The deduction of Value Added Tax

Summary:

Value added tax (VAT) has been a feature of EU law for almost five decades. VAT is a consumption tax that applies generally to transactions carried out by taxable persons for the purposes of their economic activities and is intended to tax only the final consumer. It is also characterised by the principle of neutrality which applies to the imposition of the tax and which also entails that there is in principle a right of deduction. Thus, the deduction system is meant to relieve the trader entirely of the burden of VAT in respect of all his or her transactions, which themselves give rise to the right to deduct. In its case-law on VAT, the Court of Justice has frequently pointed out that the right to deduct (and, therefore, the right to the refund of VAT paid) forms an integral part of the VAT mechanism and in principle cannot be limited.

However, while the right of deduction should, a priori, apply in every instance in order to achieve neutral taxation, certain restrictions on that right are necessary. The Court has made clear in its case-law that it is necessary for there to be a direct and immediate link between the acquisition of goods or services and a downstream taxable transaction. In other words, the acquisition should, according to objective criteria, be made for the purposes of the taxable person’s economic activity. On the other hand, when goods or services are acquired for the purposes of carrying out exempt transactions or transactions which fall outside the scope of VAT, no output VAT is chargeable and so no input VAT may be deducted.

The Court has also made clear in its case-law that EU law may not be relied on for fraudulent or abusive ends. Where abusive practices are detected in the exercise of the right of deduction, the right to deduct input VAT may be refused, with retroactive effect. Accordingly, national authorities may refuse the benefit of the right of deduction where it is established, on the basis of objective evidence, that the taxable person knew, or ought to have known, that by means of his or her acquisition he or she was participating in a transaction connected with VAT fraud, even if the transaction in question meets the objective criteria on which the concepts of a ‘supply of goods effected by a taxable person acting as such’ and an ‘economic activity’ are based.

The following is a selection of judgments, arranged under specific subject headings, which provide an overview of the Court’s recent case-law on the deduction of VAT.