Subject: Review of key European Court of Justice (ECJ) rulings concerning the right of taxable persons to deduct input VAT, particularly in circumstances where the VAT on prior transactions has not been paid to the public purse by the supplier.
Introduction:
This briefing document summarises the main themes and important ideas presented in the provided source regarding the European Court of Justice’s jurisprudence on the right to deduct input VAT under Article 168(a) of the EU VAT Directive 2006/112/EU. The core principle highlighted is the fundamental nature of this right and its importance in ensuring tax neutrality within the VAT system. The ECJ’s rulings consistently affirm that a taxable person’s right to deduct input VAT generally remains intact, irrespective of whether the supplier in the preceding transaction has paid the corresponding output VAT to the tax authorities. Exceptions to this principle are noted, primarily in cases involving fraud or mutual errors regarding VAT liability where no VAT was invoiced or paid.
Key Themes and Ideas:
- Fundamental Nature of the Right to Deduct Input VAT: The ECJ views the right to deduct input VAT as a cornerstone of the common system of VAT. It is essential for ensuring tax neutrality, meaning businesses are not burdened by the VAT on their inputs as long as those inputs are used for taxed outputs.
- Irrelevance of Supplier’s VAT Payment Status: A central and recurring theme across multiple ECJ cases is that the taxable person’s right to deduct input VAT is generally not contingent upon the supplier having actually remitted the VAT due on the prior transaction to the tax authorities. This principle is explicitly stated and reinforced in numerous judgments.
- Quote: “the right to deduct VAT applies whatever the purpose and result of the economic activity in question, and whether the VAT payable on prior transactions relating to the goods concerned has or has not been paid to the public purse is irrelevant to that right.” (C-610/19 Vikingo Fővállalkozó Kft.)
- Quote: “The question whether the VAT on the earlier or later sale of the goods concerned to the end-user has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input VAT…” (C-354/03, C-355/03 and C-484/03 Optigen and others)
- Quote: “The question whether the VAT payable on the prior or subsequent sales of the goods concerned has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input VAT.” (C-285/11 Bonik)
- Quote: “The Court has previously held that the question whether the VAT on an earlier or later sale of the goods concerned has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input VAT…” (C-552/16 Wind Innovation 1)
- Principle of Tax Neutrality: The ECJ repeatedly emphasizes that VAT applies to each transaction after the deduction of VAT borne by cost components. This ensures that the tax burden falls on the final consumer, not the intervening businesses. Denying the right to deduct input VAT solely because the supplier has not paid their output VAT would undermine this principle.
- Quote: “VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components…” (C-354/03, C-355/03 and C-484/03 Optigen and others, citing earlier cases)
- Interpretation of “Due or Paid” in Article 168(a): The ECJ’s interpretation of the terms “due or paid” in Article 168(a) of the VAT Directive reinforces the idea that the supplier’s payment status is not a prerequisite for the recipient’s deduction right. The VAT is considered “due or paid” from the perspective of the taxable person making the deduction if it was legally payable on the prior transaction, regardless of whether it was actually remitted by the supplier.
- Quote: “… Article 17(2)(a) of the Sixth Directive, which also uses the terms ‘due or paid’, as shown in paragraph 19 of this judgment, must be understood as meaning that the question whether the VAT due on the earlier or later sale of the goods concerned has or has not been paid to the public purse is irrelevant to the taxable person’s right to deduct…” (C-414/10 Véleclair)
- Limitations and Exceptions: Fraud, Abuse, and Lack of Valid VAT: While the right to deduct is broad, it is not absolute. The ECJ’s jurisprudence indicates that exceptions exist, primarily in cases of fraud or abuse. If a taxable person knew or should have known that their transaction was part of a VAT fraud scheme, they may be denied the right to deduct.
- The case of C-227/21 (HA.EN.) highlights this, stating that a denial of the deduction right is incompatible with VAT principles unless there is “evidence of fraud or abuse.”
- The case of C-156/20 (Zipvit Limited) demonstrates another exception: when both parties to a transaction mistakenly treat it as VAT-exempt, and no VAT is invoiced or paid, the VAT cannot be considered “due or paid” under Article 168(a), and thus no deduction is possible for the recipient.
- Knowledge of Supplier’s Financial Difficulties is Insufficient for Denial: The ECJ ruled in C-227/21 (HA.EN.) that merely knowing about a supplier’s financial difficulties (e.g., insolvency proceedings) is not, in itself, sufficient grounds to deny a purchaser’s right to deduct input VAT. This reinforces the principle that the supplier’s failure to remit VAT does not automatically negate the recipient’s right.
Most Important Ideas/Facts:
- The right to deduct input VAT is a fundamental principle of the EU VAT system, crucial for tax neutrality.
- Generally, a taxable person can deduct input VAT even if the supplier has not paid the output VAT to the tax authorities.
- This principle is supported by numerous ECJ judgments, including Optigen, Bonik, Wind Innovation 1, Véleclair, and HA.EN.
- The ECJ interprets “due or paid” in Article 168(a) in a way that prioritises the taxable person’s right to deduct when the VAT was legally payable on the preceding transaction.
- Exceptions to the right of deduction exist in cases of fraud, abuse, or where VAT was not legally “due or paid” due to mutual error and lack of invoicing/payment.
- Knowledge of a supplier’s financial difficulties, without evidence of fraud or abuse, is not sufficient to deny the right to deduct input VAT.
Conclusion:
The ECJ’s consistent stance on the right to deduct input VAT underscores its importance in maintaining the integrity and neutrality of the EU VAT system. Taxable persons can generally rely on this right as long as the substantive conditions are met, and they are not involved in fraudulent activities or situations where VAT was not genuinely due or paid. The focus remains on the economic reality of the transaction and the principle that businesses should not be burdened by VAT on their inputs when those inputs are used for taxed outputs. The source highlights VATupdate.com as a valuable resource for staying informed on these crucial ECJ VAT rulings.
See also
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
