Introduction

A taxpayer’s right to a refund of tax (which is not due) is a basic right of a taxpayer. This has been sharply brought into focus in recent times with cashflow even more vital to businesses. One perhaps underutilised area in Irish and UK tax practice is practitioners not utilising European law in support of their clients rights in this area.

EU law has supremacy over national law so can be very useful in support of a taxpayer’s position. In other areas of law, principally labour law or environmental law, Irish and UK lawyers would always seek the “EU law” angle; tax consultants’, particularly in the area of VAT, should perhaps do likewise.

Recent case law

Last month there has been an interesting and useful EU case which is of support to Irish and UK taxpayers seeking a refund – Case C-446/18, AGROBET CZ s.r.o.

Advocate General Decision

On 19 December 2019, Advocate General (“AG”) Kockott of the Court of Justice of the European Union (“CJEU”) issued her Opinion regarding the recovery of Value Added Tax (“VAT”) during an ongoing tax investigation in Case C-446/18, AGROBET CZ s.r.o.

Tax investigations can last for many years, and if VAT would not be recoverable during an ongoing investigation, this would have a detrimental effect on the taxpayer’s cash flow. The question before the CJEU was whether tax authorities may defer a VAT refund in full, even though it is only a small component of an ongoing inspection.

According to the AG, Member States do not have the right to defer the assessment and payment of an undisputed part of the reclaimed VAT for an indefinite period of time until the disputed part of the excess VAT claimed has been adequately inspected.

The Czech tax authorities initiated a tax inspection because it had doubts as to the correct taxation of the rapeseed oil transactions in this case. The doubts related both to the tax rate applied and to the existence of fictitious transactions in light of the fact that the rapeseed oil originated from Poland, was traded on without further processing in the Czech Republic and was then sold on again by AGROBET to a consignee in Poland.

Given those doubts, the tax authorities did not grant a refund of the requested VAT. AGROBET thereupon offered to secure the disputed part of the VAT so that the undisputed part could be assessed, and the remaining excess VAT paid. The tax authorities declined that offer on the ground that the excess VAT was indivisible and related to the tax period as a whole, not only the part for which the transactions were reported.

Following a request for information by way of international administrative assistance, the Polish tax authorities described the consignee of the rapeseed oil from AGROBET as uncontactable and thus as a ‘missing trader’.

The Supreme Administrative Court of the Czech Republic therefore referred the following question to the Court for a preliminary ruling:

‘Is it consistent with European Union law and in particular with the principle of VAT neutrality for a Member State to adopt a measure which makes the assessment and payment of part of a VAT deduction claimed conditional on the completion of a procedure applying to all taxable transactions in a given tax period?’

The AG opined that, in accordance with the EU VAT Directive, the right to recover VAT should not be understood in relation to the total amount, but in relation to a transaction. As such, the excess VAT amount is not indivisible from the total VAT amount reclaimed and thus the argument of the Czech tax authorities must be rejected.

Member States may impose reasonable conditions to effectuate the recovery of VAT, but tax authorities may not refuse to refund an undisputed part of the reclaimed VAT solely because another part is still disputed. Excess VAT, which is undisputed and requires no further inspection, must be paid promptly.

Proportionality

According to the AG, there is an encroachment on the fundamental rights of a taxpayer if it is compelled to pre-finance undisputed tax for several years. Such infringement may be justified, but only if it is proportionate, e.g., for the prevention of possible tax evasion, avoidance and abuse.

This proportionality test is very significant in the context of various tax measures in Irish and UK tax code. Proportionality, a general principle of EU law, has its origin in German Law and means a public authority may not impose obligations on a citizen except to the extent to which they are strictly necessary in the public interest to attain the purpose of the measure.

Proportionality was first applied in a tax case by the Irish courts in McCarthy V Daly 1986 1 ILRM 122. This decision which struck down section 26(1) of the Finance Act 1990 which permitted a “prior year” only deduction of professional fees withholding tax as being repugnant to Article 40.3.2 of the constitution was broadly welcomed. The section had been introduced originally to deal with a transitional situation and to militate against windfall gains arising on the switch from the preceding year basis to current year basis income assessment.

Like many interim measures, the combination of inertia and financial expediency had led to its retention.

The Revenue Commissioners had offhandedly dismissed Dr. Daly’s hardship claim, but it submitted in any event that such a provision will not save an enactment from condemnation under Article 40.3.2 of Bunreacht na hEireann, which provides:

“The State shall, in particular by its laws, protect as best it may from unjust attack and in the case of injustice done vindicate the life person good name and property rights of every citizen.”

