ECJ VAT Case C-122/23 Explained | Lagafact & Small Business VAT Exemptions

ECJ Case C-122/23 refers to a dispute between a Bulgarian company and the Tax Authority over when the VAT registration was required and what amount of VAT is due. At the core of the disagreement is the national VAT provision that differentiates between taxable persons based on how quickly they exceed the VAT registration threshold and whether this aligns with the EU-wide VAT rules and regulations.

Background of the Case 

In August 2018, Lagafact, a consultancy company, issued several invoices totaling BGN 171,712 (around 87,700) for services provided between 2012 and 2018. Up to that point, the company had not registered for VAT. On September 3, 2018, it applied for mandatory VAT registration, and from September 19, 2018, it was officially a VAT-registered company.

However, the Tax Authority considered that the company missed a seven-day application deadline after exceeding the VAT registration threshold of BGN 50,000 (around EUR 25,600). Consequently, in December 2019, the Tax Authority issued a tax adjustment notice to the company stating that it owes BGN 24,701.66 (EUR 12,600) in penalties and BGN 3,218.33 (EUR 1,650) in interest for the tax period ending August 2018.

After the Director of the Sofia Territorial Directorate ‘Appeals and Practice in Tax and Social Security Matters’ of the National Revenue Agency (Director) denied the appeal, the company brought the case before the Administrative Court in Sofia. The Administrative Court ruled in favor of the company, stating that the tax adjustment notices were issued contrary to the applicable national laws, EU VAT-related rules and regulations, and ECJ case law.

The Director appealed against the Administrative Court's decision before the Supreme Administrative Court, which was unsure whether Article 102(4) of the Bulgarian Law on Value Added Tax, adopted by the Bulgarian legislature to implement Articles 213 and 214 of the EU VAT Directive, contradicts the principles of the EU VAT system.

Therefore, the Supreme Administrative Court paused the proceeding and referred three questions to the ECJ for a preliminary ruling.

Main Questions from Request For Ruling

The first question referred to the ECJ, which asked whether a provision from national law that differentiates between taxable persons based on how quickly they reach the turnover threshold for mandatory VAT registration is contrary to the principles of the EU's VAT system.

The second question examines whether the EU VAT Directive allows the national rules of the EU country to make tax exemptions for small companies dependent on the supplier’s timely application for VAT registration.

With the third question, the Supreme Administrative Court sought clarification on the criteria that should be used under the EU VAT Directive to determine whether a national provision that results in VAT liability due to late registration should be considered a penalty.

Applicable EU VAT Directive Article

Regarding the applicable articles from the EU VAT Directive, the ECJ discussed provisions from Recitel 49 and Articles 2, 213, 214, 273, and 287.

Recital 49 allows EU countries to apply a national special scheme for small businesses following a common provision and the approach to moving toward the EU level. Article 2 defines which transactions are subject to VAT. 

Articles 213 and 214 were perhaps the most crucial for this case. Article 213 requires every taxable person to declare when they start, change, or cease their taxable activities. EU countries must allow and may such declarations to be made electronically. Furthermore, Article 214 is imposed on EU countries to ensure that specific categories of taxable persons are identified with an individual VAT number, including those who conduct VAT-deductible supplies, make intra-Community acquisitions, or receive or provide cross-border services where VAT is payable by the recipient.

Under Article 273, EU countries can introduce additional obligations to ensure proper VAT collection and prevent tax evasion. However, these obligations are imposed with respect to the principle of equal treatment, which means that stricter rules on cross-border transactions than on domestic ones are not allowed.

Finally, Article 287 defines that taxable persons whose annual turnover in Bulgaria does not exceed EUR 25,600 or the equivalent in national currency may be exempt from VAT obligations.

Bulgarian National VAT Rules 

Regarding the Bulgarian national VAT rules, Articles 96, 102, 178, and 180 from the Law on Value Added Tax (VAT Law). Article 96 defines that once a taxable person's taxable turnover exceeds a VAT registration threshold of BNG 50,000, they must apply for VAT registration within seven days from the end of the financial year in which the turnover was exceeded. However, if the turnover is exceeded in a period not exceeding two consecutive months, the application must be submitted within seven days from the moment the threshold was exceeded.

