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ECJ decision about penalties on reverse charged VAT

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ECJ decision about penalties on reverse charged VAT

ECJ weights on imposed penalties for reverse charged VAT

Following the opinion of the advocate general published last November, the ECJ gave its decision in Farkas case (C-564/15). This judgement has reduced the powers of Member States to impose penalties on reverse charged VAT on transactions that are incorrectly reported. This case is important for non-established companies registered for VAT in other EU countries, as these businesses are often involved in reverse charge transactions.

In summary, the ECJ position is as follows:

  • If a business is charged VAT where it should have received an invoice under the reverse charge mechanism, the tax authorities cannot assess a penalty on the output VAT of the transaction and then request input VAT to be deducted separately. According to the ECJ, tax authorities cannot apply disproportional penalties where they do not suffer a loss of tax revenue. In Farkas case, the Hungarian authorities assessed a penalty of 50% of the VAT due.
  • If a business is charged VAT where it should have received an invoice under the reverse charge mechanism, such business should be allowed to deduct input VAT incurred where it is not possible to recover the VAT and net amount with a credit note issued by the supplier (eg. where the supplier is bankrupted).

This ECJ decision gives an opportunity for businesses who receive penalties on reverse charged VAT for not reporting reverse charged purchases in due time in the VAT return.