EU l CJEU Rules that VAT Recovery Only Possible if it Has Been Correctly Charged

The Court of Justice of the European Union (CJEU) has held in the case of PORR Építési Kft. (Case C-691/17) that no right to deduct input VAT exists when the VAT has been incorrectly charged by the supplier.

Background

The company, PORR Építési Kft., built a motorway in Hungary and deducted input VAT on the invoices it received from three local contractors for their work.

The Hungarian tax authorities subsequently refused to accept the claim for input VAT deduction.  They maintained that because the work was related to construction taking place in Hungary, the suppliers had charged VAT on their supplies in error.  Instead, the supply should have been subject to the reverse charge mechanism with PORR Építési Kft having an obligation to account for the VAT.

The issue for the CJEU to decide was whether the company had the right to input VAT deduction under the normal VAT rules as the VAT had been charged to it despite that being the incorrect VAT treatment.

Decision

The CJEU ruled that PORR Építési Kft. was not entitled to recover the VAT charged on those invoices. It stated that if the reverse charge applies, VAT charged and paid in error carries no right to deduction because this right can only be exercised against correctly charged VAT.  This is in spite of the fact that there was no suspicion of fraud and the suppliers had paid the VAT over to the tax authorities.

Instead, to recover the VAT charged by suppliers PORR Építési Kft. would have to request a refund from them.  The suppliers would then have to reclaim the overpaid VAT from the tax authority and adjust their invoices.  The CJEU did clarify that in a scenario where the reimbursement of the VAT by the supplier to the recipient would be impossible or excessively difficult, for instance, in the case of insolvency, the recipient may apply for the refund directly to the tax authorities.

Consequences

This decision underlines the important point that a businesses can only recover VAT when it’s been correctly charged.  Thus, despite the onus normally being on the supplier to determine the correct VAT treatment, recipients should also take care to check it is correct.  This will help to determine whether VAT has been correctly charged and also highlight the need to undertake any reverse charges.  This proactive approach will hopefully avoid having issues such as those involving PORR Építési Kft.

If you believe you are affected by this development and should like to discuss it further, please do get in touch with us.