The right to recover input VAT for start-ups might not be straight forward

On 6 October 2022, the European Court of Justices issued a ruling in the Vittamed case--. In this case, the CJEU determined that an adjustment should take place of the VAT recovery in case capital goods are never used for VAT taxable activities. This case could have a potential impact on the production costs for start-up businesses and these carefully need to review their VAT position in order to avoid revision of the input VAT recovery on these production costs. In this update we will provide our view on what this case will mean for practice.

Facts and circumstances

The CJEU case concerns a Lithuanian company named ‘Vittamed technologijos’ that acquired goods and services for the development of medical diagnostic and monitoring devices. The investments were utilized for the production of prototype devices and intangibles (licenses). Vittamed had the intention to use these for future VAT taxable activities.

Following the R&D phase, the company reported losses due to a failure to sell or license its products. Vittamed’s sole shareholder decided to liquidate the company after concluding that the activities would not become profitable. Shortly after being put in liquidation, the company requested to be removed from the VAT register. In the final VAT return of the company, Vittamed made no corrections on previously recovered VAT. In addition, the assets of the liquidated company were not sold upon liquidation.  

The Lithuanian tax authorities stated that a revision must be made on previously recovered VAT as the services and goods, were not deemed to have been used for VAT-taxable activities due to the liquidation of the company.

The ruling of the CJEU

In earlier case law such as INZO, Ghent Coal Terminal, and Ryanair, the intended activities were never carried out, but the CJEU ruled that there is a right to recover input VAT if the intention to carry out VAT taxable activities can be substantiated by objective criteria when the costs are incurred. In the Vittamed case, the CJEU considered that the company is placed in liquidation and removed from the VAT register making it apparent that the company no longer has, nor will have, any intention of using the acquired goods and services for VAT-taxable activities. As such a revision should be made to the initial recovered VAT.

Our vision and impact on current practice

Start-up businesses need to carefully review their VAT position in relation to the production costs, especially if the intended activities will never take off. The appropriate substantiations should be in place in order to avoid the full revision of VAT recovery on production costs.

More information?

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