Recovery of overcharged output VAT

In P GmbH v Finanzamt Osterreich (Case C-378/21), the CJEU held that the obligation to pay the full amount of VAT incorrectly shown on an invoice does not apply where the recipient is exclusively a final consumer who is not entitled to deduct VAT. The Court held that there is no risk of a mismatch between output VAT and input VAT in such cases that requires output VAT incorrectly included on an invoice to be collected.

A further decision in this case on referral back from the Austrian courts, Finanzamt Osterreich v P GmbH (Case C-794/23), has now provided further guidance on the application of this approach. In particular, the Court has held that the principle does not apply where the recipients of the supplies are exempt from VAT (rather than non-taxable) and that, where there is a mixture of taxable and non-taxable recipients, it may be appropriate to use an estimate of the proportions of each to determine the amount of VAT payable.

Background

When the original case returned to the Austrian courts, the domestic court started from the premise that almost all the customers of P GmbH (which supplied admission to an indoor playground) were non-taxable, but since it could not be ruled out that some customers had recovered input VAT, then an estimated 0.5% of the invoices should be treated as made to taxable persons giving rise to a risk of tax loss.

The Austrian tax authorities appealed on the basis that the CJEU judgment had been provided on the basis that the supplies had been made “exclusively” to final consumers and it could not be assumed that a split could be made on the basis of an estimate between taxable and non-taxable customers. Since it could not be said that there was no risk of tax loss, the Austrian tax authority argued that P GmbH should remain wholly liable to pay the incorrectly charged output VAT. In this situation, the Austrian courts decided to refer the matter back to the CJEU for further clarification.

CJEU decision

The Court noted that the basis for the original decision was that Article 203 (which requires payment of VAT appearing on a VAT invoice) applies only where there is a risk of tax loss (for example, where the recipient has recovered that amount as input VAT). Accordingly, where the invoice is provided to a “final consumer who does not have the right to deduct input VAT”, no risk of tax loss arises and the taxpayer is not required to account for any output VAT incorrectly shown on the invoice.

On referral back, the Court was asked whether it was possible to apply the principle where the supplies were not “exclusively” to final consumers but also to taxable persons. Contrary to the arguments of the Austrian tax authorities, the Court confirmed that the principle did also apply where output VAT was incorrectly charged to non-taxable persons, even if the supplier also supplied those services to other taxable persons.

Secondly, the Court was asked if the same principle applies where the recipient is exempt from VAT. The Court has effectively answered that this approach is limited to customers who are non-taxable. The Court indicated that if there is any chance that an invoice could be used to obtain a deduction, then the principle does not apply and “it is conceivable that complex circumstances and legal relations could prevent the tax authorities from identifying, in sufficient time, the grounds which preclude the exercise of a right to deduct”. Therefore, the concept of “final consumer” should be construed strictly and does not include taxable persons who do not have a right to deduct.

In principle, the Court noted that the risk of tax loss should be determined on the basis of the specific invoice. However, where that is not possible, the Court held that it was for national tax authorities to determine the burden of proof and the criteria to be used in distinguishing between invoice to taxable and non-taxable persons. However, such procedural autonomy must respect the principles of equivalence and effectiveness. Therefore, the domestic rules must ensure that it is not “practically impossible” for a taxpayer to exercise their rights. In this context, the Court indicated that an approach based on a calculation of the proportion of invoices issued to non-taxable persons, based on all the relevant circumstances including the nature of the service, the way in which it was invoiced and supplies and any statistical information concerning recipients that are available to the supplier, would be an appropriate approach.

Comment

These decisions of the CJEU would appear to call into question the UK rules in VATA 1994 Sch 11 para 5 which specifically provide that any amount charged as VAT on an invoice is recoverable as a debt due to the Crown whether or not VAT was actually chargeable. Restricting the application of this rule in circumstances where the supplies are to final consumers not entitled to input VAT recovery (on the basis that there is no risk of a mismatch between the output VAT and input VAT) also appears to shortcut the question of unjust enrichment. And whilst the decisions of the CJEU on the scope of Article 203 is no longer be binding in the UK, it will still be of persuasive value.