Under Article 203 of the VAT Directive, VAT must be paid by anyone who mentions it on an invoice.

With this provision, the legislator aimed to prevent a customer in possession of an invoice from exercising its input VAT deduction right, while the person who issues the invoice would not owe VAT (due to a lack of legal basis). This would put the State at risk of losing tax revenue.

The case concerned an Austrian operator (P GmbH) of an indoor playground, which had erroneously applied the normal (i.e.: excessively high) VAT rate. Entry fees to the indoor playground could benefit from the reduced VAT rate of 13%. P GmbH therefore requested a refund of the overpaid VAT amounts. However, the Austrian tax authorities refused the refund request. Ultimately, the case ends up before the Court of Justice, which has to consider a number of preliminary questions.

Is wrongly invoiced VAT due where there is no risk of loss of tax revenue because the customers have no right to deduct the VAT?

The Advocate General had already concluded that the erroneous entry of VAT on an invoice issued to a private individual does not result in the trader having to pay VAT merely because it is mentioned on an invoice. This is because the state does not suffer a loss of tax revenue as the customer does not use the invoice to assert the right of deduction.

In a remarkable short judgment, the court agrees with this conclusion of the Advocate General.

If there is no risk of loss of tax revenue because the recipient is not entitled to deduct VAT, the safety net provision can be disregarded. In such a case, the over-invoiced VAT is also not due.

Should invoices be corrected where there is no risk of loss of tax revenue? Should VAT be refunded in such a case?

The Court of Justice has already ruled on several occasions that when setting the conditions for VAT refund requests, Member States should not set the conditions in such a way as to make the exercise of this right impossible or excessively difficult in practice.

Where the issuer of the invoice has timely eliminated the risk of loss of tax revenue, the principle of neutrality requires that the VAT wrongly invoiced may be adjusted.

In this case, the referring court had also raised the question whether the failure to reimburse VAT to the customer precludes the refund of VAT. This question must be seen in the context of the doctrine of unjust enrichment. Indeed, it is settled case-law of the Court of Justice that an unlawfully collected tax can only be refunded if the entitled party is not unjustly enriched.

The Court does not even bother to answer these questions. Since the safety net of Article 203 does not come into play (no danger to the treasury), no VAT is due, and there is no need to answer these questions.

Therefore, it seems clear to us that, in this context, Member States may not require an adjustment, nor other conditions, for the refund of overpaid VAT.

The traditional view of the tax authorities is that wrongly invoiced VAT is always due.

For refund requests in a B2C context, the tax authorities do not always require corrective documents to be issued. This is the case for sales to private individuals where there is no invoicing requirement. But it does, as a general rule, require that the excess VAT is reimbursed to the customers. Thus, this additional obligation does not seem to pass the European test.

The court thus clearly takes a different stand here. From now on, the principle that unlawfully invoiced VAT is always due no longer applies by default in a B2C context.