Can VAT be deducted within the adjustment mechanism even after the limitation period?

In the Dutch case of Company X (C-194/21), the Court of Justice of the European Union held that the adjustment mechanism should not be applied where the taxable person failed to exercise the right to deduct VAT and has lost that right due to the expiry of the limitation period

In 2006, a company purchased building plots from another company for the purpose of building mobile homes and then selling them. The company received an invoice including VAT for the supply of the plots, which it did not deduct. Due to economic circumstances, the planned development of the land did not take place. In 2013, the company sold some of the plots back to the original owner, including output VAT. However, the company neither declared that tax in its VAT return nor paid it.

In 2015, the tax administration sent the company an additional VAT assessment ordering them to pay VAT on the sale. The company argued that under Articles 184 and 185 of the VAT Directive (on adjustments of deductions), the additional assessment shall be reduced by the VAT paid on the supply of the land in 2006; the court of appeal accepted this argument.

However, the Supreme Court of the Netherlands had doubts whether Articles 184 and 185 of the directive could be applied in the case at hand, as the limitation period for the company to claim the deduction had already expired: this would in fact mean that the possibility to make an adjustment under the mentioned articles could be resorted to whenever the limitation period was not observed.

The Court of Justice of the EU first pointed out that being able to exercise the right to deduct VAT without any time limit would be contrary to the principle of legal certainty which requires the tax position of a taxable person as regards their rights and obligations vis-à-vis the tax authority not to be indefinitely open to challenge. Next, the court reiterated that setting a limitation period that if not observed (by lack of diligence) would result in the loss of the right to deduct VAT, is consistent with the directive. This is subject to the condition that the limitation period is applied in the same way to analogous rights in tax matters under national and EU law (principle of equivalence) and that it does not in practice render the exercise of the right to deduct VAT impossible or excessively difficult (principle of effectiveness).

Thus, although the Court of Justice of the EU confirmed that the obligation to make an adjustment to the VAT deduction under the adjustment mechanism is defined broadly, it is necessary that the right to deduct VAT exists at the time the adjustment is made. The mentioned articles of the directive cannot give rise to a right of deduction. It follows from the above that the adjustment mechanism shall not be applied where the taxable person has not exercised the right to deduct VAT and has lost that right because of the expiry of the limitation period (which is the case here). 

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