© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
M8. Subsequent adjustment of input tax
GENERAL​
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Purpose​
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- A retroactive corrective mechanism
"Finally, the adjustment of deductions, which is made, inter alia, where, after the VAT return is made, some change occurs in the factors used to determine the amount of VAT, and which aims to ensure that the deductions made closely reflect the use of assets for business purposes, is a retroactive corrective mechanism, as the Advocate General observed in point 28 of her Opinion." ​(Mateusiak C-229/15)
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- Prevention of unjustified advantages/disadvantages
"The period laid down in Article 187 of the VAT Directive for adjustment of deductions makes it possible to avoid inaccuracies in the calculation of deductions and unjustified advantages or disadvantages for a taxable person where, in particular, changes in the factors initially taken into consideration in order to determine the amount of deductions occur after the declaration has been made." ​(Mateusiak C-229/15)
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CHANGE IN CIRCUMSTANCES​
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Obligation to adjust where change in factors used to determine deduction
EU law
"The initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled." (Article 184)
"(1) Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.
(2) By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.
However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made." (Article 185)
"Member States shall lay down the detailed rules for applying Articles 184 and 185." (Article 186)
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- Obligation to adjust defined as broadly as possible
"[46] The Court has also pointed out that Article 184 of the VAT Directive defines the coming into existence of an obligation to make a VAT adjustment as broadly as possible and that its wording does not exclude, a priori, any foreseeable situation of undue deductions, since the general scope of the adjustment obligation is supported by the express enumeration of the derogations provided for in Article 185(2) of that directive (see, to that effect, order of 18 May 2021, Skellefteå Industrihus, C‑248/20, EU:C:2021:394, paragraph 43 and the case-law cited)." (Vittamed C-293/21)
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- No adjustment where supply fully consumed before change of circumstances
"[91] It must be noted, however, that where those supplies of services or supplies of goods subject to deductible VAT were entirely consumed in the course of the business activity before the goods were allocated, there is no change in the factors within the meaning of Article 20(1)(b) of the Sixth Directive to justify an adjustment of the deductions.
[92] Accordingly, the deduction of the VAT on the expenditure incurred in connection with the work carried out on Mr Fischer's and Mr Brandenstein's vehicles must be adjusted pursuant to Article 20(1)(b) of the Sixth Directive in so far as the allocation is not subject to VAT under Article 5(6) of the Sixth Directive and the value of the work in question was not entirely consumed in the course of the taxable persons' business activities before the vehicles were allocated to their private assets." (Fischer C-322/99)
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Must be a change in circumstances relevant to original deduction
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- No adjustment where T demolishes buildings acquired
"[41] However, as regards the dispute before the referring court, the demolition of the buildings at issue in the main proceedings does not constitute a change within the meaning of Article 185(1) of the directive since, as is clear from paragraphs 32 to 35 above, that demolition was envisaged by GVM upon acquisition of the buildings." (SC Gran Via MoineÅŸti C-257/11)
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Taxpayer no longer intends to use goods/services for taxable output transactions
"[44] It is only if the taxable person no longer intended to use the goods and services in question to carry out taxable output transactions, or used them to carry out exempt transactions, that the close and direct relationship, within the meaning of the case-law cited in paragraph 41 above, which must exist between the right to deduct input VAT and the performance of planned taxable transactions, would be broken." (ITH Comercial C-734/19)
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- No adjustment where property has laid empty for 2 years but person sought to rent it out
"[53] In the light of the foregoing, the answer to the first question is that Articles 167, 168, 184, 185 and 187 of the VAT Directive must be interpreted to the effect that they preclude national legislation which provides for the adjustment of the VAT initially deducted on the ground that a property, for which the right to opt for taxation was exercised, is regarded as no longer being used by the taxable person for the purposes of its own taxed transactions, where that property has remained unoccupied for more than two years, even though it is established that the taxable person has sought to rent it during that period." ​(Imofloresmira C-672/16)
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- No adjustment where plan changes but still involves taxable supplies
"[47] Furthermore, the Court has stated that, where, by reason of circumstances beyond its control, the taxable person did not make use of a service or goods, such as immovable property, which gave rise to a deduction in the context of taxed transactions, it is not sufficient, in order to establish the existence of a ‘change’ for the purposes of Article 185 of the VAT Directive, for that property to remain empty after the termination of the lease to which it was subject, even where it has been established that the taxable person still intends to use it for a taxed activity and undertakes the necessary steps to that end, since that would be tantamount to restricting the right of deduction through the provisions applicable to adjustments (judgment of 28 February 2018, Imofloresmira – Investimentos Imobiliários, C‑672/16, EU:C:2018:134, paragraph 47; order of 18 May 2021, Skellefteå Industrihus, C‑248/20, EU:C:2021:394, paragraph 44)." (Vittamed C-293/21)
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"[46] In the light of all the foregoing considerations, the answer to parts (a) to (i) of the first question is that Articles 167, 168, 184 and 185 of the VAT Directive must be interpreted as meaning that the right to deduct input VAT on goods, in the present case immovable goods, and services acquired with a view to carrying out taxable transactions, is maintained where the investment projects initially planned have been abandoned owing to circumstances beyond the taxable person’s control, and there is no need to adjust that VAT if the taxable person still intends to use those goods for the purposes of a taxable transaction." (ITH Comercial C-734/19)
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- Query whether adjustment might be required when lease company cannot recover goods from customer
"[31] Therefore, Article 18 of the VAT Directive does not permit Member States to treat as a supply of goods for consideration transactions such as those of the case in the main proceedings.
