Recently, a Hungarian court accepted the right of a taxpayer to recover VAT on a bad debt where the VAT claim has already elapsed. The court made it clear that the statute of limitations does not count from the day of the original invoice but from the date when the debt became definitively irrecoverable. This decision may give hope to taxpayers in many pending cases.
The background of the case is that last October the European Court of Justice made a statement in the Porr Építési Kft. case. According to the communication if a debt becomes definitively irrecoverable then the VAT due on it should be refunded to the seller. Publication of the Porr judgment made it possible for other taxpayers to file a special application to recover the VAT on bad debts within 180 days.
You might get it back, but with strict conditions
When assessing the applications, however, it soon transpired that the Hungarian tax authority (NAV) applies a very restrictive approach to calculating the period of limitation: from the original due date of the invoices on which the debts are based. NAV only refunds VAT if the statutory period calculated from the original due date has not elapsed, whereas in many cases it only turns out much later than this that the debt is definitively irrecoverable. That is because it typically becomes obvious after a lengthy enforcement or liquidation procedure, only. In other words, in many cases the original due dates have elapsed but the date on which the debt becomes irrecoverable has not yet come.
A new ray of hope
In a case represented by our office, the court has now accepted our invocation that the period of limitation should not be calculated from the original payment date but from the date when the debt becomes definitively irrecoverable. The regional court judgment in the specific case does not establish a precedent, but it is an important milestone. It shows that it is not impossible to recover VAT on a debt whose original payment date has lapsed but where the date on which the debt becomes irrevocable has not yet arrived.
The saga continues…
As the judgment has not served to conclude the legal dispute even in that particular case, and as an appeal is likely, the uncertainties are not yet over. In fact, the question could easily land before the EU Court again, as a great number of similar applications have been filed with the Hungarian courts. Although the regional court did not consider it necessary to turn to the European Court of Justice, other courts in other cases may decide to do so.
In any event, this decision offers an important ray of hope for taxpayers who have been unable to recover the VAT on their bad debts for years because Hungarian law, in violation of Community law, has not enabled them to do so. For our part, we are looking forward with some excitement to the continuation of these cases.
By Tamas Feher, Partner, Jalsovszky