Reemstma and limitation periods

The CJEU has held that a taxpayer is entitled to recover overpaid VAT from the tax authorities directly where it is unable to recover such overpaid VAT from its suppliers due to the operation of civil law limitation periods: Schütte v Finanzamt Brilon (Case C‑453/22). The situation fell within the principle set out by the Court in Reemstma and there would be no risk to the tax authorities in such a situation of double reimbursement.

The decision deals, in principle, with the question of VAT recovery where there may be different limitation periods for tax authorities and taxpayers to recover overpaid / underpaid amounts and provides a useful precedent in that area. However, clearly taxpayers would be better advised, where possible, to bring protective claims against their suppliers rather than rely on the Reemstma principle in such cases.

Background

Mr Schutte (S) was a farmer and forester. In 2011 to 2013, he purchased timber from various suppliers and subsequently resold it to his customers as firewood. He was charged VAT at the standard rate of 19%, but only charged VAT on his supplies at a reduced rate of 7%. Following an audit, the tax office concluded that S's supplies should not have been subject to the reduced VAT rate, but rather to the standard rate. On appeal, the local court held that S's supplies were indeed subject to the reduced VAT rate. However, it also took the view that the purchases made by S were also subject to the reduced rate of 7%. The deduction of input VAT by S was, as a result, reduced accordingly.

In order to implement that judgment, the tax office sought to recover the VAT due for the years 2011 to 2013, plus interest. Accordingly, S then contacted his suppliers for them to correct the invoices issued to him and repay him the overcharged VAT. All the suppliers invoked the limitation period provided for under German civil law and, accordingly, the invoices were not corrected and S did not receive repayments.

In those circumstances, S applied to the tax office to discharge the additional VAT recovery which had been sought from him together with interest. The tax office rejected that application and the matter was referred back to the courts who referred questions to the CJEU.  

In particular, the referring court had concerns that the suppliers could adjust the invoices without a limitation period and, consequently, do so at a date subsequent to S's reimbursement by the German tax authorities. Were those suppliers then to claim reimbursement of the overpaid amounts from those authorities, this would expose those authorities to the risk of having to reimburse the same amount of VAT twice.

Decision of the CJEU

The Court noted that this case raises the question in what circumstances the VAT Directive and the principles of VAT neutrality and effectiveness provide the recipient of a supply of goods with a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to his or her suppliers and paid by those suppliers to the public purse.

It is for the domestic legal system of each Member State, in principle, to determine the conditions under which improperly invoiced VAT may be adjusted. And the Court has accepted that a system in which, first, the supplier of the property who has paid the VAT to the tax authority in error may seek to be reimbursed and, second, the purchaser of that property may bring a civil law action against that supplier for recovery of the sums paid but not due, observes the principles of VAT neutrality and effectiveness. Such a system enables that purchaser, which bore the tax invoiced in error, to obtain reimbursement of the sums improperly paid.

However, the Court noted that where reimbursement of VAT becomes impossible or excessively difficult, in particular in the case of the insolvency of the supplier, the principle of effectiveness may require that the purchaser be able to recover VAT from the tax authorities directly (Reemtsma Cigarettenfabriken (Case C‑35/05)).

The Court considered that this principle equally applies where national rules result in refusing an input VAT reimbursement to a purchaser of goods in respect of which they were improperly invoiced and which they overpaid to their suppliers, where it is impossible for them to claim reimbursement from those suppliers on the ground of the civil limitation period.

In those circumstances, the Court has held that if it is impossible or excessively difficult for the purchaser to obtain reimbursement from the suppliers of the improperly invoiced and paid VAT, that purchaser, in the absence of any fraud, abuse or negligence on their part, is fully entitled to address their application for reimbursement to the tax authorities directly.

As regards the risks to the tax authorities of double repayments, the Court noted that such a risk is, in principle, precluded in these circumstances. The right to reimbursement of improperly invoiced and paid VAT must be refused if it is established that that right is relied on fraudulently or abusively. In this case, it was clear that S paid the suppliers the VAT amounts set out in the invoices and that those suppliers paid the VAT amounts to the tax authorities. As a result, were those suppliers to adjust those invoices and claim reimbursement of the overpaid VAT from the tax authorities, after the authorities have reimbursed the overpaid tax to S, in circumstances where those suppliers had first relied on the limitation period vis-à-vis S and thereby showed that they had no interest in rectifying the situation, those claims would have no other objective than obtaining an advantage contrary to the principle of fiscal neutrality. Such a practice would therefore be abusive within the meaning of the case-law cited above and could not result in reimbursement to that supplier, which precludes the risk of double reimbursement.

Comment

Ultimately the position was reached whereby the decision reaffirms the fundamental nature of the right to deduct input VAT in circumstances where, for reasons beyond its control, a taxpayer is unable to recover overpaid VAT from its supplier.

Clearly this may be the case where there are differences in the limitation periods for claims by tax authorities and contractual claims by taxpayers. What is not so clear is whether a taxpayer which had an opportunity to bring a civil repayment in time but failed to do so would be regarded as "negligent" in these circumstances so as to deny itself a right to claim directly from the tax authorities.

It does however seem peculiar for the German tax authorities to be pushing a taxpayer down the route of a civil claim and subsequent tax reclaims by vendors against the same tax authorities. In situations where a UK taxpayer has incorrectly recovered a sum purported to be VAT on an invoice which was not in fact VAT, HMRC via ESC 3.9 in the case of debt to the crown provisions (VAEC9670) or under their care and management of the Revenue powers in the case of TOGCs (VTOGC4150) will normally not seek to recover that overpaid VAT. It seems reasonable to assume the same powers would be used in the case of an incorrect VAT rate. HMRC's policy in this area under their care and management powers from the earlier quoted guidance is "to avoid unnecessary bureaucracy where no tax is at risk". That seems pragmatic and sensible in a scenario such as this one.

As regards the concern that the suppliers might seek to recover overpaid VAT where the German tax authorities had already refunded such amounts directly to S, it should be noted that HMRC take the view that the principle of "unjust enrichment" would prevent a claim by the suppliers in such circumstances (see VAT Notice  700/45 paragraph 5).