Will Overstated VAT on Consumer Sales Be Recoverable?

The European Court of Justice (ECJ) addressed this issue in its ruling on March 21, 2024 (Case C-606/22), following a preliminary ruling request from the Polish Supreme Administrative Court (NSA).

The case involved a Polish company providing services related to recreation and physical fitness improvement. The company sold memberships granting access to its club and use of the facilities, which it documented with receipts and applied a 23% VAT rate.

In its general interpretation issued on December 2, 2014 (PT1/033/32/354/LJU/14), the Minister of Finance indicated that the correct VAT rate for such services was 8%. As a result, the company amended its VAT returns. However, tax authorities at both levels ruled that the taxpayer was not entitled to correct the tax base or the VAT due, as the sales were documented with receipts. Therefore, the tax authorities argued that the taxpayer should have paid VAT corresponding to the amount collected from final consumers. The authorities also noted that correction would only be possible if the sales had been documented with invoices and the taxpayer had corrected the original invoices with corrective invoices.

The taxpayer disagreed with this position and appealed the decision of the Director of the Tax Administration Chamber to the Provincial Administrative Court. The court ruled in favor of the taxpayer, stating that even if the sales were documented with receipts, the taxpayer had the right to correct the VAT due on those sales. The Director of the Tax Administration Chamber filed a cassation complaint, and the case was referred to the NSA, which suspended the proceedings and submitted a preliminary ruling request to the ECJ.

In its ruling, the ECJ clarified that EU regulations (Directive 2006/112) do not specifically address the correction of VAT returns in cases of incorrect tax rates. Moreover, it emphasized that refusing a VAT correction due to sales being documented with receipts rather than invoices violates the principles of tax neutrality, effectiveness, and equal treatment. However, the court also stated that if the undue VAT burden is entirely passed on to the consumer, tax authorities have the right to refuse a refund of VAT, as this could result in unjust enrichment for the taxpayer.

In conclusion, the ECJ confirmed that a VAT correction could be made even if the sales were documented with receipts, but also allowed tax authorities to challenge such a refund. The NSA will now have to assess, taking into account the ECJ’s ruling, the circumstances of the case, and the evidence presented, whether unjust enrichment could have occurred in this instance.