On 7 July 2022, the European Court of Justice (“ECJ”) decided on case C-194/21 concerning the adjustment of input VAT deductions within the meaning of Articles 184 and 185 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“VAT Directive”).
The case at hand concerned the possibility for a taxable person who did not exercise his right of deduction before the expiry of a limitation period to make this deduction in the context of an adjustment at the time of the actual use of the purchased good.
The facts involved a Dutch company that sold plots of land to an individual VAT taxable person and contractually committed, at the same time, to construct mobile homes with accessories, which were intended to be sold together with the land on which they stood. The net proceeds of the sale of the developed plots were to be divided between the two parties in equal shares.
The VAT invoiced by the company to the purchaser for the supply of the plots of land had not been deducted by the purchaser.
Approximately seven years later, when it became clear that the planned development of the plots was not carried out due to economic circumstances, the parties agreed that the initial supplier would redeem the land from the initial purchaser. The initial purchaser then claimed a deduction of the input VAT, paid at the time of the initial acquisition of the land, against the output VAT collected on its resale.
Since the Dutch tax authorities did not grant the deduction, the matter ended up before the Dutch Supreme Court. The latter noted that, while the VAT Directive defines the adjustment obligation of input VAT as broadly as possible, such a broad interpretation does not necessarily amount to allowing the right of deduction to be exercised without any temporal limit and referred the question to the ECJ, specifically asking whether the absence of fraud or abuse of rights would affect the ECJ’s response.
The ECJ’s decision
The ECJ ruled that “Articles 184 and 185 of the VAT Directive must be interpreted as not precluding a taxable person who failed to exercise, before the expiry of the limitation period laid down by national law, the right to deduct VAT relating to the acquisition of goods or services, from being denied the possibility of subsequently making that deduction, by way of an adjustment, at the time when those goods or services are first used for the purposes of taxed transactions, even where no abuse of rights, fraud or loss of tax revenue has been established”.
The ECJ recalled that even if the right to deduct is an integral part of the VAT scheme and may not, in principle, be limited, the possibility of exercising this right without any temporal limit would be contrary to the principle of legal certainty.
Indeed, the VAT Directive establishes the principle that the right to deduct VAT must be exercised during the same period as that in which it has arisen, namely at the time the tax becomes chargeable (i.e. when the goods or the services are supplied).
Articles 180 and 182 of the VAT Directive however allow a VAT taxable person to make a deduction even if they did not exercise their right during the period in which the right arose, subject to compliance with certain conditions and procedures determined by national legislation.
Thus, the ECJ considers 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 deduction of the input VAT, by making them forfeit their right to deduct VAT, cannot be regarded as incompatible with the regime established by the VAT Directive provided that:
- The limitation period applies in the same way to analogous rights in tax matters founded on domestic law and to those founded on EU law; and
- It does not in practice render impossible or excessively difficult the exercise of the right to deduct VAT.
According to the ECJ, the adjustment mechanism provided for by the VAT Directive is not intended to apply where the taxable person failed to exercise the right to deduct VAT and has lost that right as a result of the expiry of a limitation period. The absence of fraud, abuse of rights or detrimental impact on the tax revenue of the Member State cannot justify a taxable person being able to circumvent a limitation period.