects of functional sales in the field of illumination. New business models are appearing in which companies offer functionality, rather than services or products.

The use of functional sales is one of several methods expected to increase the efficiency with which we use society’s resources. By selling a service rather than a product – cooling instead of refrigerators, transport instead of lorries, illumination instead of light fittings or lamps – the purchaser obtains better control of costs, while the seller obtains increased influence over the service and maintenance of the products. In this way, the seller can have greater influence of the lifetime of the products and have full control over when parts need to be exchanged or undergo service. Examples of functions that many companies already purchase are access to photocopies, green plants and coffee/tea.

New major international markets are appearing in which Swedish manufacturing industry can gain competitive advantages by offering environmentally sustainable and economically competitive services and functions.

However, if new business models are to be developed and applied, the legal conditions must be both unambiguous and fit for purpose. A research group at LiU, under the leadership of Associate Professor Jan Kellgren of the Division for Commercial and Business Law, is now to provide answers to several legal questions raised by new business models. In particular, the research project will look at the functional sale of illumination, having received funding of SEK 4.5 million from the Swedish Energy Agency.

Jan Kellgren“We will be examining illumination, but the project will generate generally applicable knowledge concerning the legal aspects of functional sales: civil law, tax law and accounting law,” says Jan Kellgren.

Questions that need to be answered include what the seller should receive if the customer does not pay on time for illumination of a certain intensity in a number of rooms, and what will happen when the house is sold.

Another aspect that seller does not have full control over is how the products are used, and this raises the question of whether the products, such as large light fittings and other equipment, must be entered as an expense immediately, even though they will generate income for several years. Does the seller have the right, for example, to include the equipment as an asset in the balance sheet?

Other questions are where the boundary goes between long-term leasing and purchase, how much VAT is to be paid/reclaimed, and the timing of VAT transactions. When does the sale actually occur, and what is it that is sold?

“The legal status of functional sales is fundamental if the business model is to work. If companies are to have the confidence required to make new investments or change existing ones, unambiguous regulations are required,” says Jan Kellgren.

The research group for the project “Sale of illumination – legal aspects of function-based business models” consists of, in addition to Jan Kellgren, Herbert Jacobsson, senior lecturer in commercial law; Ingrid Arnesdotter, professor emerita in commercial law, and Professor Mattias Lindahl, of the Division of Environmental Technology and Management. For this reason, the results will be included in research into new business models for the more efficient use of resources, carried out within the research programme Mistra REES (Resource Efficient and Effective Solutions).

The project will continue throughout 2017 and 2018.

Timing is everything

Jan Kellgren and Docent Stefan Schiller, of the Division of Business Administration, have recently been awarded a research grant from the Torsten Söderberg Foundation to study the accounting and tax consequences of events that occur between the end of the financial year (or another significant date) and the submission of the annual report or tax returns. A number questions relating to tax law are not clear under existing regulations.

“Whose perspective is the most accurate? What should the company have investigated or known when the annual report was written,” asks Jan Kellgren, without being able to give an answer.

Some examples: A customer goes bankrupt a few weeks after the accounting date and the accounts receivable become worthless. How should the company management decide the value of the accounts receivable on the accounting date?

A company invests money in a sports team and intends to benefit from the goodwill, and thus views the investment as tax deductible. When the annual report has been completed, but before it has been approved and submitted, it turns out that the team’s star was using illegal drugs at the time the investment was made. Is it even so justified to deduct the sponsoring expenses as a business expense? When the decision to sponsor the team was made, it appeared to be a good decision. Is the true situation to be what determines tax liability, or what the situation appeared to be?

“We plan to travel to the Nordic countries and investigate how these issues are handled there. There may be interesting solutions that we can use as inspiration in Sweden,” says Jan Kellgren.

This research is based on, among other things, work that Jan Kellgren published in his book (in Swedish) “Tidsfrågor i skatterättstillämpningen”, details of which are available at the link below.

Photo of illumination: iStock Photo


Tidsfrågor i skatterättstillämpningen, Jan Kellgren, Jure 2016
Division for Commercial and Business Law
Mistra REES (external link)


Monica Westman Svenselius 2017-01-12

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Last updated: 2017-02-13