Article 102, the main article of the dispute, states that if a person fails to apply for VAT on time but meets the requirements, the Tax Authority will register it automatically. Even if taxable persons miss the deadline, they are still responsible for paying VAT on their taxable sales, purchases from other EU countries, and particular services received. Additionally, if a business exceeds the VAT registration threshold but does not register, it must pay VAT from the moment of exceeding it until it is officially registered.

Articles 178 and 180 determine penalties for failure to comply with VAT registration and payment obligations.

Importance of the Case for Taxable Persons

The case between the Lagafact and Bulgarian Tax Authority helps taxable persons understand which rules and to what extent apply to those who fail to register for VAT on time, especially for small businesses. Moreover, it underlines the legal consequences for businesses that exceed the VAT registration threshold but do not register for VAT within the national time frame.

Additionally, the case clarifies the difference between a penalty for late registration and a measure to ensure payment of the due VAT during the period that taxable persons should have been VAT-registered but failed to do so.

The ruling also confirms EU countries' flexibility when defining specific VAT rules and highlights the importance of understanding that some rules may vary from one EU country to another.

Analysis of the Court Findings

The ECJ noted that Recital 49 allows EU countries to apply special schemes for small businesses and that, in this case, it is apparent that the Bulgarian VAT registration threshold was defined under Article 287 of the EU VAT Directive. Therefore, taxable persons must register for VAT within seven days of exceeding the threshold. The ECJ also acknowledged that there are two scenarios for the seven-day deadline to start.

The ECJ further underlined that the special VAT scheme for small businesses aims to simplify administration, support business growth, and keep tax supervision costs reasonable. However, a certain level of flexibility is allowed for EU countries when applying this scheme. Moreover, treating two groups of taxable persons differently and setting different rules when they must register for VAT based on how quickly they exceed the threshold is generally allowed under the discretionary rights granted to EU countries. However, to apply this, EU countries must pay attention to the fact that such a rule must align with the scheme's purpose and maintain fairness in tax administration.

In its ruling, the ECJ added that case law establishes that EU countries can impose penalties for failing to register for VAT to ensure proper tax collection and prevent fraud.  However, these penalties must not be excessive and must be as severe as necessary. Nevertheless, it is up to the national courts to evaluate the penalty's proportionality, considering each case's specific circumstances. The principle applies to the interest that is treated as tax penalties.

Additional examination of the case led to the conclusion that when a business misses the VAT registration deadline, the national law requires the payment of due VAT from the moment the conditions for registration are met until the official registration.

As stated by the European Commission, such provisions are not considered penalties, and their purpose is simply to recover VAT on transactions that would have been taxed if the businesses registered on time. Therefore, such a provision aims not to penalize the non-compliant business but to ensure VAT is collected for the period it should have been charged.

Under the national VAT rules, if a business exceeds the threshold within two consecutive months and fails to apply for VAT within the seven-day deadline, it must pay VAT on taxable supplies for the period until it registers for VAT. However, the ECJ left it to the national court to decide whether such a provision is a penalty.

Courts Final Decision

In the end, the ECJ ruled that the EU VAT Directive does not forbid EU countries to implement requirements under national legislation that oblige small businesses to register for VAT once their annual turnover or turnover within two consecutive months exceeds the  VAT registration threshold. Additionally, EU countries are free to define a time frame in which the registration must be completed.

Furthermore, the ECJ stated that the EU VAT Directive does not prevent EU countries from imposing a tax debt on taxable persons who do not comply with VAT registration rules. However, the penalty should be limited to recovering VAT for transactions that would have been charged if the taxable persons had registered on time. Furthermore, the national rules must be defined according to the principles of effectiveness and proportionality, meaning they must effectively address VAT rule violations without being excessive.

Conclusion

The case clarifies VAT registration requirements and penalties for those who fail to meet these requirements. Additionally, the ECJ confirmed that EU countries have a discretionary right to implement national VAT rules within the EU VAT Directive framework, including registration deadlines. 

Moreover, EU countries can impose VAT liability on unregistered taxable persons if the rules follow the principles of fairness, proportionality, and effectiveness. The ECJ's decision underlines the importance of timely VAT registration for businesses, ensuring that measures for VAT compliance are defined to ensure tax collection without imposing an undue burden on taxable persons.

Source: Case C‑122/23 - Director of the Sofia Territorial Directorate ‘Appeals and Practice in Tax and Social Security Matters’ of the National Revenue Agency v Legafact, EU VAT Directive