Weekly VAT Update – 25 July 2018
The European court holds that in four cases the restriction of the right to deduct input tax is unlawful
The Court has released judgments in four cases relating to the general principles of VAT. They are referred to as Intreprinderea, Volkswagen, Biosafe and Zebrus. Each one starts by stating that it is a fundamental principle of the common system of VAT that a taxpayer has a right to deduct the VAT due or paid on goods and services received as inputs from the VAT they are liable to pay on their taxable supplies of goods and services (outputs).
That fundamental right exists even if the taxpayer has failed to comply with some of the formal regulatory requirements, which are merely there for the purposes of control. The Court said that penalising the taxpayer for failing to comply with the obligations relating to accounts and tax returns by denying the right to deduct goes further than necessary. This is because EU law does not prevent financial fines in accordance with the seriousness of the breach. The cases will affect the particular states involved in these four cases. The states had imposed restrictions on the right to deduct which were held to be inappropriate, but unlikely to affect the UK.
The European court overturns a major retriction on VAT recovery in Portugal
The case concerns a developer of two large buildings. While most of the space in the properties was leased fairly quickly, two years after completion there were still parts of each building which remained vacant. The developer appears to have done everything possible to let the remaining space, including reducing the rent and offering incentives. There was plenty of evidence of the clear and continuing intention to rent the remaining space. However, under Portuguese VAT law, if a building or part of a building remains empty for more than two years, then owning that building (or part of a building) is not an economic activity. Therefore, any input tax on purchase or development is clawed back. So the Portuguese authorities attempted to collect in excess of €1 million from the developers – presumably a proportion of the VAT recovered on the construction.
Unsurprisingly, the Court concluded that the key test for VAT recovery was the intention of the taxpayer when he incurred the costs. The Court said that the authorities could not impose any restriction on recovery based on time limits or other events, providing the taxpayer’s intention remained in place, and the original intention was reasonable. Interestingly, the Portuguese state attempted to get the court to limit the impact of its decision. It agreed that there would be no retrospective application, which the Court refused. The Court suggested that there may be a large amount of Portuguese VAT that has been restricted in this way.
Apparently, other EU member states have similar provisions which may well now be open to challenge. Closer to home, this case once again highlights HMRC’s policy on abortive costs. The Revenue makes it clear that the key tests are around the intention of the taxpayer at the time the costs are incurred. While the intention to make taxable supplies may never be realised, this does not automatically prevent VAT recovery on costs.
JDI International denied £5.5 million input tax recovery
JDI acquired machinery in the UK for oil exploration. It leased it to a group company free of charge. It attempted to recover input tax on the basis that the machinery was for its spare parts business. However the Upper Tribunal did not accept that argument and denied the input tax recovery.