German VAT law and ECJ rulings: how much VAT is due if invoices contain an incorrect overstatement?

EU Member States are required to transpose Council Directive 200/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive) into directly applicable law through national legislation.  According to the established case law of the European Court of Justice (the ECJ), both the tax authorities and the tax courts of EU Member States are obliged to apply national VAT law in accordance with the VAT Directive.  In certain cases, the VAT Directive even applies directly in favor of taxable persons, superseding conflicting national VAT law.

Against this background, ECJ rulings on the application and interpretation of the VAT Directive can be of considerable practical relevance for taxable persons.  It is not uncommon for ECJ rulings to contradict the view of national tax authorities and tax courts – and one example of this in Germany is the ECJ's recent decision that, under certain circumstances, no additional VAT liability arises for service providers as a result of them incorrectly overstating the VAT due in invoices to end consumers.

We explore the ramifications of that ECJ decision in this blog post.

The ECJ decision in Finanzamt Österreich (C-378/21)

Background

Art. 203 of the VAT Directive and Sec. 14c German VAT Act (UStG) stipulate that a taxable person who incorrectly overstates VAT on an invoice is liable for such incorrectly overstated VAT.  According to Sec 14c UStG, fixing that mistake so as to be liable only for the ‘correct’ amount of VAT requires, among other things, that the invoice itself is corrected too.  This is effectively impossible for taxable persons rendering ‘everyday’ services to end consumers, as it is simply not practicable to correct the underlying invoices.  

Facts

The plaintiff operated an indoor playground.  Its customers were exclusively end consumers who were not entitled to deduct input VAT.  The plaintiff issued approximately 22,500 invoices including 20 per cent. Austrian VAT, and then paid that VAT to the tax authorities.  The rendered services were in fact subject to the reduced Austrian VAT rate of 13 per cent..  The plaintiff corrected its VAT return and applied for a tax refund.  The tax authorities refused to honour the purported correction on the grounds that, because the underlying invoices had not been corrected, the plaintiff still owed VAT at the standard rate.  In addition, the tax authorities argued that a refund would lead to the unjust enrichment of the plaintiff as its customers had already paid it an amount equal to VAT at the standard rate.

The plaintiff appealed this decision, and the Austrian Federal Finance Court in turn referred various questions to the ECJ for a preliminary ruling.

Decision of the ECJ

The ECJ ruled that the plaintiff was not liable for the overstated VAT as it had only issued the invoices to end consumers who were not entitled to deduct input VAT.  According to the ECJ, in such cases an invoice correction is not necessary.  The purpose of Art. 203 of the VAT Directive is to eliminate the risk of tax revenue losses which might result from an unjustified input VAT deduction by the service recipient.  The provision can only be applied if there is such a risk – and that means that it is not applicable if there is no risk of tax revenue losses because the recipients are exclusively end consumers who do not have the right to deduct input VAT.

Why does this matter?

From a German perspective, the ECJ's decision is important for taxable persons who provide their services directly to end consumers as part of ‘everyday’ transactions and for whom it is effectively impossible to correct their invoices.  According to Sec. 14c UStG, the liability for incorrectly overstated VAT arises regardless of whether the service recipient is entitled to deduct input VAT.  Based on the ECJ's decision, either: (a) Sec. 14c UStG must be interpreted in accordance with the VAT Directive to the effect that no VAT is due in such circumstances, or (b) the taxpayer can claim that Sec. 14c UStG is not applicable at all in cases where the service recipients are not entitled to deduct input VAT.  In either case, a correction of the invoice would not be necessary.  A repayment by the service provider of the excess amount paid by the service recipient, as currently required by the German tax authorities, should also not be needed. 

There is an interesting question as to whether the ECJ decision is also applicable in cases where a taxable person renders services to end consumers as well as other taxable persons who are actually or potentially entitled to deduct input VAT.  The ECJ (expressly!) did not comment on this fact pattern in its judgement, and instead reached its decision on the assumption that all customers were end consumers.  The Advocate General Kokott indicated in her opinion delivered to the ECJ that it should be acceptable for taxpayers to estimate the proportion of the invoices issued to taxable persons for which Art. 203 VAT Directive does still apply, such that a VAT adjustment would be possible without prior correction of the invoice with respect to the remaining proportion. 

It is not yet clear how the German tax authorities will respond to the ECJ ruling.  However, it is likely that a circular will be published in due course.  As such, taxable persons who find themselves in a comparable situation to the plaintiff in this case should seek to keep relevant tax assessments open and – depending on their individual circumstances – should consider challenging corresponding tax assessments with reference to the ECJ ruling. 

If you would like to discuss any of the points raised in this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact.