VAT overcharged on invoices

The CJEU has held that the obligation to pay the full amount of VAT incorrectly shown on an invoice does not apply where the recipients are exclusively final consumers who are not entitled to deduct VAT: P GmbH v Finanzamt Osterreich (Case C-378/21). Agreeing with the opinion of the AG, the Court held that there is no risk of a mismatch between output VAT and input VAT in such cases that requires output VAT incorrectly included on an invoice to be collected.

The decision appears at odds with the UK legislation in VATA 1994 Schedule 11 which provides that any VAT shown on an invoice is recoverable as a debt owed to the Crown. The decision also appears to eliminate considerations around unjust enrichment in such cases and is contrary to the approach of HMRC in the UK.

Background

The facts of this case are simple. P ran a children’s playground. It charged a fee for entry and issued “small value” invoices to its customers, which appear to have been simple receipts but which were required to show the amount of VAT charged. During the period in dispute, P charged VAT at 20% when the correct VAT rate was a reduced rate of 13% for such supplies. When it discovered its mistake, it sought to recover the VAT overpaid, but the Austrian tax authorities resisted that claim on the basis that the VAT had been due as it was shown on the invoices and to repay the VAT in those circumstances would unjustly enrich P as it would be unable to repay the excess VAT to its customers.

The Austrian courts stayed P’s appeal against the refusal to repay the overpaid VAT and referred questions to the CJEU concerning the obligation to pay an amount shown as VAT on an invoice under Article 203 of the Principal VAT Directive (PVD), the need to correct invoices and the unjust enrichment defence.

Decision of the CJEU

Article 203 simply provides that “VAT shall be payable by any person who enters the VAT on an invoice”. On this basis, the Austrian tax authorities contended that the VAT paid by P had been due to them.

The Court, however, agreed with the analysis of the AG that the purpose of Article 203 is to eliminate the risk of loss of tax revenue which might be entailed by an unjustified deduction being claimed by the recipient of an invoice. In other words, if VAT was shown on a VAT invoice provided to a taxable person, then that VAT must be paid as otherwise there would be a mismatch between the amount of VAT recovered by the recipient and the amount of VAT paid by the supplier.

However, if it could be shown, as in this case, that all the recipients of the supply were final consumers, then the position was different as there was no risk of any loss of VAT. In circumstances where the recipients of the supply are exclusively final consumers, the Court has held that Article 203 does not apply.

Since the Court had held that there was no obligation to pay the excess VAT shown on the invoice, it was unnecessary for the Court to consider the questions referred to it concerning the defence of unjust enrichment and the ability to adjust VAT invoices.

Comment

The decision of the CJEU would appear to call into question the UK rules in VATA 1994 Sch 11 para 5 which specifically provide that any amount charged as VAT on an invoice is recoverable as a debt due to the Crown whether or not VAT was actually chargeable. Restricting the application of this rule in circumstances where the supplies are to final consumers not entitled to input VAT recovery (on the basis that there is no risk of a mismatch between the output VAT and input VAT) also appears to shortcut the question of unjust enrichment. And whilst the decision of the CJEU on the scope of Article 203 is no longer be binding in the UK, it will still be of persuasive value.

AG opinion

It is also worth noting that the decision of the CJEU in this case is short and limited to the application of Article 203 in cases exclusively concerning final consumers. However, the AG went on to consider a number of additional points of interest.

Firstly, the AG considered that if the risk of tax loss for the tax authorities could not be ruled out (because supplies may have been made to taxable persons), the position would be different and Article 203 would apply. In these circumstances, the AG opined that it may be necessary to make an apportionment based on an estimate of the proportion of supplies to taxable persons.

Secondly, turning to the question of unjust enrichment, the AG noted that the CJEU has already held that unjust enrichment does not automatically arise where excess VAT is passed onto the customer, since the supplier may still have suffered as a result of a fall in volume of sales as a result of the higher price charged. A successful plea of unjust enrichment would require the tax authorities to show that the economic burden of the excess VAT on the supplier has been “completely neutralised”.

In any event, the AG pointed out that if the agreed price charged was inclusive of VAT, “it cannot be said that the final consumer has borne too much VAT and that [P] is therefore unjustly enriched… The final consumer already paid the correct amount of VAT… it was merely calculated in the wrong amount and stated on the invoice in the wrong amount”. In fact, the AG went further and suggested that in cases involving a single fixed price that is inclusive of VAT charged to a final consumer, “I would go one step further and rule out per se the possibility of unjust enrichment of the taxable person making the supply…. [t]he taxable person making the supply has suffered either a lower profit margin or lower competitiveness in relation to its competitors”. The position could be different if the price charged was a fixed amount plus VAT.

The position of the AG on the question of unjust enrichment in this case seems largely in line with HMRC policy which accepts that there would be unlikely to be any unjust enrichment in cases where the trader has simply charged a fixed price based on the market, which includes an element of VAT.

As regards the AG’s comments regarding apportionment where it cannot be ruled out that supplies were made to taxable persons, it will be interesting to see to what extent such analysis develops. Such analysis could prove helpful in challenging HMRC’s policy on the refund of VAT incorrectly charged on supplies to partially taxable persons whereby they require the customer to detail the specific recovery rate previously applied on receipt of the supply prior to permitting the refund under reimbursement arrangements.