The AG opinion is not binding on the CJEU however its reasoning is of great assistance to the Court in reaching its decision. It is effectively, in the words of the doyen of European law TC Hartley, “a preliminary independent expert opinion” prior to court deliberations.

CJEU decision

On May 14, 2020 the Court of Justice delivered its ruling in C-446/18, AGROBET. The CJEU had previously ruled on the possibility of withholding the excesses VAT in favour of taxpayers when control procedures are developed, making considerations of significant interest.

The Court of Justice ruled that it is in fact possible to distinguish between disputed and undisputed amounts of excess VAT and to carry out a partial refund accordingly. The reasoning of the Court leading to this conclusion was, essentially, the following:

• The VAT is materially due for each transaction. The fact that the taxable person has to determine the VAT amount for a given tax period by a difference between the ‘total amount’ of the VAT due and deductible (Article 179 of the VAT Directive) is a formal aspect of the deduction mechanism;
• The fact that Member States may choose whether to carry forward or refund the excess VAT (Article 183 of the VAT Directive) does not in any way allow for the withholding of undisputed excess VAT;
• Withholding an undisputed amount of excess VAT would undermine the principle of neutrality, as it would mean that the taxable person bears the burden of the VAT.

Interestingly, the Court analysed with a great deal of detail certain procedural aspects to be followed by the national tax authorities in such cases.

The Court also recalled its case law on several points regarding the excess VAT refund procedures and also brought up the right to good administration. This is a concept enshrined in the Revenue Customer Charter in Ireland.

In application of EU Law, the principle of good administration, which is part of it, implies the right of everyone to have their affairs dealt with impartially and within a reasonable time.

The Court considered that the fact that the Czech regulations do not allow the taxable person to submit evidence of the claim regarding an undisputed part of the excess VAT undermines such a right.

Against this background, what was raised before the CJEU was “whether articles 179, 183 and 273 of the VAT Directive, in light of the principle of fiscal neutrality, oppose a national regulation that does not foresee the possibility that, before of the termination of a control procedure related to a VAT declaration that reflects an excess corresponding to a certain period, the tax authorities return the part of said excess related to operations that are not the object of the aforementioned procedure at the time of its initiation”.

These principles, as well as the jurisprudence on which they are based, must also be applied in the event that the taxable person affirms and proves that the suspicions that the tax authority has on part of its operations cannot have repercussions on the rest and that, therefore, there is an identifiable undisputed portion of the requested tax refund.

The CJEU deduced from all this that a national regulation that does not authorize the taxable person to act in this way would be contrary to the principle of good administration and, therefore, incompatible with the VAT Directive.

In essence the question of a tax refund comes down to proportionate, fair and good administration on the part of revenue authorities.

The judgment we are commenting on is relevant, in my opinion, for two reasons, the first of which is due to the growing reference to general principles of Union law, good administration. This is a growing trend, as evidenced by other recent CJEU rulings (for example of 17-12-2015, WebMind Licenses, C-419/14).

Secondly and equally important is the delimitation of the possibilities for the tax authorities to act in specific control procedures, limited to equally specific operations, the consequences of which will hardly be extended to the rest. At this point, the growing information available to the tax authorities encourages these actions. In the event that this is done, the AGROBET judgment establishes quite clear limits in its procedure.

The principles applied by the ECJ are not new concepts of jurisprudence, having being part of the law for over two thousand years. Roman law, the original EU law system, deals with refunds expressly. The concept of a refund of money which is not legally payable but paid incorrectly goes back to at the very least to Justinian in 565 AD and is termed a condicto indebiti “the recovery of a thing not owed”.

Borkowski in his textbook on Roman Law states that the remedy of condicto indebiti is based on the concept of fairness, indeed in Justinian’s Digest we are told that the condictio “was grounded in the idea of what is good and fair”.

Conclusion

In summary, an accountant seeking a tax refund for their client, should be very reluctant to concede to a revenue authorities refusal of a legitimate tax refund. All that needs to be shown is that the tax paid was not properly exigible. Therefore for practical purposes, taking into account the foregoing EU law, common law rights and administrative rights the law points to the general principle that payments of tax not owed are prima facie recoverable.

The case is a sensible one, and is also useful as an aide memorie of principles of tax admiration by which revenue authorities must comply with; principles are important in tax law. There is a danger that in the morass and minutia of technical detail and provisions, basic concepts and safeguards a of a proper functioning tax system such as fair administration, proportionality and equal treatment of taxpayers may be lost sight of to the detriment of the taxpayer.

Mark Lonergan is a Partner at Sabios, a boutique advisory firm specialising in Tax, Financial Advisory and Corporate Restructuring

Email: mark.lonergan@sabios.ie