[32] Finally, in order that the referring court may be provided with a helpful answer, it should be made clear that the adjustment provided for in Articles 184 to 186 of the VAT Directive is an integral part of the VAT deduction scheme established by that directive (judgment in TETS Haskovo, C‑234/11, EU:C:2012:644, paragraph 30). The foregoing considerations thus do not affect any right of the tax authorities to require adjustment on the part of a taxable person under the conditions prescribed in that regard in the VAT Directive." (BCR Leasing C-438/13)
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- No adjustment where allocation to private use gives rise to deemed supply
"[95] The answer to Question 5 in Case C-322/99 and to Question 4 in Case C-323/99, as reformulated in paragraph 88 above, must therefore be that where work which is carried out on goods (in this case a motor vehicle) after their purchase and on which the input VAT was deducted does not give rise to liability for VAT pursuant to Article 5(6) of the Sixth Directive when the vehicle is allocated, the VAT deducted in respect of that work must be adjusted in accordance with Article 20(1)(b) of that directive if the value of the work in question has not been entirely consumed in the context of the business activity of the taxable person before the vehicle is allocated to his private assets." (Fischer C-322/99)
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Liquidation​
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- Liquidation may mean no intention to use goods for taxed transactions
"[49] In the present case, it is apparent from the request for a preliminary ruling that, as a result of its being placed in liquidation and removed from the register of VAT payers, the taxable person concerned no longer has – and will never have – any intention of using the capital goods produced for the purposes of taxed transactions. If that situation is confirmed, which is a matter for the referring court to ascertain, the ‘close and direct relationship’, within the meaning of the case-law referred to in paragraph 45 above, which must exist between the right to deduct the input VAT paid and the carrying out of taxed output transactions is broken, and the adjustment mechanism provided for in Articles 184 to 187 of the VAT Directive must be applied." (Vittamed C-293/21)
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- But an intention to dispose of assets through taxable transactions in the course of liquidation means adjustment not immediately required
"[50] However, that might not be the case where the placing of the taxable person concerned in liquidation has nevertheless resulted in taxed transactions being carried out, for example the sale of assets for the purposes of discharging the taxable person’s debts, even though that does not form part of the economic activity initially planned by that taxable person.
[51] In that regard, the Court has held that, since the activity must be considered per se and without regard to its purpose or results, the mere fact that the initiation of insolvency proceedings in respect of a taxable person changes, in accordance with the rules laid down in national law, the purposes of that taxable person’s transactions, in the sense that those purposes no longer include the long-term operation of its business, but relate solely to its liquidation for the purposes of extinguishing debts followed by its dissolution, cannot, in itself, affect the economic nature of the transactions carried out in the course of that business (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 38).
[52] The Court has therefore ruled that Articles 184 to 186 of the VAT Directive must be interpreted as precluding national legislation or practice whereby the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the VAT deductions which it has made in respect of goods and services acquired before it was declared insolvent, where the initiation of those proceedings is not such as to prevent that operator’s economic activity, within the meaning of Article 9 of that directive, from being continued, in particular for the purposes of the liquidation of the undertaking concerned (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 45)." (Vittamed C-293/21)
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Change in price ​
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Purchase cancelled ​
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PERSON LIABLE ​
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- Person liable for adjustment is person who claimed the deduction​
"[40] Moreover, in the event of successive supplies of an immovable property, such as those at issue in the main proceedings, the fact that one of the taxable persons concerned did not, at the time of the supply in which it has participated, comply with the rules governing the exercise of the right of option referred to in second paragraph of Article 13C of the Sixth Directive cannot have the consequence of requiring that taxable person to pay the tax debt due following the adjustment of a VAT deduction applied by another taxable person in relation to one of those supplies in respect of which the first taxable person is extraneous.
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[47] The answer to the question referred for a preliminary ruling is therefore that the Sixth Directive must be interpreted as precluding the recovery of amounts due following the adjustment of a VAT deduction from a taxable person other than the person who applied that deduction." (Pactor Vastgoed C-622/11 - Supply to T treated as taxable, but that depended on whether T used the property for taxable transactions. In the event, T did not. That meant T's supplier had made an exempt supply and its input recovery was to be adjusted. The tax authority sought to assess that sum against T because it thought it would unfair to assess the supplier, since it was T's failure to use the property for taxable transactions that led to exemption.)
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