Immovable work, performed by a VAT payer for another VAT payer, should be invoiced under the reverse charge mechanism. In other words, the contractor does not charge the VAT due, but it is the customer which will account for the VAT due through its VAT return and will deduct it to the possible extent at the same time. But what if the contractor did after all charge VAT?
Reverse charged followed by bankruptcy
As indicated above, a contractor should issue an invoice under the reverse charge mechanism for immovable work, provided the customer is a VAT payer using these services for his VAT activity.
The advantage of this mechanism is that as customer you do not have to prefinance the VAT.
After all, if you buy goods or services, you should wait between the payment of the VAT due to the supplier/service provider and the moment you can report the VAT in your VAT return and set it off against the VAT you received from your customers. In the construction business, the amounts at stake can be quite high.
With the reverse charge mechanism we avoid this problem: you do not pay VAT to the contractor, but you report the VAT due in your VAT return and you deduct it at the same time. Is there a difference (because the building is not 100% used for your economic activity or because you are a partial VAT payer), then you should pay this to the Treasury.
This mechanism is obligatory … meaning that according to the VAT authorities the VAT which you have paid to your contractor is not due and therefore not deductible. The only possibility you have, is to reclaim the VAT from the contractor. Unfortunately for a VAT payer which has paid VAT to his contractor, which went bankrupt and therefore the VAT was not reclaimable. Moreover, the bankrupt contractor has paid the VAT received to the Treasury, so the tax authorities in the end received the VAT twice.
Judgment of the Court of Justice
In 2017 the European Court of Justice judged in a similar Hungarian case. Also in this case a VAT payer bought services with VAT, for which the reverse charge mechanism was applicable. Notwithstanding the supplier had paid the VAT to the Treasury, the client was not allowed to deduct this VAT.
The European Court in first instance confirmed that VAT paid is not deductible when the reverse mechanism applies. But the Court adds that in case repayment by the supplier to the customer is impossible or extremely difficult, e.g. in case of bankruptcy of the supplier, the principles of fiscal neutrality, efficiency and proportionality require that the customer can claim the VAT directly from the tax authorities.
Judgment of the Antwerp Court of Appeal
The Court of Appeal in Antwerp which had to decide in the above case, follows the decision of the European Court. The Court finds that there is a double VAT payment and parties acted in good faith. Due to the bankruptcy of the contractor it is very difficult, if not impossible for the customer to reclaim the VAT paid from the contractor.
The court does not accept the tax authorities’ argument that the prescription period for VAT refund has expired. As a general rule, this term expires after three years.
With this good news you may not lose sight of the fact that the reverse charge mechanism is obligatory. The tax authorities can at all times disallow the deduction of the unduly paid VAT. Only in case of difficulties to obtain repayment you can turn to the tax authorities.