02/11/23

EU: European Court Clarifies Rules on VAT Refund From Tax Authority

As published on: news.bloomberglaw.com, Thursday 2 November, 2023.

On Sept. 7, the Court of Justice of the EU explained in its Michael Schütte v. Finanzamt Brilon decision how value-added tax that was paid, but not due, can be claimed back from the tax authorities. The CJEU decided that if certain conditions are met, a buyer can claim back incorrectly charged VAT directly from the tax authority.

Context
Sometimes a seller of goods or provider of services incorrectly applies the VAT rules and consequently charges too much VAT from the buyer in error. If the supplier later finds out it has charged too much VAT from its buyer, it must still report and pay this VAT to the tax authorities. The buyer isn’t allowed to deduct incorrectly charged VAT as input VAT.

If the VAT is incorrectly charged, the buyer should ask the supplier to cancel (or credit) the incorrect invoice and issue an invoice with a correct amount of VAT, or without any VAT on it.

But what if the buyer isn’t able to recover overpaid VAT from the supplier—because the supplier is insolvent, liquidated, or doesn’t pay the incorrectly charged VAT back to the buyer for some other reason? In Schütte the seller refused to correct the invoices and pay back VAT wrongly charged because it wasn’t obliged to do so under civil law.

Facts of Schütte
German farmer and forester Schütte purchased timber and received invoices with VAT at a rate of 19%. However, the German tax authority reduced the buyer’s deduction of input VAT to 7% from 19%, because the purchases should have been subject to a reduced rate of 7%, not a standard rate of 19%. The tax authority claimed back from the buyer (Schütte) the VAT that was wrongly charged to him by his suppliers, plus interest.

Schütte then asked the suppliers to correct the invoices and pay him back the VAT that they had overcharged him. The suppliers invoked the defense of the statute of limitations under civil law and didn’t correct the invoices.

Schütte therefore claimed the undue VAT back directly from the tax authority, together with the interest in respect of the VAT. The tax authority refused to refund the overpaid amounts of VAT to Schütte.

Questions for the Court
On July 6, 2022, the German court referred a question to the CJEU on whether a taxable person that had overpaid VAT to its suppliers could claim a reimbursement of that VAT, including interest, directly from the tax authority. The referring court also asked whether there was a possibility that the suppliers could subsequently claim a refund of undue VAT from the German tax authority, after having corrected the invoices they originally issued. This would mean the tax authority might be obliged to refund the VAT amount twice.

Previous Case Law
The CJEU had previously decided—for example, in its judgment of March 17, 2007 in Reemtsma—that the principle of effectiveness permits a direct claim by a recipient of a supply against the tax authority, if the recipient has overpaid VAT to a supplier but didn’t receive a refund, or if the refund is excessively difficult to obtain from the supplier.

In HUMDA the CJEU decided that where a receiver of a service can claim directly from the tax authority a refund of the VAT wrongly charged by its supplier, the authority is obliged to pay interest on that amount where it hasn’t made that refund within a reasonable time after being requested to do so.

Decision
On Sept. 7, the CJEU gave its decision in Schütte. The court decided that the principles of effectiveness and VAT neutrality required the tax authority to refund directly to Schütte the VAT that he paid, but that wasn’t due, as his suppliers had a valid limitation defense to a contractual claim.

The CJEU said from its previous decisions that in principle, the buyer should demand a refund from the supplier if the latter has invoiced VAT that isn’t due. If the refund of a buyer from the supplier proves impossible or excessively difficult, the tax authority should refund the VAT that wasn’t due directly to the buyer. Such a refund should be made with interest.

According to the court, a direct claim against the tax authority exists even after the deadline to correct invoices under civil law. The court stated that the statute of limitations constitutes a reason making the enforcement of the claim excessively difficult and thus makes a direct claim against the tax authorities possible.

The buyer can invoke a direct claim even if the supplier could still correct invoices and claim the overpaid VAT from the tax authority.

If the service provider invokes the statute of limitations under civil law against the service recipient, it is acting abusively if it also seeks a VAT refund from a tax authority. The tax authority may refuse to provide such refund. The risk that the tax authority needs to refund the VAT twice therefore doesn’t exist.

Pending Cases
Further questions on a direct claim against the tax authority have already been referred to the CJEU. In the case of H GmbH v. Tax office of M, the German court has referred for a preliminary ruling the question of whether a direct claim exists against the tax authorities when the taxable person has paid VAT that isn’t due.

Practical Results
The main result of the decision is that the right to a direct claim against the tax authorities also applies in the case of a civil law limitation. The buyer is protected if its input VAT deduction and refund from the supplier have failed.

The CJEU states that the right of deduction fulfills the principle of neutrality and, in principle, can’t be limited.

The decision shows that appeals against the strict tax policies of some member states may pay off where those policies or practices are against EU VAT principles such as neutrality and efficiency.

The case is Michael Schütte v. Finanzamt Brilon, Judgment of the Court (Eighth Chamber), Sept. 7, C-453/22.

 

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EU European Union VAT Refund