Incorrectly invoiced VAT can still be revised once an assessment is final
Correcting invoices is a common practice. An invoice must be corrected if local VAT has been invoiced and new facts later show that, for example, the VAT reverse charge mechanism was applicable. Can a taxable person who paid the incorrectly invoiced VAT reclaim this VAT from the tax authorities if the assessment had already been finalised? The EU Court of Justice has recently ruled on this question (SC Terracult SRL, C-835/18, 2 July 2020).
In our opinion, the ruling of the European Court has positive practical consequences. We will briefly discuss the case and the possible consequences for your business in this article.
Facts in this case
The taxable person is based in Romania and has supplied rapeseed to a German entrepreneur. The taxable person applied the 0% VAT rate for intra-Community supplies to this order. However, the taxable person was unable to prove that the rapeseed had left Romania. The Romanian tax authorities therefore claimed this was a local supply, subject to Romanian VAT at the general VAT rate. The taxable person did not dispute this and, in accordance with this classification, corrected its invoices and paid the assessment.
New facts have since shown that a local VAT reverse charge mechanism is applicable here. The taxable person has therefore applied the VAT reverse charge mechanism and reclaimed the VAT paid. However, the Romanian tax authorities are of the opinion that the assessment had become definitive and that the VAT will therefore not be refunded to the taxable person.
The EU Court of Justice’s ruling
The EU Court of Justice had to rule on this situation and determine whether the taxable person could recover the (incorrectly) paid VAT. The European Court ruled that a taxable person will generally not be required to pay this VAT if it is clear that VAT is not due. The VAT system is intended to be ‘neutral’ and VAT should not be a cost for taxable persons with a full right to deduct VAT. If the issuer of the invoice has eliminated the risk of loss of tax revenue, good faith cannot be a condition for the issuer of the invoice to revise the incorrectly invoiced VAT.
However, Member States may impose certain conditions to prevent fraud and abuse. In addition, Member States may set a reasonable time limit in order to ensure legal certainty. A relatively short formal objection or appeal period (e.g. six weeks in the Netherlands) will normally not qualify as a reasonable period.
This is mainly a practical ruling. In our opinion, the EU Court of Justice hugely values the principles of neutrality and effectiveness. We see this as a confirmation of the trend in which material reality prevails over formal aspects. In addition, this ruling emphasises the importance of determining your VAT position and a decent administration, in order to be able to substantiate the material reality. It is important for Dutch practices to be able to substantiate the material reality, because once an assessment is final, the Dutch tax authorities will treat a correction request as 'ex officio'.
Do you have any questions, or would you like to discuss your VAT position? Please contact Barthold Bergman (+31 (0)6 15 48 68 85) or Jayant Rakhan (+31 (0)6 12 02 41 49) from our VAT & Customs Advisory team.