No VAT liability for the excess when incorrect higher VAT rates are applied on invoices to final consumers

Facts of the case

P GmbH (appellant) operated an indoor playground in Austria. P GmbH applied VAT to its services at a rate of 20 percent. The customers of the appellant were exclusively final customers who were not entitled to deduct input VAT. After realising that the applicable tax rate was not 20 percent but 13 percent, the P GmbH adjusted its VAT return so the excess VAT would be credited to it by the tax authorities. But the latter refused this adjustment.

In reviewing the case the ECJ had to decide the following questions:

1. Is VAT payable by the issuer of the invoice under Article 203 of the VAT Directive if, as in this case, there may be no risk of loss of tax revenue because the recipients of the services are final consumers who are not entitled to the right of deduction?
2. If the answer to the first question is yes and VAT is payable by the issuer of an invoice under Article 203 of the VAT Directive:
3. Can the correction of invoices regarding the recipients of services be precluded if, on the one hand, a risk of loss of tax revenue is excluded and, on the other hand, the correction of invoices is effectively impossible?
4. Does the fact that final consumers have borne the tax as part of the process, thereby enriching the taxable person by correcting the VAT, preclude the correction of the VAT?

The ECJ’s decision

Under Article 203 of the VAT Directive, VAT is payable by any person who issues invoices with VAT on those invoices, and the VAT indicated on an invoice is payable by the issuer of the invoice, even in the absence of an actual taxable transaction. It is also clear that Article 203 of the VAT Directive seeks to eliminate the risk of loss of tax revenue which the right of deduction provides for.

Article 203 of the VAT Directive therefore is to be applied where VAT is being invoiced incorrectly and there is a risk of loss of tax revenue due to the fact that the recipient of the invoice in question has a right to deduct such VAT.

In this case there was no risk of loss of tax revenue because the customers of the appellant were exclusively final consumers who did not have the right to deduct input VAT. The ECJ therefore decided that Article 203 of the VAT Directive did not apply in such a situation.

The answer to the first above mentioned question is that Article 203 of the VAT Directive must be interpreted such that a taxable person who has supplied a service and who has stated on the invoice a VAT amount calculated on the basis of an incorrect rate is not liable for the part of the VAT invoiced incorrectly if there is no risk of loss of tax revenue on the grounds that the recipients of that service are exclusively final consumers with no right to deduct input VAT.

This presupposes that there is no risk of a VAT loss. But often customers include not only final customers but also taxable entrepreneurs. The challenge then is to find a benchmark as to what the share of sales of these various customers will be so one can state the quantum of VAT loss to the authorities. The issuer of the invoices therefore will often get difficulties trying to prove there is no risk of VAT loss to the authorities.

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