Input VAT and destroyed goods

The CJEU has held that it is not necessary for a business to adjust its input VAT recovery on goods it acquired but later wrote off as no longer suitable: Balgarska telekomunikatsionna kompania’ EAD v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Sofia (Case C-127/22). The situation falls within the derogation for goods which have been destroyed and it does not matter that the destruction occurs under the control of the taxable person, rather than as a result of force majeure.

Background

The case concerned a Bulgarian telecoms business, BTK, that acquired various goods both for resale and for use in the services it provided. It deducted input VAT on those purchases. Later it wrote off various of those goods which were no longer considered suitable for use or resale for various reasons, including wear and tear, defects or their obsolete or unsuitable nature. Under Bulgarian rules, this required BTK to remove the assets from its balance sheet. In practice, some of those goods were later sold as scrap and some destroyed.

The writing off of the goods led to adjustments involving repayment of input VAT originally deducted on their acquisition under the Bulgarian rules. BTK appealed against that adjustment, contending it was contrary to the provisions of the Principal VAT Directive.

Articles 184 and 185 of the PVD deal with the adjustment of input VAT recovery where there is a change in the factors used to determine the original amount deducted. However, Article 185(2) provides that no adjustment should be made “in the case of destruction, loss or theft of property duly proved or confirmed”. BTK argued that this derogation applied in their case and the Bulgarian rules were contrary to this provision.

Decision of the CJEU

The CJEU noted that some of the goods had been disposed of as scrap (subject to VAT) after they had been removed from BTK’s balance sheet. In these circumstances, the Court has held that there was no “change in the factors” used to determine the input VAT deduction. It made no difference that BTK’s business did not normally involve the sale of goods as waste or that they were sold at a reduced value. The goods were sold as part of taxable transactions subject to VAT and as such were used in the course of an economic activity. The right to deduct the original input VAT was unaffected therefore.

As regards the goods that were destroyed, it was clear that this did involve a change in the factors used to determine the initial input VAT recovery for the purposes of Article 184 and 185. But did the situation fall within the scope of Article 185(2) for the destruction or loss of goods? The Hungarian rules appear to have limited the application of Article 185(2) to cases where the destruction was beyond the control of the taxable person, such that BTK was not able to benefit from this exception. The CJEU has held, however, that there is nothing in the wording of Article 185 nor in the preparatory work to that Article that indicates it should be limited to the destruction of goods that is totally beyond the control of the taxable person.

Accordingly, the Court has held that the deliberate destruction of goods following a finding that they are no longer suitable for use falls within the exception in Article 185(2) and does not require any adjustment to the input VAT originally recovered, provided that the taxable person can “duly prove or confirm” that destruction and provided that “the destruction is decided upon because of the objective loss of use of those goods in the context of the taxable person’s usual economic activities”.

Comment

The decision of the Court is clearly in line with the fundamental application of the VAT system, which is to relieve taxable persons of the burden of VAT incurred in the course of their economic activities. It should not matter that goods acquired for use in that taxable business become no longer serviceable for whatever reason and are destroyed.

The UK VAT Regulations 1995 which provide for the adjustment of input VAT on change of use do not specifically deal with the position on the loss or destruction of goods. However, it is understood that HMRC would not normally expect any adjustment in these circumstances (or indeed for an output VAT charge under VATA 1994 Schedule 4 paragraph 5 to arise where goods are disposed of in these circumstances provided that there is evidence of the destruction.)