Analysis: “Court of Justice limits formal requirements to VAT bad debt relief” by Darya Budova
On 15 October 2020 the Court of Justice handed down its ruling in the case E., C-335/19 referred to as the so-called ‘bad debt relief’ case in the field of VAT. That relief refers to the possibility to reduce the taxable amount and the VAT payable when, after a transaction has been concluded, part or all of the consideration has not been received by the taxable person.
Such a possibility is established in the Article 90 of the VAT Directive and Member States can regulate the specific conditions for the application of this relief. In Poland, the possibility to make such an adjustment was made subject, inter alia, to (i) the recipient of the service being registered as a taxable person for purposes of VAT and not being subject to insolvency or winding-up proceedings at the time of the delivery; and (ii) both the creditor and the debtor meeting the same conditions at the time the adjustment is made.
In this case, the appellant’s client was registered at the time the service was provided and the invoice was issued to it, but it was wound up shortly after that, and did not pay E’s invoice. According to the Polish regulation, E. was in a position to make an adjustment only 150 days after the expiry of the period for payment indicated in the invoice and at that time E’s client was already wound up, although still registered as a taxable person. E. was denied the possibility to adjust its taxable base and the question arose as to whether the ‘bad debt relief’ could be validly restricted in these terms and still be in accordance with the principles of neutrality and proportionality.
The Court recalls that when the total or partial non-payment of the transaction price occurs without the contract being cancelled or rescinded, the purchaser still remains liable for the agreed price and the seller still has, in principle, its claim on which it can rely in legal proceedings. Therefore, the conditions under which the debt may be considered unrecoverable has to be established and that was left by the EU legislator to the Member State to set in accordance with their own legislation. According to the Court, restrictions to this adjustment that the Member State establish may not go beyond the necessary to ascertain the definitive nature of the non-payment, especially when unjustified exclusion of the possibility to reduce the VAT taxable amount would run counter to the principle of neutrality.
In this context, the Court rules, firstly, that the creditor’s right to reduce the taxable amount for these purposes does not depend on the creditor’s continued status as a taxable person (since the creditor remains liable for the VAT irrespective of the fact that the creditor has in the meantime lost its status as a taxable person). Secondly and similarly, the Court establishes that it must be possible for the amount of deductible VAT to be adjusted by any person who no longer has the status of a taxable person but who had that status at the time the right of deduction arouse, and thus the debtor’s obligation to reduce the amount of deductible VAT does neither depend on whether it retains it status as a taxable person.
Lastly, regarding the absence of insolvency or winding-up proceedings requirement, the Court states that although this requirement may effectively be taking account of the inherent uncertainty of whether the non-payment is definitive, it does not appear to be proportionate. The creditor could demonstrate, before the outcome of the insolvency or winding up proceedings, a reasonable probability that the debt will not be honoured, even if the taxable base is further revaluated upwards. Otherwise and given the length of winding-up proceedings, the debtor could find itself at a cash-flow disadvantage compared to its competitors in other Member States, which would clearly undermine the objective of fiscal harmonisation in the field of VAT.
The Court considers that Article 90 of the VAT Directive precludes such national legislation.
Darya is a lawyer specialised in customs and VAT matters and disputes.