In an era where reusable packaging deposit schemes support much of Europe's food supply chain, a Hungarian tray and pallet rental company found itself caught between an outdated VAT assumption and the rigid finality of a closed tax inspection. 

After years of unknowingly overcharging VAT on deposit fees, the company's belated attempt to correct its returns collided with Hungary's strict rules on reopening already-audited tax periods. The dispute escalated to the Court of Justice of the European Union (ECJ), forcing the ECJ to examine the compatibility between national rules and fundamental EU-wide principles.

Background of the Case 

The company, which primarily rented reusable trays and pallets to businesses in the food supply chain, such as fruit growers, wholesalers, retailers, and food processors, as part of its business model, also used a deposit system. 

Under such a system, customers paid a deposit fee when receiving the trays and pallets, which encouraged them to return the items within a certain time. If customers returned only some of the goods, the company corrected the invoices to reflect the partial return. If all goods were returned, the deposit invoices were cancelled entirely. Initially, these deposit fee invoices included VAT.

In 2015, the Hungarian Ministry of Finance issued an advance tax ruling stating that such deposits should not have been subject to VAT, adding that where VAT had already been incorrectly charged, the company was allowed to issue corrected invoices without VAT and amend its earlier VAT returns through a procedure called self-correction. Consequently, the company stopped charging VAT on deposits in November 2015.

In December 2017, the Hungarian Tax Authority began a tax inspection covering the period from January 2015 to July 2017. Under Hungarian law, once tax inspection starts, taxable persons are no longer allowed to amend their VAT returns for that period through self-correction. The inspection was completed in July 2018, without identifying any VAT irregularities or making any findings against the company.

Given that the company did not challenge the decision, the relevant tax period was officially closed by an inspection. However, in November 2020, the company asked the Tax Authority to open a new tax inspection for the same period, stating that it had discovered that some corrected invoices relating to deposit fees had either not been included in the VAT returns for the inspected period or had only been issued after the original inspection had already started.

The First-tier Tax Authority rejected the company’s request without examining the substance of the case, concluding that the legal conditions for reopening the inspection were not met because the facts were not considered new under Hungarian law. The Appeals Directorate confirmed the rejection in January 2021, which led to the company challenging the decision before the Budapest-Capital Regional Court.

The company argued that the refusal to reopen the VAT inspection violated important principles of EU law, particularly fiscal neutrality, effectiveness, and proportionality. Since the Budapest-Capital Regional Court had doubts about whether the national rules governing requests for a new tax inspection were compatible with EU law, it suspended the proceedings and referred a request for a preliminary ruling to the ECJ.

Main Questions from Request For Ruling

The Budapest-Capital Regional Court essentially asked whether the EU VAT Directive, together with the principles of tax neutrality, effectiveness, and proportionality, allows national legislation to impose very strict conditions on correcting and refunding VAT that was wrongly invoiced. 

More specifically, it questioned whether national institutions could lawfully refuse VAT corrections for a tax period already closed by inspection unless the taxable persons could prove the existence of genuinely new facts or circumstances that were previously unknown and could not reasonably have been discovered earlier.

Applicable EU VAT Directive Article

At the center of this case lies the ECJ interpretation of Article 203 of the EU VAT Directive, which states that any person who includes VAT on an invoice becomes legally liable to pay that VAT.

Hungary National VAT Rules

Regarding national rules and regulations, the ECJ interpreted Articles 54(5), 89(2), and 92 of the 2017 Law on General Tax Procedure. These articles set out strict procedural rules on when and how VAT returns can be corrected, especially in relation to tax periods that are already under inspection or have been formally closed by a previous audit.

Importance of the Case for Taxable Persons

The case is significant because it tests whether national rules imposing strict finality on closed tax inspections, allowing reopening only if a taxable person proves genuinely new and previously undiscoverable facts, can lawfully override a business's right to correct VAT that was wrongly invoiced. Given that Article 203 makes liability attach simply from stating VAT on an invoice, the case probes whether overly rigid national procedures could leave taxable persons stuck paying VAT they were never substantively liable for.

Analysis of the Court Findings

The ECJ recalled that when VAT has been incorrectly invoiced, the issuer of the invoice is liable for that VAT. Therefore, it is the issuer's responsibility to correct it. Given that the EU VAT Directive does not explicitly set out detailed rules on how such corrections should be made, it is up to each EU country to define the conditions under which wrongly invoiced VAT can be adjusted in its national legal system. This is in alignment with the ECJ case law, particularly ECJ Case C-640/23.

