Refund of VAT paid in error – tax authorities required to refund VAT paid in error where impossible to recover from issuer of invoice

The Court of Justice of the European Union (CJEU) has held that national tax authorities are obliged to refund VAT paid in error to either the recipient or issuer of a relevant invoice, and that invoice recipients can claim back VAT from national authorities in cases where it is impossible, or excessively difficult, to recover the amount from the issuer of the invoice.

The Hungarian Motorsport and Green Mobility Development Agency (HUMDA) had appealed against a decision to deny recovery of overpaid VAT.

In 2015, HUMDA's predecessor company was involved in the construction of Hungary's national pavilion at that year's World Expo, hosted in Milan. In constructing the pavilion, HUMDA recruited the assistance of Bíró Hűtéstechnikai és Acélszerkezetgyártó Ipari Kft (BHA). BHA issued nine invoices to HUMDA's predecessor, all of which were paid by HUMDA's predecessor. BHA then paid VAT on those invoices to the Hungarian tax authorities.

Following an investigation, it was determined that as the construction of the pavilion had taken place in Italy and not in Hungary, VAT was not payable on the invoices. HUMDA therefore brought an action before the Hungarian courts to recover the amount of VAT paid together with interest, which was around €‎320,000. While the standard practice would have been to recover the VAT directly from the supplier itself, in this case BHA was the subject of liquidation proceedings and BHA's liquidator argued that the claim was irrecoverable.

The Hungarian court referred three specific questions on the VAT directive to the CJEU. These questions concerned whether:

(1) national authorities were obliged under the PVD to refund VAT erroneously paid to either the issuer or the recipient of a relevant invoice;

(2) invoice recipients could claim back erroneously paid VAT directly from national tax authorities only if it was impossible, or excessively difficult, to do so another way under civil law; and

(3) national authorities in such cases were obliged to pay interest on the relevant VAT refund.

The CJEU found in favour of HUMDA on the first and second questions, concluding that a refund of unduly paid tax could be claimed back from the national tax authorities in cases where it is impossible, or excessively difficult, to recover the amount from the issuer of the invoice. The CJEU also concluded that interest would be payable on the amount in such cases.

Why It matters:

The CJEU's judgment was consistent with that in Reemtsma Cigarettenfabriken (C-35/05) in holding that member states should provide a mechanism for adjusting any tax that has been incorrectly invoiced in circumstances where the person who issued the invoice acted in good faith. The Reemtsma principles have been followed in a number of UK tax tribunal decisions and so this provides helpful guidance on those principles (even if the decision is no longer binding on UK courts following the European Union (Withdrawal Agreement) Act 2020).

The decision can be viewed here.