4 Eyes Ltd: VAT, Tax and Customs Consultants

In a seminal case likely to have repercussions across the EU, the ECJ has held, in effect, that a supplier who charges VAT in accordance with a tax authority's policy should not bear the economic cost of refunding that VAT to his customer if the tax authority's policy is flawed.

From 1984 to 1994 the taxpayer supplied services to its customers which the Italian authorities said were subject to VAT. In 1999, the tax authority changed its original interpretation such that the supplies in question were exempt rather than taxable. The customers then claimed the 'VAT' back from the taxpayer through civil proceedings and the taxpayer was ordered by the Italian courts to reimburse that 'VAT'. The Taxpayer then sought to recover that 'VAT' from the tax authority but, whilst it had been obliged to reimburse the whole of the 10 years of 'VAT', the tax authority sought the protection of a two year time limitation to resist the taxpayer's claim.

Following various appeals before the Italian Courts, the Italian Supreme Court referred questions to the ECJ. In essence the questions related to principles of EU law and whether the taxpayer could be placed in a situation where it had to fund the 'VAT' which had been charged to its customers according to the policy of the Italian tax administration.

The Court ruled, in effect, that where a customer has a claim against his supplier for VAT charged in error and paid to the tax authority, the principle of effectiveness requires that the supplier has the ability to recover that VAT from the tax authority. This is a development of major significance in all cases where a Member State has made an error, whether of policy or of law. How the principle of effectiveness interplays with domestic routes to recovery of VAT by supplier and customer alike will have to be worked through in due course.

The ratio of the judgment was as follows:

"The principle of effectiveness does not preclude national rules governing the recovery of sums paid but not due, under which the time-limits for a civil law action for recovery of sums paid but not due, brought by the recipient of services against the supplier, a taxable person for the purposes of VAT, are more generous than the specific time-limits for a fiscal law action for a tax refund, brought by the supplier against the tax authority, provided that it is possible for that taxable person effectively to claim reimbursement of the VAT from the tax authority. That condition is not satisfied where the application of such rules has the effect of totally depriving the taxable person of the right to obtain from the tax authority a refund of the VAT paid but not due, which the taxable person has himself had to pay back to the recipient of his services. "

This case is ground breaking and has significant consequences for taxpayers and their customers. The implications will be felt by tax authorities, taxpayers and their customers across the EU.

This case deals with the issue of whether a supplier charging VAT to his customer at the insistence of his tax authority is left 'on the hook' in the case of an error of law by that tax authority. Seen in that light, the ECJ's response is both fair and rational. VAT charged by a supplier at the insistence of a tax authority should not be borne by him when he has collected that VAT from his customer and remitted it to the tax authority.

What this case does not deal with are a host of remaining issues such as the circumstances when a customer does or does not have a claim for overpaid tax against his supplier. Taking the easiest end of the continuum, if a supplier makes a mistake, nothing to do with domestic law or policy but a simple supplier error, there may be a claim by the customer as against his supplier. Even that apparently simple position however is not beyond doubt once the supplier has passed the VAT on to the tax authority. Thus, in the UK, the question of when a customer claim is available as against his supplier may not be definitively known. Beyond that simple position significant issues arise for the availability of a customer claim against a supplier - including but not limited to the question of statutory interpretation and contractual interpretation of the meaning of "VAT", whether the VAT was charged in accordance with domestic law but in breach of EU law, whether the specific provision of EU VAT law in question has horizontal direct effect, and the availability of defences to a claim which a supplier may deploy. The fact pattern in Banca Antoniana was that the customer had made good his claim against the supplier and the issues in these proceedings flowed from that fact.

This case therefore does not shed light upon the question of when a customer has an effective claim against his supplier in relation to VAT and therefore does not determine the circumstances when a customer is able to claim directly against HMRC rather than his supplier in the wake of the Sauer Danfoss judgment.  What this case does show is that, irrespective of whether the claim is made directly by the customer against HMRC or is made via a claim against the supplier and a claim by the supplier against HMRC, the economic effect for HMRC is the same - it is obliged to reimburse the tax irrespective of statutory time limitations which might otherwise have barred a supplier claim.

There is therefore the availability of enhanced recovery by a customer beyond that which may have been available under any benevolent claim made by the customer's supplier (a claim which would be restricted to 4 years). Whilst uncapped claims for mistaken payments of VAT may need to be proven on a case by case basis, the possibility of such claims and their neutral effect on a supplier who has complied with domestic obligations is highlighted by this judgment. The key decision for taxpayers and customers is whether they wish to work in a cooperative manner to determine the maximum recovery of 'VAT' from the tax authority. In circumstances where the supplier and customer are in conflict, HMRC may be able to restrict the total amounts reimbursed.

It is yet to be seen how HMRC or other jurisdictions amend their reimbursement arrangements in the wake of this judgment although revised legislation appears certain to be required in the UK.

If you would like any advice on the issues raised in this case, please contact 4 Eyes Ltd.