Is it possible for my VAT refund claim to be rejected because a subcontractor has failed to pay VAT? The short answer is YES. It is possible that your right to claim a tax credit may be denied in respect of certain supplies received.
Value added tax (VAT) is a type of indirect tax levied on the consumption of goods and services.
VAT is a non-cumulative tax – it is included once in the final price of the goods or services, and taxation of the added value alone is achieved through the mechanism of tax credit deduction by each recipient in the chain of supplies as the goods or services are sold on.
VAT is a multi-stage tax – it is assessed and collected at every stage of the production and supply of goods (and services) to the end consumer.
VAT is a neutral tax – it is based on the principle of deduction, according to which every registered taxable person calculates the tax on the price of the goods or services sold and deducts the VAT included in the value of the components of that price.
VAT is a type of turnover tax – its liability depends on the nature of the supplies made and, in principle, is not linked to the status or legal form of the supplier – the taxable person – nor to the legal basis of the acquisition.
Given these characteristics of the tax, the right to claim a tax credit is of fundamental importance.
A tax credit is the amount of tax that you are entitled to deduct from your tax liabilities under the Value Added Tax Act in respect of goods purchased or services received, as well as any advance payments relating to them.
To claim a tax credit, you must:
- you must be a person registered under the Value Added Tax Act on grounds other than Article 97a (registration for services supplied and/or received) or Article 99 (for intra-Community acquisitions);
- the tax must have been charged in respect of goods or services received or paid for in advance by you as part of a taxable supply;
- the goods or services are to be used for the purposes of your taxable business;
- to hold a tax document in which the tax is shown on a separate line (if the document is a customs declaration, you must be listed on it as the importer, and the tax must have been paid or a report issued in respect of it, and the tax must have been self-assessed in the cases provided for in Chapter Eight of the VAT Act);
- to exercise the right to claim a tax credit during the tax period in which that right arises, or in one of the following twelve tax periods, by including the tax document (invoice, customs declaration, report) in the purchase ledger;
- the right to claim a tax credit must not be expressly excluded by the Value Added Tax Act.
Article 177 of the VAT Act provides for the liability of persons in cases of abuse:
A registered person – the recipient of a taxable supply – is liable for tax owed and not paid by another person, to the extent that they have exercised the right to a tax credit directly or indirectly linked to the tax owed and not paid.
Liability arises where the registered person knew, or ought to have known, that the tax would not be paid, and this is proven by a tax authority in accordance with Articles 117–120 of the Tax and Social Security Procedure Code. It is deemed that the person was obliged to know when all of the following conditions are met simultaneously:
- the tax due has not been effectively paid in respect of a tax period by any preceding supplier in connection with a taxable supply of the same goods or services, whether in the same, altered or processed form, and
- the taxable supply is a sham, circumvents the law or is at a price that differs significantly from the market price.
Liability is not contingent upon the person deriving a specific benefit from the failure to pay the tax due. The previous supplier of the person liable for the unpaid tax is also liable. Liability is imposed on the person who is the direct recipient of the supply in respect of which the tax due has not been paid; where recovery proves unsuccessful, liability may be imposed on any subsequent recipient in the supply chain.The same applies mutatis mutandis to previous suppliers.
That was the theoretical part. What does it mean in practice?
You may hold a tax document that formally complies with the rules for claiming a tax credit. However, at the same time, the taxable supply received is fictitious, circumvents the law, or is at a price that differs significantly from the market price, or the tax due has not been effectively paid as a result for a tax period by any previous supplier in respect of a taxable supply of the same goods or services.
These conditions are scrutinised carefully by the tax authorities and, if they are found to be true, you will be denied the right to claim a tax credit. This may occur both during an audit relating to VAT set-off and refunds, and during other audits or inspections in which your business activities and entitlement to a tax credit are examined.
What can you do to avoid the possibility of your tax credit being refused?
Get to know your supplier. Check their registration. Use the National Revenue Agency’s resources: Public register of companies registered under the Value Added Tax Act, Report on sales declared by persons registered under the VAT Act for a specific tax period, List of persons sought by the National Revenue Agency (Article 32 of the Tax and Social Security Procedure Code) and other sources.
