Tax Alert

Tax Alert

CJEU ruling on incorrect application of reverse charge VAT


Recently, the Court of Justice of the European Union (“CJEU”) delivered two judgements related to reverse charge VAT cases in Hungary (cases no. C-564/15 “Farkas” and C-691/17 “PORR Építési Kft.”)

In those cases, taxpayers received invoices which were issued in accordance with the general VAT rules (i.e. the supplier charged VAT in its invoices).The taxpayer receiving the invoices deducted the VAT charged. The Tax Authority carried out a tax audit at the recipient of those invoices. Taking the view that the underlying transactions fall under the scope of reverse charge VAT, they denied the deduction of input VAT.(The fulfilment of the transactions was not questioned and there was no indication of tax fraud.)

During its procedures the CJEU considered the following questions:

  • The practice of the Hungarian Tax Authority is to deny input VAT at the purchaser of goods (or recipient of a service) in situations in which the seller of the goods (or supplier of the service) charges VAT in its invoices (and declares and pays the VAT to the State Treasury), even though the reverse charge mechanism applies to the transaction. Is this incompatible with EU law?
  • Is the Tax Authority obliged to investigate whether the issuer of the invoice is able to revise that invoice and pay back the VAT to the purchaser (recipient) before denying the right of deduction of input VAT at the purchaser (recipient)?

According to the CJEU, it is not in contravention of EU law if the tax authority makes an assessment regarding the application of the reverse charge mechanism against a taxpayer, even if the State Treasury suffered no shortage in relation to the transaction. Namely, the taxpayer receiving the invoices in question does not have the VAT deduction right because the sum payed to the supplier cannot be seen as tax to be paid by the supplier to the State Treasury.

However, the principles of fiscal neutrality and effectiveness require that the taxpayer, having incorrectly deducted the VAT, is able to exercise its right to reimbursement of the unduly charged VAT directly from the State Treasury if reimbursement from the supplier becomes impossible or excessively difficult (due to, in particular, insolvency or liquidation of the supplier).

The Tax Authority is not obliged to investigate the ability of the supplier to revise the VAT treatment of the transaction. Accordingly, the possibility for reimbursement from the State Treasury should be considered by the purchasers (recipients) subject to such assessment by the Tax Authority, and such reimbursement may be requested in a separate procedure.

In accordance with these judgements, in cases of Tax Authority assessments where the correction of the invoice was not possible because of the insolvency or liquidation of the supplier, it is worth investigating if there is a possibility for reimbursing the VAT directly from the State Treasury.

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