Invalid invoice… reverse charge VAT… input VAT recoverable?
Earlier this month, in a decision handed down from the Court of Justice of the European Union (“CJEU”), it was decided that VAT was irrecoverable where an incorrect invoice was issued. The ruling in PORR Epitesi Kft (“PORR”) was that the right to deduct VAT was lost where a normal invoice was issued, when the “reverse charge” procedure should have been followed.
In light of the proposed introduction into UK legislation of the Construction Services Domestic Reverse Charge (“CSDRC”), which we discussed in a previous article, this Hungarian case becomes even more relevant. This is by reason of the CSDRC requiring recipients, rather than suppliers of construction services, to account for VAT due as from 1 October 2019.
In this case, it was decided that PORR could not recover VAT on invoices received.
The appeal was dismissed.
In this case which had been referred to the CJEU, the recovery of Hungarian VAT was sought from three suppliers who had helped in the construction of a motorway. PORR paid VAT in full on invoices received and sought deduction of the amounts as input VAT.
The Hungarian tax authority (NTCA) considered that a domestic reverse charge should apply as the services related to construction activities. It therefore did not refund the claim, which PORR had submitted.
This had not resulted in any double taxation, as PORR had argued. The NTCA had granted PORR the right to deduct such VAT under the reverse charge procedure, had the invoices been treated correctly.
Even though the NTCA maintained that the suppliers could be requested to correct the invoices issued, PORR observed that the possibility of such a correction happening was unlikely. This was due to self-corrections not being permitted under national law, following an inspection having been undertaken in accordance with Hungarian VAT legislation.
Questions put to CJEU
The two questions put to the CJEU by Hungary’s Administrative and Labour Court was whether, in circumstances not involving tax evasion, the principles of proportionality, fiscal neutrality and effectiveness prevent national legislation which refuses the right to deduct VAT in these circumstances.
It was firstly held that the right to deduct VAT was integral part of the VAT system which cannot be restricted.
The judgement further specified that under the “reverse charge” regime, where and when it is operated correctly, no VAT payment can arise between the supplier and recipient of the services. Assuming that the recipient’s supplies are wholly “VATable”, no payment is made to the tax authorities. Accordingly, in relation to economic activities:
“… whatever their purpose or results, provided that they are, in principle, themselves subject to VAT, [they] are taxed in a neutral way.”
Since PORR had not adhered to the rules regarding the “reverse charge” when paying the net and VAT amounts to the suppliers of services, who had erroneously charged VAT when it should not have done so, the additional amount paid was seen not to be “VAT”. The right of deduction can only be claimed in instances where the VAT is due.
In this instance, as it was not due, the right of deduction was not available to PORR.
Finally, the CJEU held that where VAT has been paid by the supplier, and the reimbursement of the VAT by the supplier to the recipient is impossible or excessively difficult e.g. where the supplier has gone insolvent, the principle of effectiveness may require that the recipient of the services concerned be able to address the recipient’s application for reimbursement to the tax authorities directly.
Who is potentially affected?
In advance of the CSDRC being introduced on 1 October, we strongly recommend that all contractors and subcontractors operating in the construction industry ensure they have a clear understanding of the rules. This is something we would be pleased to assist you with.
Shortly after 1 October, in the event of an invoice being raised by a subcontractor and paid by you, including VAT where it should not have been, for services provided falling under the “reverse charge” regime, HMRC is likely to disallow input tax recovery where an incorrect invoice is raised.
You will then have the unenviable task of seeking recovery from the subcontractors of the 20% payment paid in error. As explained earlier, HMRC will withhold this repayment of “VAT” on the grounds that the “right of deduction can only be claimed in instances where the VAT is due”.
For more information, please get in touch with your usual BKL contact or use our enquiry form.