VAT refund also for irrecoverable receivables from non-payers?

In response to an older ruling of the Court of Justice of the EU (CJEU) in the Enzo Di Maura case (C-246/16), the amendment to the VAT Act effective from 1 April 2019 has extended the scope of VAT refund also for irrecoverable receivables from non-payers? where previously paid VAT can be corrected. In its recent judgement (C‑127/18) concerning A-PACK CZ, a Czech entity, the CJEU held that the regulation is still not sufficient, and that Czech law is contrary to the EU directive and fundamental principles of VAT.

In the case of A-PACK CZ, the CJEU dealt with whether the provision of the Czech VAT Act that prevents correcting the tax base for irrecoverable receivables where the debtors have ceased to be VAT payers is contrary to the EU VAT directive.

A-PACK CZ demanded a refund of VAT on an irrecoverable debt from a debtor in insolvency. The Czech financial administration refused to refund the VAT, arguing that correction was not possible under Czech law as the customer had in the meantime ceased to be a VAT payer. The company appealed the decision and the case appeared before the Supreme Administrative Court. In a prejudicial question, the court referred to the CJEU to determine if the provision of the Czech VAT Act requiring the debtor to remain a VAT payer to allow a correction of the VAT was in accordance with the directive.

The CJEU held that the member states may limit the refunding of VAT on irrecoverable debts solely on the grounds of uncertainty as to their non-payment. The requirement that makes the correction to the tax base conditional upon the debtor not ceasing to be a VAT payer does not take account of such an uncertainty. On the contrary, the fact that the debtor has ceased to be a taxable person in the context of insolvency proceedings is evidence of the definitive nature of the non-payment. The CJEU thus concluded that the provisions of the Czech VAT Act are contrary to the directive: generally, it is not possible for a VAT payer in the position of creditor to be liable to pay VAT they did not receive from their customers.

Although the A-PACK case did not directly concern debtors – non-VAT payers, we believe that the above judgement has significant potential also for creditors (VAT payers) facing the insolvency of their customers that are end consumers and non-VAT payers; VAT corrections should be also possible in these cases. Czech legislation will now have to respond to the judgement, as the present law is clearly contrary to the directive.

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