No VAT recovery if reverse charge applies
C-691/17 PORR Építési Kft.
On 11 April 2019, the Court of Justice of the European Union (CJEU) released its decision in this Hungarian referral asking whether, in circumstances not involving fraud, the principles of proportionality, fiscal neutrality and effectiveness preclude national legislation which refuses the right to deduct VAT on the basis of a VAT invoice issued in accordance with the ordinary taxation regime, which the tax authority considers should have been issued in accordance with the reverse charge procedure?
Following a review of PORR Építési Kft’s (PORR) VAT returns, the tax authority raised assessments for what it considered to be VAT incorrectly recovered. In connection with construction services PORR received invoices from a number of suppliers with VAT charged, however the tax authority suggested that the services provided to PORR, under national law, should have been subject to a reverse charge. The VAT was not recoverable under the normal VAT system and the suppliers could be asked to correct the invoices issued.
PORR asserted that the tax authorities were wrong to consider that the invoices fell under the reverse charge procedure. Alternatively, it suggested that the tax authorities had failed to check whether the suppliers had paid the VAT charged and whether it was still possible for them to correct the invoices. The tax authorities had not considered that such a correction for the supplier was probably excluded under national law and consequently PORR would essentially be denied VAT recovery on its costs.
The Administrative and Labour Court referred the case to the CJEU for a preliminary ruling to consider whether, in circumstances not involving fraud, the principles of proportionality, fiscal neutrality and effectiveness preclude national legislation, which refuses the right to deduct VAT in these circumstances.
The CJEU noted that under the reverse charge procedure, there is no payment of VAT by the supplier, with the customer taking responsibility to both declare the VAT due and to recover it in accordance with the normal rules. It also considered that the right to deduct is an integral part of the VAT mechanism and cannot, in principle, be limited.
Considering the reverse charge procedure and the right to recover VAT, a taxable person is not obliged to hold an invoice drawn up in accordance with the formal conditions of the VAT Directive but must fulfil the formalities established by the Member State. PORR did not hold appropriate invoices and wrongly paid the VAT to its suppliers. Beyond the fact that those invoices did not satisfy the formal requirements a substantive requirement was also lacking; the payment of VAT to the tax authorities by the taxable person claiming the deduction. Such a situation had prevented the tax authorities from monitoring the application of the reverse charge system and had introduced a risk of loss of tax revenue for the Member State concerned. Also, the VAT paid by PORR to the service providers was not due and the exercise of the right to deduct is limited to taxes that are.
The CJEU held that since PORR failed to comply with a substantive requirement of the reverse charge regime and the VAT it paid to the service providers was not due, it could not claim a right to deduct the VAT charged.
The CJEU considered that the tax authority is not required, before rejecting a claim for deduction of VAT, either to ascertain whether issuers can correct invoices on the basis of the national legislation or to order such correction. It is for each Member State to legislate for procedural rules. Such rules must however observe the principles of equivalence and effectiveness. In a situation where VAT has been paid by the supplier and the reimbursement of the VAT by the supplier to the recipient is impossible or excessively difficult, in particular in the case of the insolvency of that supplier, the principle of effectiveness may require that the recipient of the services concerned be able to address its application for reimbursement to the tax authorities directly. Such an application would, however, be distinct from a claim for deduction of VAT.
This case highlights the importance of identifying the nature of supplies and ensuring appropriate VAT accounting, it also confirms that in certain circumstances, where seeking restitution through a supplier is impossible or excessively difficult, a taxpayer can seek repayment directly from the tax authority.
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