Input VAT on advance payments on account

A person is entitled to input VAT credit for a payment on account in circumstances where the supply never takes place and a refund of the deposit paid is not possible due to the fraud of the supplier.

The ECJ has held that a person is entitled to deduct input VAT incurred on a payment on account in circumstances where the supply never took place due to the fraud of the supplier and a refund of the deposit paid was not possible due to the insolvency of the supplier: Finanzamt Dachau v Kollroß (Case C 660/16) and Finanzamt Göppingen v Wirtl (Case C 661/16). Provided that the relevant goods or services were sufficiently identified such that the existence of a future supply was not uncertain, input VAT credit arose on the payment of the deposit. In addition, EU law did not require an adjustment to that VAT deduction where the expected supply did not actually take place due to the fraud of the supplier and the recipient of the supply was not able to obtain a refund of the deposit it had paid.

Background

These two cases both involved orders made for a combined heat and power unit. In both cases, the supplier issued an invoice requiring payment on account of €30,000 plus VAT. In both cases, after the deposit payments were made, the unit was never delivered, the supplier became insolvent and employees of the supplier were convicted for fraudulent trading practices. The taxpayers in these cases sought credit for the input tax on the payment on account. The German Tax Authorities refused these requests.

Decision of the ECJ

The ECJ has held that a buyer is entitled to a right to deduct VAT relating to a payment on account, provided that at the time the payment is made all the relevant information concerning the future chargeable event, is known and the goods or services precisely identified (Article 65 of the 2006 VAT Directive). In this case, it appeared that those conditions for deduction were met. The goods were clearly identified and the price had been clearly specified. Contrary to the arguments of the German tax authorities, the fact that a specific date for delivery of the units had not at that stage been agreed did not call into question the certainty of the future supply and did not prevent the taxpayers having a right to deduct the input VAT.

Later events or facts only known subsequent to the payment on account, should not generally affect the right to deduct. However, it was for the national court to determine that the taxpayers in this case did not know (or should not reasonably have known) of the fraudulent trading practices at the time of the deposit payment. If the buyers did know or should reasonably have known of the fraud, then the supply would be uncertain at the time of the deposit payment and the input tax would not be deductible.

The German tax authorities also argued that the right to the input VAT deduction in these cases should have been later adjusted on the basis that no supply took place. In particular, the German tax authorities referred to the earlier ECJ decision in FIRIN (Case C-107/13) in which it was suggested that the tax authorities may require an adjustment under Article 185 where it is established that a supply, in relation to which a deposit has been made, does not take place.

The ECJ were able to point to distinguishing factors between the FIRIN case and the current cases, however. In particular, the FIRIN case was one that potentially involved VAT fraud in which the recipient of the supply colluded. In the current cases, there was no VAT fraud by the buyers, the buyers had already derived revenue from the units (by pre-leasing them) and it was not possible for the buyers to recover their payments on account from the seller. In addition, it appeared that the seller had actually paid over the VAT to the tax authorities and so there was no risk of tax loss to the German state.

In addition, the court drew attention to its earlier decision in Reemstma, in which it held that the recipient of a supply may be able to recover a refund of VAT paid in error to a supplier directly from the tax authorities where refund from the supplier is excessively difficult (for example in a case of insolvency). Equally, in this case, it would be excessively difficult for the buyers to obtain a refund of the VAT from the sellers. Given this position, compliance with the principle of fiscal neutrality, meant that it would be “manifestly unreasonable” to require the buyers to adjust their tax accounts to remove the deduction for VAT on the deposit payments (only to then bring an action against the tax authorities for a repayment on Reemstma principles).

Therefore, the court held that it is not contrary to EU law to make an adjustment to the VAT account of a taxpayer in the position of those in this case condition on an actual refund of the payment by the supplier.

Comment

The approach by the ECJ in this case seems eminently sensible. The taxpayers in this case, unaware of any intention to defraud them, were entitled to VAT deductions based on the deposit payments. To require adjustment of the VAT position on the basis that the supply never took place due to that fraud, without any repayment to the buyer, would be very harsh on those buyers. This would particularly be the case, where as appears to have been the case here, the output VAT was accounted for to the tax authorities.

In addition, the ECJ has suggested that the principles that it outlined in Reemstma, under which the recipient of a supply may be able to recover overpaid VAT from the tax authorities directly where it is not able to make recovery from the supplier, may have wider application. Accordingly, had the German tax authorities in this case required the buyers to adjust their VAT accounts to remove the input VAT deduction in circumstances where they were not able to obtain a repayment from the supplier, the ECJ suggested that they may have had a right to recover that amount from the tax authorities.

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