The VAT capital goods scheme and liquidations

The CJEU has held that an adjustment must be made under the capital goods scheme where a company goes into liquidation and ceases to make taxable supplies: UAB ‘Vittamed technologijos’ v Valstybinė mokesčių inspekcija (Case C-293/21). The capital goods scheme provisions overrode the general principle that input VAT which is deducted initially on the basis of intended supplies remains deductible even where those supplies do not actually take place.

The decision highlights the risks of ceasing to trade on assets which are subject to the capital goods scheme, where those assets are not disposed of by way of taxable transactions in the course of the liquidation.

Background

UAB was a Lithuanian company engaged in technical scientific research and the practical applications thereof that incurred costs and input VAT in acquiring goods and services for a project funded by the EU, the objective of which was to develop a prototype of a medical diagnostic and monitoring device and subsequently to place that device on the market. The project was completed in December 2013, but no sales of the medical prototypes were ever made. As a result, the company was placed into liquidation in 2015.

The Lithuanian tax authorities then sought to adjust the VAT deductions that had been claimed by UAB. This was on the basis that the input VAT fell within the scope of the capital goods scheme (Articles 184 to 187 of the VAT Directive) and this required adjustments to be made where it became clear that the input VAT was no longer attributable to the intended taxable supplies (here the intended sales of medical equipment that did not take place).

UAB appealed, pointing to the case law of the Court that indicated that where costs are incurred in the preparation of an economic activity, input VAT may be deducted even where that economic activity does not in the event take place (in particular, Ryanair (Case C 249/17) and Ghent Coal Terminal (Case C 37/95).

CJEU decision

The Court noted the principle that the right of deduction, once it has arisen, is retained even if, subsequently, the intended economic activity was not carried out and, therefore, did not give rise to taxable transactions. However, this principle is modified in the case of the adjustment mechanism provided for in Articles 184 to 187 of the VAT Directive.

In the context of the capital goods scheme, the Court pointed out that Article 184 defines the obligation to make a VAT adjustment as broadly as possible. The taxpayer relied on the decision in Imofloresmira (Case C 672/16) indicating that the right to deduct input tax is retained where the taxable person has been unable, for reasons beyond his control, to use the goods or services giving rise to the deduction for taxable transactions despite an intention to use them for taxable purposes. The CJEU has, however, distinguished the facts of that case (where there was simply no use despite an ongoing intention to use) and cases (such as HF v Finanzamt Bad Neuenahr-Ahrweiler (Case C 374/19)) where there is a change of intention, even if that change is not voluntary.

If the taxable person no longer plans to use the goods or services concerned in order to carry out taxed output transactions or uses them to carry out exempt transactions, “the close and direct relationship which must exist between the right to deduct the input VAT paid and the carrying out of the planned taxed transactions is broken, and it must result in the application of the adjustment mechanism provided for in Articles 184 to 187 of the VAT Directive”.

In this case, it was clear that UAB no longer had any intention of using the capital goods for the purposes of making taxable supplies and therefore the adjustment mechanism in Articles 184 to 187 of the VAT Directive applied. It made no difference to the analysis that the placement of UAB in liquidation and the abandonment of the planned taxable economic activity might be entirely justified in the circumstances by the losses made by UAB.

Of course, as the Court noted, in many cases the placing of the taxable person concerned in liquidation nevertheless results in taxed transactions being carried out by the sale of those assets. But in this case, those assets remained unsold.

Comment

It is interesting to note that, in the absence of the application of the capital goods scheme, the input VAT incurred by UAB would, presumably, have remained deductible. It incurred the input VAT in connection with intended future taxable supplies and the fact that those supplies did not materialise (since the product turned out to be unviable) would not affect that initial deduction.

The application of the capital goods scheme rules to the situation has produced an entirely different outcome for the taxpayer in this case. However, the Court has stressed that is the purpose of the capital goods schemes rules – to ensure that the close and direct relationship between input VAT and actual use in such cases is retained.