On 26 March 2021, the Dutch Supreme Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on whether the VAT rules relating to the adjustment of a deduction of input VAT apply where a taxpayer initially mistakenly forgot to take a deduction.
The case involves an entrepreneur who purchased 10 plots of land but did not deduct the input VAT incurred on the purchase. The entrepreneur intended to build mobile homes on the plots and then sell them, but this plan was never carried out due to economic circumstances. The entrepreneur eventually sold the land back to the original seller. However, the entrepreneur did not pay the VAT charged, taking the position that the VAT on the original purchase should be adjusted.
An additional VAT assessment and a penalty were imposed on the entrepreneur, against which the entrepreneur filed an objection. After the tax inspector upheld the additional assessment and fine, the entrepreneur appealed the decision to the District Court, which held that there is no right to deduct input tax if that right is not immediately exercised. The entrepreneur then filed an appeal to the Dutch Court of Appeal.
The Court of Appeal held for the entrepreneur, concluding that he was entitled to deduct the input VAT on the purchase in the year the land was put into use. The court noted that neither Dutch VAT law nor the EU VAT Directive indicate that an adjustment of a VAT deduction at the time goods and services start to be used is possible only in situations in which the actual use of the goods/services deviates from the intended use. The State Secretary of Finance disagreed, arguing that under the relevant VAT rules, the right to deduct input VAT must be exercised immediately rather than subsequently, and appealed the case to the Dutch Supreme Court.
The Supreme Court decided to refer the case to the CJEU due to the lack of clarity under EU law and Dutch VAT law. The Supreme Court specifically has asked the CJEU to rule on whether it is possible to deduct VAT that was mistakenly not deducted in a timely manner but that can be deducted at a later point in time when goods and services are put into use and whether it is relevant that there is no fraud or abuse of rights involved and that no detrimental consequences for the treasury have been established.
It is unclear when the CJEU will issue its decision in the case. If the CJEU concludes that it is possible for a taxpayer to subsequently deduct VAT that was inadvertently not deducted in a timely manner, affected entrepreneurs may have an opportunity to offset this VAT against VAT owed at a later stage.