Time Limit to exercise the Right to Deduct VAT
Standard rule
- Articles 167 and 179(1) of the VAT Directive regulate that the Right to Deduct VAT shall arise at the same time VAT becomes chargeable
- Article 178 requires that the Right to Deduct VAT can only be exercised if the taxable person holds an invoice (”shall” article)
Derogation allowed upon conditions determined by each Member State
- Article 180 provides that Member States may authorize the Right to Deduct VAT if ”Standard rule” has not or could not been followed
- Article 181: If a taxable person doesn’t have the correct invoice, Member States may allow them to deduct VAT related to their intra-Community purchases of goods.
- Article 182 regulates that Member States shall determine the conditions and detailed rules of this Derogation
Relevant articles in the EU VAT Directive 2006/112/EC
TITLE X – DEDUCTIONS – CHAPTER 1 – Origin and scope of right of deduction
Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.
CHAPTER 4 – Rules governing exercise of the right of deduction
Article 178
In order to exercise the right of deduction, a taxable person must meet the following conditions:
- (a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;
- (b) ….
Article 179
The taxable person shall make the deduction by subtracting from the total amount of VAT due for a given tax period the total amount of VAT in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178.
Article 180
Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179.
Article 181
Member States may authorise a taxable person who does not hold an invoice drawn up in accordance with Sections 3 to 5 of Chapter 3 of Title XI to make the deduction referred to in Article 168(c) in respect of his intra-Community acquisitions of goods.
- Article 168: In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
Article 182
Member States shall determine the conditions and detailed rules for applying Articles 180 and 181.
Article 222
For supplies of goods carried out in accordance with the conditions specified in Article 138 or for supplies of services for which VAT is payable by the customer pursuant to Article 196, an invoice shall be issued no later than on the fifteenth day of the month following that in which the chargeable event occurs.
For other supplies of goods or services Member States may impose time limits on taxable persons for the issue of invoices.
Principles applied in ECJ VAT Cases
- 1. The Right to Deduct VAT is a Fundamental principle ensuring VAT Neutrality
- The Right to Deduct VAT of taxable persons of VAT due or already paid on goods purchased and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by EU legislation
- The Right to Deduct VAT is an integral part of the VAT scheme and in principle may not be limited. In particular, it is exercisable immediately in respect of all the taxes charged on transactions relating to inputs
- The deduction system thus established is meant to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT
- C-324/11 (Tóth) – Right to deduct VAT if the business operator’s licence of the issuer of the invoice had been withdrawn – Paragraph 23, 24 and 25
- C-424/12 (Fatorie) – No deduction of VAT in case reverse-charge should have been applied – Paragraph 31
- C-590/13 (Idexx Laboratoires Italia) – Right to deduct VAT if substantive requirements are met – Paragraph 30 and 33
- C-518/14 (Senatex) – VAT deduction for non-compliant invoices – Paragraph 26 and 37
- 2. Member States can implement a limitation period to ensure legal certainty, expressed in a number of years
- Subject to the substantive conditions governing the right to deduct VAT being met – which is a matter for the referring court to verify – the application of national legislation cannot prevent … the exercise of the right to deduct VAT due on an intra-Community acquisition during the same period as that during which the same amount of VAT was calculated, without all the relevant circumstances being taken into account, including the good faith of the taxable person.
- Member States can provide, on grounds of legal certainty, for a 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 input tax, by causing him to forfeit his right to deduct, in so far as, first, that period applies in the same way to analogous rights in tax matters founded on domestic law and to those founded on EU law (principle of equivalence) and, second, that it does not in practice render impossible or excessively difficult the exercise of the right of deduction (principle of effectiveness)
- The Court has already held that the possibility of exercising the right to a refund of excess VAT without any temporal limit would be contrary to the principle of legal certainty, which requires the tax position of the taxable person, having regard to his rights and obligations vis-à-vis the tax authorities, not to be open to challenge indefinitely.
- The Court has also stated that it is compatible with EU law to lay down reasonable time limits for bringing proceedings, in the interests of legal certainty, which protects both the taxpayer and the authorities concerned. Such periods are not by their nature liable to make it virtually impossible or excessively difficult to exercise the rights conferred by EU law, even if the expiry of those periods necessarily entails the dismissal, in whole or in part, of the action brought
- C-81/17 (Zabrus) – Deduction of input tax on transactions that have been audited – Paragraph 38
- C-562/17 (Nestrade) – Refund of VAT; Incorrect VAT ID number – Paragraph 41 and 42
- C-835/18 Terracult – Correction of invoices for purchases subject to reverse charge after the assessment became final– Paragraph 32
- C-895/19 (A. (Exercice du droit à déduction)) – Timing of exercising right to deduct VAT on intra-community acquisitions of goods – Paragraph 50 and 51
- Company A in Poland carries out intra-Community acquisitions of goods for transactions subject to VAT. In some cases, A cannot declare the VAT due on these acquisitions within the required 3-month period, and has to correct the tax return later. Polish tax authorities disallow this, but the Polish court questions this rule.
- Since January 1, 2017, a new condition requires submission of tax return within 3 months from the end of the month in which the tax liability arose. Failure to meet this deadline means the input tax can only be deducted for the current period, burdening the taxpayer with VAT and potential interest payments. The law does not differentiate based on the taxpayer’s good faith.
