CJEU 26 April 2017, case C-564/15 (Farkas) A business can claim incorrectly invoiced VAT from the tax authorities, but only if it is impossible or very difficult to recover this VAT from the issuer of the invoice and additional conditions are met.

The case

At an electronic auction organized by the Hungarian tax authorities, Mr. Tibor Farkas purchased a mobile hangar from an insolvent company. The seller issued an invoice with VAT. Farkas paid the invoice including the amount charged as VAT. The Hungarian tax authorities refused to refund Farkas this amount. They stated that a reverse charge applied, so that not the seller, but Farkas himself should have paid the VAT directly to the tax authorities. Farkas was not allowed to deduct the VAT, as the VAT was wrongfully charged by the seller.

The Hungarian referring court asked the CJEU whether the Hungarian tax authorities were allowed to deny the deduction of input VAT and could also raise a penalty for the presumed incorrect filing of a VAT return by Farkas.

Judgment

Under a reverse charge it is not the seller, but the purchaser himself who must account for the VAT due. In the Farkas case this did not happen, instead it was the supplier who invoiced VAT and paid this amount to the tax authorities. The CJEU finds that this VAT is incorrectly charged as a result of which Farkas is not allowed to deduct this amount as input VAT.

The CJEU, however, considers that the tax authorities could be obliged to reimburse Farkas this amount under specific circumstances. Firstly, it must be impossible or very difficult to recover the VAT paid from the seller. This condition was met as the seller was insolvent. Secondly, the treasury should not suffer a loss. This was also the case, as the seller remitted the VAT paid by Farkas to the tax authorities. Thirdly, the transaction should not involve any form of tax evasion. This was also not the case, as there was no evidence supporting any signs of tax evasion.

Conclusion

This judgment shows that recovering unduly paid VAT can be quite difficult. The purchaser is fully dependent on whether the seller has actually paid the VAT to the tax authorities before being able to recover the VAT. Therefore, it is highly recommended to assess whether a reverse charge applies when purchasing goods and/or services. Reverse charge mechanisms apply in multiple kinds of transactions. For instance in transactions where the supplier is not established, nor has a fixed establishment in the country of the customer. This also applies in transactions where the supplier is insolvent and in transactions where mobile phones, microprocessors or CPU's are supplied.