EuG endorses bringing forward input VAT deduction

Factual background and ECruling

A Polish company received supplies in a specific tax period but did not receive the corresponding invoices until the following tax period. It applied for a tax ruling to the effect that it could claim input VAT deduction in the tax period in which the supplies were received, provided that the invoice was available by the time the VAT return for that tax period was submitted.

After the Polish authorities rejected this, the EC approved the input VAT deduction upon referral by the Polish court dealing with the matter. It reiterates the well-known principles according to which the right to input VAT deduction accrues when the output VAT accrues, i.e. when the supply is received. The prerequisite for exercising the right to deduct input VAT is possession of the invoice. However, if the taxpayer receives the invoice in a tax period after the supply has been provided but before the VAT return has been submitted, receipt of the invoice has retroactive effect to the period in which the supply was received. Otherwise, the taxpayer would temporarily bear the burden of VAT, which would be incompatible with the principles of neutrality, proportionality and immediate input VAT deduction.

The EC also draws a parallel with the correction of an invoice that did not initially entitle the taxpayer to deduct input VAT due to missing mandatory information: under certain conditions, the correction has retroactive effect, which must therefore also apply to an invoice that was initially issued too late.

Impacts

This decision turns the established approach to VAT compliance on its head: until now, input VAT deduction has always been claimed for the tax period in which the invoice is available. However, the reasoning of the EC is quite convincing, especially with regard to the right to immediate deduction of input VAT. The ECJ decision "Grundstücksgemeinschaft Kollaustraße", C-9/20 of 10 February 2022 on taxations based on received payments also shows that the synchronisation of the accrual of output VAT and input VAT is of great importance. The ECJ ruled here that in the case of taxation based on received payments, where output VAT is only incurred when the payment is received, the input VAT deduction must be claimed in the same tax period. The ECJ rejected the previous German administrative practice, according to which input VAT should be claimed in the period in which the supply was received.

Taxpayers can now refer to the ECJ ruling in their compliance practice, but must disclose this to the tax office. On the new advance return form, a 2 should be entered in line 55 ("a legal opinion deviating from the administrative opinion is deliberately taken") and an explanation should be attached. It is currently unclear whether receipt of the invoice also has a retroactive effect on the tax period for the service provision if there is an individual or permanent extension of the deadline, or if the deadline for submitting the advance return is exceeded without an extension.

The technical implementation of this change is likely to be challenging, particularly with regard to accounting. However, once "almost real-time reporting" based on e-invoicing is implemented, this problem will be alleviated, as tight deadlines apply to invoicing and transaction-based reporting.

Author: Nadia Schulte