The Reemtsma principle: incorrect place of supply

The CJEU has held that the principle that the recipient of a supply who has been incorrectly charged VAT may recover that VAT from the national tax authority where to recover that amount from the supplier is impossible or excessively difficult applies equally where the VAT was incorrectly charged due to a misapplication of the place of supply rules: HUMDA Magyar Auto-Motorsport (Case C-397/21). It made no difference to the application of this principle that the supply fell outside the scope of the Member States’ VAT system entirely.

However, there is a suggestion that the CJEU may have reached a different conclusion if the taxpayer had not been fully taxable – perhaps on the basis that it would not have been in a position to recover the VAT it should have been charged in the jurisdiction where the supply actually took place.

Background

This Hungarian case concerned supplies made to HUMDA in connection with a project for the construction of Hungary’s pavilion at the World Expo held in 2015 in Milan. HUMDA was charged and paid VAT in connection with these supplies and the supplier accounted for the output VAT to the Hungarian tax authorities.

It subsequently became clear that these supplies should have been treated as outside the scope of Hungarian VAT as the supply as the supplies related to property in Italy. In the meantime, the supplier of the services had been liquidated and HUMDA was therefore unable to recover the incorrectly levied VAT from its supplier. Instead, it turned to the Hungarian tax authorities and sought to recover the VAT overpaid together with interest. The Hungarian tax authorities refused that claim and, in the resulting appeal, the Hungarian courts referred questions to the CJEU concerning the principles under which the recipient of a supply may recover overpaid VAT directly from the tax authorities.

Decision of the CJEU

HUMDA was seeking to rely on the earlier CJEU case law in Reemtsma (Case C-35/05) that where a VAT refund becomes impossible or excessively difficult, in particular in the case of the insolvency of the supplier, the principles of VAT neutrality and effectiveness require a Member State to provide for the possibility for the recipient to recover that VAT, which has been incorrectly invoiced and paid, directly from the tax authorities.

The Hungarian tax authorities sought to distinguish that case law, however. In particular, they argued that, since in this case, the provision of services did not fall within the scope of Hungarian VAT at all, there was no obligation to refund the VAT.

The CJEU has rejected that distinction. The principle of neutrality lies at the heart of the VAT system and requires that a taxable person should be able to deduct VAT charged to it. In the absence of abuse or fraud, there is no risk of loss of tax revenue in a case such as this and the Reemtsma principle was equally applicable. (In fact, the CJEU pointed out that the Reemtsma case concerned a very similar situation.) It made no difference that the supply was outside the scope of the Hungarian VAT system.

On the question of interest, the Court held that the principle of fiscal neutrality requires that a financial loss incurred on account of a refund of excess VAT not made within a reasonable time should be compensated by a payment of interest. Accordingly, HUMDA was entitled to a payment of interest to the extent that the Hungarian tax authority did not repay the VAT within a reasonable period of time after a claim was brought.

Comment

The decision is another confirmation of the principle that a taxpayer should be able to recover overpaid VAT from the tax authority where it is impossible or excessively difficult to recover those amounts from the supplier. And that interest should be payable where that refund is not made within a reasonable amount of time.

Whilst the case seems to be a straightforward application of the Reemtsma principle, the Court did make its conclusions concerning the right to repayment of the overpaid VAT by HUMDA subject to the “preliminary consideration” that “HUMDA benefited from a right of deduction in respect of VAT invoiced and paid in error”. It is not entirely clear why HUMDA’s right to recover the VAT overcharged should have been subject to this condition (if no VAT was chargeable, it should not have paid any – for example, if HUMDA had not been a fully taxable person). However, perhaps it suggests that should HUMDA not have benefited from the right of deduction in Italy, the CJEU may have viewed this as a "windfall" as a consequence of the incorrect decision of the supplier to charge Hungarian VAT instead of Italian VAT and its subsequent insolvency. It is uncertain whether in this instance the absolute loss of tax revenue (albeit in a different Member State) would have impacted on the decision of the CJEU.