- The ECJ states that national legislation cannot require VAT deduction on intra-Community acquisitions in the same tax period, as it goes against the VAT Directive.
- 3. Member States can not refuse Right to Deduct VAT for a period that has already audited
- The Romanian national legislation allows for a general limitation period of five years for the right to deduct VAT. However, in the event of a tax inspection, the right to correct VAT returns for the periods under inspection is restricted. This restriction, based on the principle of a single tax inspection and legal certainty, prevents taxable persons from correcting their VAT returns when they have been inspected by the tax authorities. This limitation may hinder the effectiveness of the legislation, as it can make it practically impossible for taxable persons to exercise their right to deduct VAT.
- 4, ECJ has not set a limitation period in number of years, but to be examined in the light of all the circumstances of the case
- C-284/11: Although such a limitation period cannot, as such, in practice render impossible or excessively difficult the exercise of the right to deduct, given that Article 167 and the first paragraph of Article 179 of the VAT Directive permit Member States to require taxable persons to exercise their right to deduct during the period during which their right has arisen, whether it is compatible with the principle of effectiveness must be examined in the light of all the circumstances of the case.
- C-332/15: The Court has ruled that a two-year time limit in Decree No 633 cannot make the right to deduct excessively difficult, as Member States can require the deduction to be exercised within the same period it arose.
- The referring court in Case C‑126/18 asked whether EU law, particularly the principles of effectiveness and equivalence, prohibits a Member State from imposing a five-year limitation period on claims for payment of interest on excess deductible VAT retained due to a provision of national law declared contrary to EU law. The Court has previously stated that reasonable time limits for bringing proceedings are compatible with EU law, in the interests of legal certainty. Allowing an application for the refund of excess VAT without any temporal limit would be contrary to the principle of legal certainty.
- C-284/11 (EMS-Bulgaria Transport) – Limitation period for the exercise of the right to deduct is permitted, unless it makes the exercise of this right impossible – Paragraph 53
- C-332/15 (Astone) – No right to deduct VAT in case of failure to submit returns – Paragraph 38
- C-533/16 (Volkswagen) – VAT may be deducted after expiry of the statute of limitation period
- C‑13/18 and C‑126/18 (Sole-Mizo) – Interest paid on VAT refund – Paragraph 52 – 60
- 5. The limitation period does not come into effect if there are alterations in the circumstances that originally led to the VAT deduction
- if there are changes in the circumstances that originally led to a VAT deduction, the time limit for claiming that deduction should not apply. In other words, if you’ve paid additional VAT to the state due to a tax adjustment and later corrected the initial invoices, you should still have the right to deduct that VAT, even if the time period specified by national legislation has expired
- 6. In VAT is paid twice, the recipient of the supply should still be allowed to deduct the input VAT.
- Decision C-314/17: The principles of fiscal neutrality and effectiveness of the common system of value added tax must be interpreted as precluding a Member State from refusing the recipient of a supply the right to deduct input value added tax where, in respect of one and the same supply, value added tax is levied on the supplier for the first time, given that it has mentioned it in the invoice which it has issued, and then a second time to the purchaser, in cases where national law does not provide for the possibility of correcting value added tax where there is a tax adjustment order.
- If you’ve paid VAT twice for the same transaction—once by the provider on their invoice and then again by the purchaser—the recipient of the supply should still be allowed to deduct the input VAT. This applies even if the national legislation doesn’t explicitly allow for adjusting the VAT in cases involving tax adjustment notices.
- 7. Member States can introduce formalities in case Reverse-Charge applies
- Where the reverse charge procedure applies, the Directive allows Member States to lay down formalities in respect of the rules governing the exercise of the right to deduct.
- However, the formalities thus laid down by the Member State concerned, which must be complied with by a taxable person in order for the latter to be able to exercise the right to deduct VAT, should not exceed what is strictly necessary for the purposes of verifying the correct application of the reverse charge procedure
- Such measures, however, must not go further than is necessary to attain such objectives and must not undermine the neutrality of VAT. The Right to Deduct VAT is to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements
- The position may be different if non-compliance with such formal requirements effectively prevents the production of conclusive evidence that the substantive requirements have been satisfied
- C-90/02 (Gerhard Bockemühl) – No invoice needed for VAT deduction – Paragraph 50
- C-146/05 (Collée) – Exemption for an intra-EU supply of goods may not be refused if it has taken place and proof of such a supply has not been provided in time – Paragraph 26
- C-95/07 & C-96/07 (Ecotrade) – A limitation period for the exercise of the right to deduct is allowed – Paragraph 63 and 66
- C-385/09 (Nidera Handelscompagnie BV) – Right to get a refund of VAT if the taxpayer was not identified as a taxable person for VAT purposes – Paragraph 42
- C-392/09 Uszodaépitö – Right to deduct & Retrospective effect of invoicing requirements – Paragraph 39
- C-284/11 (EMS-Bulgaria Transport) – Limitation period for the exercise of the right to deduct is permitted, unless it makes the exercise of this right impossible – Paragraph 62 and 71
- C-424/12 (Fatorie) – No deduction of VAT in case reverse-charge should have been applied – Paragraph 34 and 35
- C-590/13 (Idexx Laboratoires Italia) – Right to deduct VAT if substantive requirements are met – Paragraph 38, 39 and 40
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