CJEU opens way to recovering twice paid VAT from state
The incorrect application of a VAT regime may have far-reaching consequences for taxpayers even if the state budget does not actually lose out. If the tax administration finds that the reverse charge regime has not been applied even though prescribed by law, it will additionally assess the tax, regardless of whether the supplier has already paid it once. A recent CJEU judgement has now opened the way to recovering from the state the VAT thus paid double.
In practice, a supplier may fail to apply the reverse charge and bill the customer in a general regime, including VAT. This often happens because the line between situations where a standard regime is to be applied and situations where a reverse charge is prescribed is not always clear.
If the customer pays the whole amount of the invoice including VAT for a supply that should have been subject to reverse charge, the tax administrator may challenge this and assess additional tax to the customers, which in fact has already been paid once. Notably, the application of the reverse charge is the responsibility of the customer, not the supplier, despite the fact that the supplier is the one who issues the tax document.
In reality, this means denying an entitlement for deduction, although technically it is an additional assessment of output VAT. It does not help customers if they can prove that they paid the tax to the supplier, not even if the supplier reported and paid the tax to the state. In practice, absurd situations thus may happen when VAT is assessed and paid twice on one transaction. Also, the supplier may not be able to fix the error and issue a corrective document, as the three-year period from the end of the taxable period in which the supply was effected may have already expired.
In April, the Court of Justice of the EU (CJEU) dealt with the Tibor Farkas case (No. C-564/15), where a standard VAT regime was applied, although under local legislation a reverse charge regime should have been applied. Based on an incorrectly issued invoice, tax was paid by the buyer, and reported and paid to the state by the seller. The Hungarian tax administrator nevertheless assessed additional output tax to the buyer.
In this case, CJEU confirmed that it is not contrary to EU legislation to assess additional tax in cases like this. At the same time, however, it stated that the customer must get the chance to recover the VAT thus paid by the supplier from the state. A necessary precondition, according to the CJEU, is that it would be impossible or unreasonably difficult to claim such incorrectly charged VAT from the seller, for instance due to their insolvency. Czech legislation does not provide a specific procedure for such a situation, but this does not mean that a member state may simply deny the entitlement to a refund of the tax.