CJEU clarifies Dutch rules on VAT deduction via the adjustment mechanism
The Court of Justice of the European Union (CJEU) issued a decision on 7 July 2022 concluding that where a taxpayer fails to exercise its right to claim input VAT within the applicable domestic statute of limitations period, the domestic rules governing VAT recovery cannot be used to take the deduction, even if the taxpayer’s inaction was inadvertent. The Dutch Supreme Court confirmed the CJEU decision on 16 September.
Facts of the case
The case before the CJEU involved an entrepreneur who purchased 10 plots of land in 2006 on which VAT was charged, but the entrepreneur did not claim an input VAT deduction on the purchase. The entrepreneur intended to develop the land for the construction of mobile homes for resale, but the planned development was subsequently abandoned due to unfavourable economic conditions.
In 2013, the entrepreneur resold two of the 10 plots back to the original seller and charged VAT on the sale but did not remit that VAT to the Dutch tax administration. In 2015, the tax administration imposed an additional assessment for the VAT due. The entrepreneur objected to the assessment, taking the position that the undeducted VAT from 2006 could be used to offset the VAT due on the additional assessment. The five-year statute of limitations to claim a refund of VAT had expired, so it was no longer possible for the entrepreneur to claim the undeducted VAT from 2006.
Decision of the CJEU
In reaching its decision, the CJEU looked at articles 167 and 179 of the EU VAT directive, which provide that the right to deduct VAT generally must be exercised during the same period in which the right arose, i.e., at the time VAT becomes chargeable, which is the time the goods or services are supplied.
The court held that a VAT-taxable person who failed to exercise their right to deduct VAT relating to the acquisition of goods or services before the expiration of the applicable statute of limitations period may be denied the possibility of subsequently taking that deduction via an adjustment at the time the goods or services are first used for the purpose of taxed transactions. This would be the case even if no fraud or abuse of rights is involved and/or no detrimental impact on the treasury has been established. The adjustment mechanism in the VAT directive does not create a right to a deduction but instead is designed to ensure that the deduction is accurate. The CJEU reiterated that the adjustment mechanism in the directive is not intended to apply where a taxpayer failed to exercise the right to deduct VAT and then forfeited that right because the statute of limitations period expired.
Entrepreneurs engaging in VAT able transactions should ensure they make input VAT claims to which they are entitled within the statute of limitations period; otherwise, they run the risk that the right will be forfeited.