ECJ clarifies right to refuse VAT deduction
By Eric van Puyvelde | Thursday 21 June 2012
The deduction of VAT cannot be refused, in principle, because of irregularities committed by the issuer of the invoice. However, such deduction may be refused if the taxable person knew, or ought to have known, that the transaction relied on as a basis for the right to deduct was connected with fraud. This is the gist of a judgement handed down, on 21 June, by the EU Court of Justice (Cases C-80/11 and C-142/11), to which two Hungarian regional courts had submitted questions. The court held that the practice of the Hungarian authorities is incompatible with EU law.
Under Directive 2006/112/EC on the common system of value added tax, companies may, as a rule, deduct the amount of input VAT which they have paid at the time of acquiring goods or services necessary for their activities. To exercise this right of deduction, they must hold an invoice duly drawn up for the supply of those goods or services.
In the first case, the company Mahagében Kft wished to deduct from the amount of tax for which it was liable the tax it had paid to its supplier for the delivery of various quantities of acacia logs. The supplier issued invoices for the delivery of those goods and paid to the public exchequer the VAT, which Mahagében had paid to it. But the Hungarian tax authority established that the invoices were irregular because they concerned a quantity of acacia logs greater than what the supplier was capable of delivering from its stock. It refused the VAT deduction and criticised Mahagében for filing to check whether the partner had complied with its statutory obligations in respect of VAT.
In the second case, a construction entrepreneur wished to deduct the VAT he had already paid to his subcontractors but the Hungarian tax authority refused the deduction because of the improper acts of those subcontractors.
In its judgement, the court held, firstly, that the question of whether the VAT due has or has not been paid to the public treasury has no influence on the taxable person’s right to deduct input VAT. However, member states may refuse the right to deduct if is established, on the basis of objective evidence, that this right is being relied on for fraudulent or abusive ends. This is the case when the taxable person to whom were supplied the goods or services constituting the basis for the right to deduct knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or by another trader at an earlier stage in the transaction. The court found, however, that it is for the tax authority to establish that the taxable person was or ought to have been aware of the existence of such fraud.
The court also held that the tax authority may not, as a general rule, require the taxable person wishing to exercise his right to deduct VAT to satisfy himself that there were no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction. It is for the tax authorities to carry out the necessary inspections of taxable persons.
Concerning both cases, the court held that the transactions relied on as a basis for the right to deduct were in fact carried out and that the conditions required for the creation and exercise of the right to deduct are fulfilled. It concluded that the directive precludes the practice of the Hungarian tax authority of refusing to allow a taxable person to deduct VAT paid because of improper acts on the part of the issuer of the invoice, which forms the basis on which deduction is sought, and in the absence of proof that the taxable person was aware, or ought to have been aware, of fraud committed earlier in the chain of supply. Likewise, the directive precludes a national practice whereby the tax authority refuses the right to deduct on the ground that the taxable person did not obtain assurance that the commercial partner was in compliance with his statutory obligations.