Right to deduct VAT where reverse charge failed to be applied
The European Court of Justice has this month ruled on the issue of the deductibility of input VAT on a services transaction where the VAT reverse charge should have been applied.
ECJ ruling on reverse charge
A Romanian company had received an otherwise compliant sales invoice with VAT added. The correct treatment was the application of the reverse charge, with no Romanian VAT charged by the supplier. The Romanian tax office held that the customer had no right to deduct the input VAT they paid as the reverse charge should have been applied. Since the supplier had subsequently gone into administration, it was not possible for the customer to seek repayment from them.
The case was passed to the ECJ, questioning whether the Romanian reverse charge requirements were overruled by the legal certainty of being able to recover input VAT paid. The argument of the customer was that fiscal neutrality should entitle them to be able to recover VAT where they have otherwise acted correctly.
The ECJ found in favour of the Romanian tax authorities, and that fiscal neutrality does not prevent the customer from losing the right to deduct VAT even if it cannot subsequently have the invoice corrected based on the EU VAT Directive.