EU upholds the right to recover VAT on fraudulent invoices

The Hungarian tax authorities had refused a taxpayer the right to deduct VAT on certain invoices based on the company’s failure to exercise due diligence with respect to its suppliers. The authorities claimed that it did not make sufficient inquiries about the true identity of the supplier and the supplier’s compliance with tax obligations, thereby committing passive fraud.

The Court reminded us that the right of taxable persons to deduct VAT for goods and services is a fundamental principle of the common system of VAT. However, national authorities and courts can deny that right on the basis of objective factors that lead to the conclusion that a taxable person has committed VAT fraud or knew or ought to have known that the transaction concerned was involved in such fraud. For the CJEU these objective factors must be outlined by the relevant authority in a foreseeable and unequivocal way and must not impose complex and in-depth checks on the taxpayers.

Key takeaway

Even if the right to recover input VAT on costs remains a fundamental right under the European VAT system, a certain level of due diligence may be expected by taxpayers where the supplier’s operations could be tainted with fraud. Taxpayers should always make sure that they comply with the relevant VAT authorities’ expectation to secure VAT recovery.

Reference: EUR-Lex - 62022CJ0537 - EN - EUR-Lex