EU Judgement supports VAT neutrality principle

The European Court of Justice has provided its judgement on 12 July in relation to a Bulgarian tax office disallowing input VAT deduction.

The judgement, although not clearly definitive, opens the door for businesses to appeal against tight rulings precluding VAT neutrality. This can be the case when VAT accounting has been submitted late, because of circumstances, and input VAT recovery has been disallowed.

The particulars relate to a Bulgarian company, EMS, purchasing lorries from a Spanish company, Marcotran International Transport, in November 2008. EMS had not been EU VAT registered. EMS did however apply for VAT registration in late December 2008 and were officially registered on 12 January 2009. EMS had required to VAT register in order to account for the EU acquisition of the goods. They accounted for output (acquisition) VAT of BGN 230k approximately belatedly in June 2009. The Bulgarian tax office disallowed input VAT deduction on this acquisition on the basis that it had exceeded a 4 month time limitation period laid down in Bulgarian VAT law. The company also had to pay default interest on the late submission of the VAT of BGN 18k.

The ECJ position supports businesses in certain circumstances in respect to time limitation periods, so that they are treated fairly under the principle of neutrality, but at the same time being subject to any proportionate interest penalties applicable.

Whether EU Member States will amend their legislation is another matter, but the judgement represents a step forward for businesses when they unwittingly walk into a minefield of VAT non-neutrality. The inability to recover input VAT is the most expensive VAT penalty that can be imposed. Too often it comes as an unwelcome shock long after the trading has taken place.

This situation occurs regularly with companies trading outside of their own home state in a non-resident capacity. While this ECJ judgement could provide legal precedent for businesses to protect themselves in future unforseen disaster scenarios, it would seem prudent to avoid the problem in the first place. This can be done by taking professional advice or researching information about the particular EU country concerned.