When EU countries exercise this right, they must respect the principle of VAT neutrality, which requires them to allow the correction of VAT that was improperly charged, but under certain safeguards. More specifically, national legislation must permit adjustments where the invoice issuer acted in good faith or where the risk of loss of tax revenue has been fully eliminated in good time. 

Regarding how two conditions for adjusting wrongly invoiced VAT relate to each other, the ECJ recalled that if the issuer of an invoice has, in sufficient time, fully eliminated any risk of loss of tax revenue, then EU countries cannot make the adjustment of VAT dependent on the additional requirement that the issuer acted in good faith. In other words, once tax revenue is fully secured, good faith is no longer a necessary condition for VAT correction. In the present case, there was no risk of tax loss. 

Furthermore, the ECJ noted that under Hungarian law, a taxable person may request a new tax inspection for a period that has already been audited only if it relies on a new fact or circumstance that would change the outcome of the earlier inspection. However, this is only possible if that fact or circumstance was previously unknown to the taxable persons, was not available to them, and could not, even with due diligence, have been known or accessed in good faith at the time of the original inspection. 

The concept of good faith does not refer to whether the taxable persons acted honestly when initially issuing invoices that incorrectly included VAT. Instead, it refers to whether taxable persons could reasonably have been aware of or had access to the new facts or circumstances that they are now invoking to justify reopening the tax period. Therefore, the concept of good faith is not the same as that used in the EU VAT case-law concerning the correction of wrongly invoiced VAT. 

Even though the principle of procedural autonomy allows EU countries to establish procedural rules in the absence of harmonised EU rules governing how taxable persons must seek repayment or correction of taxes, the principle is limited by principles of equivalence and effectiveness.

The first requires that national rules do not treat EU-based claims less favourably than similar domestic ones, and the latter requires that those rules must not make it practically impossible or excessively difficult to exercise rights derived from EU law. 

Focusing on effectiveness, the ECJ noted that EU law does not require VAT correction rights to be available without any time limits, as it would conflict with the principle of legal certainty, which requires that both taxpayers and tax authorities be able to rely on stable and final tax positions.

Consequently, EU countries can impose reasonable time limits or procedural conditions on the exercise of VAT refund or adjustment rights. However, for these limitations to be compatible with EU law, they must allow taxable persons a reasonable opportunity to exercise their rights. While such rules may sometimes result in claims being rejected, they should not make the exercise of EU rights impossible or excessively difficult.

When assessing whether a national procedural rule makes the exercise of EU rights excessively difficult or practically impossible, the focus is on how that rule operates within the overall national procedure, including the structure of the proceedings, the role of different national authorities, and how the procedure unfolds in practice. 

Applying that approach to the present case, it is apparent that Hungarian law allows taxable persons to correct improperly invoiced VAT through a self-correction procedure. However, that is limited until tax inspection has been initiated, even if the general limitation period for claiming a refund has not yet expired. Notably, the law provides alternative avenues for adjustment by allowing taxable persons to submit corrected invoices during the tax inspection, and in a complaint against that decision.

The ECJ noted that the company had, in total, a period exceeding three years during which it could have effectively pursued the adjustment of the incorrectly invoiced VAT through the various procedural channels available under national law. Moreover, nothing in the case file suggests any objective obstacle that would have prevented the company from making use of these opportunities.

On a related point, the ECJ emphasized that the principle of neutrality cannot independently justify allowing a VAT adjustment where a taxable person has failed to comply with the applicable national procedural rules, provided those rules do not make the exercise of EU rights practically impossible or excessively difficult. 

Finally, the ECJ concluded that, since the company was not deprived of the possibility of exercising its rights within a reasonable system of procedural avenues, the national procedural framework does not impose a disproportionate restriction on the right to a VAT refund.

Court's Final Decision

Based on its analysis and interpretation of the case-related facts and key VAT rules and regulations, the ECJ concludes that the EU VAT Directive, together with the principles of effectiveness, fiscal neutrality, and proportionality, does not prevent EU countries from adopting rules such as the Hungarian legislation at issue.

More specifically, the ECJ held that national law may require taxable persons seeking to adjust wrongly invoiced VAT for a tax period already closed by an inspection to rely on the existence of a new fact or circumstance capable of changing the outcome of that earlier inspection. However, for this to apply, taxable persons must have been given a real and reasonable opportunity to exercise their right to correct the VAT within the procedural framework provided by national law.

Conclusion

Based on the ECJ's decision, EU countries may impose strict reopening conditions for closed tax periods, but only where those conditions are balanced by practical and reasonable opportunities for taxable persons to correct VAT errors through other available procedures. In this case, Hungarian institutions were right to deny the company's request, as the company had more than enough time to adjust the wrongly invoiced VAT.