In Volkswagen AG v Finančné riaditeľstvo Slovenskej republiky C-533/16, the Court of Justice of the European Union (CJEU) has confirmed that Member States cannot impose time limits on input tax recovery that deny claims before the taxable person is in a position to exercise its right to recover.

Background

This case concerned goods that were supplied to Volkswagen in Slovakia between 2004 and 2010. At the time of the supplies, the suppliers did not include VAT on their invoices that were issued to Volkswagen. They wrongly (but in good faith) concluded that the supplies were 'financial compensations' and were not, therefore, subject to VAT.

In 2010, the suppliers realised their mistake and corrected their error, issued new invoices charging VAT and accounted for the VAT. Volkswagen filed a claim to recover the input VAT in respect of all revised invoices.

The Slovak tax authority rejected part of the claim (worth €1.3M) as being time-barred. It argued that the right to recover VAT arose on the date of delivery of the goods and accordingly the right to claim VAT for the period from 2004 to 2006 had expired.

The domestic court referred to the CJEU a number of questions which were intended to determine whether Volkswagen could reclaim the input VAT for the earlier periods.

The Advocate General (AG) released his opinion on 26 October 2017. He considered that the commencement date of the limitation period could not solely be referable to the time when the goods were supplied. In his view, in 'exceptional cases', like the present case, the right to deduct should be linked to the actual payment of VAT.

The AG noted that the time limit applied equally to claims for input and output VAT. If the Slovak tax authority was prepared to accept the output VAT due, it should also accept that that taxable person has the right to deduct input VAT. Anything else would be contrary to the principle of fiscal neutrality. As Volkswagen had acted in good faith, it would be disproportionate to deprive it of the right to deduct in these circumstances.

CJEU decision

The CJEU agreed with the AG's opinion and ruled that in principle Volkswagen should be entitled to exercise its right of deduction.

The CJEU confirmed that although the right to deduct VAT is a fundamental principle of the common system of VAT established by EU legislation which ensures neutrality of taxation of all economic activities it is nonetheless subject to substantive and formal requirements or conditions.

The CJEU ruled that although the right to deduct VAT arises at the time the VAT becomes chargeable under Article 167 (in this case, the moment that the goods were delivered), Article 178 provides that it can be exercised only once the taxable person holds an invoice which refers to VAT.

The CJEU considered that the possibility of exercising the right to deduct VAT without any temporal limit, to be contrary to the principle of legal certainty and the CJEU has previously held that a limitation period, the expiry of which has the effect of penalising a taxable person who has not been sufficiently diligent and has failed to claim the deduction of input VAT, by making him forfeit his right to deduct, is compatible with the Principal VAT Directive.

That said, it was apparent in the present case that the taxable person (Volkswagen) did not demonstrate a lack of diligence and there was no abuse or fraudulent collusion with its suppliers. In such circumstances, it was objectively not possible for the taxable person to exercise its right to recover VAT before the limitation period expired as it had neither been in possession of the invoices nor aware that VAT was due. Accordingly, Slovakia could not deny VAT recovery on the grounds that the national limitation period had expired before the request for recovery was made.

Comment

The approach adopted by the CJEU in this case is helpful to taxpayers as it ensures that input VAT recovery should not be precluded where a taxable person acts in good faith but does not pay VAT until sometime after a supply takes place.

The UK already appears to comply with this approach as regulation 29 of the VAT regulations (SI1995/2518) provides that a claim for input VAT deduction may be made up to four years after the end of the first period in which the taxpayer held the documentary evidence required for deduction.

It should be noted that the CJEU's finding in this case was based on the fact Volkswagen had been sufficiently diligent and there had been no abuse. The UK rules should therefore be read with this important proviso in mind. The outcome may well have been different had there been a lack of diligence or abuse.

A copy of the CJEU's judgment can be viewed here.