Recovery of VAT on bad debts: a positive step for Spain

With the exception of the special Spanish cash accounting regime, VAT collected as a result of the supply of goods or services must be paid to the Spanish tax authorities, whether or not paid by the recipient of the goods or services. services.

Notwithstanding the above, Spanish VAT law provides for the possibility of recovering VAT on bad debts, provided that a series of strict formal requirements are met.

Some of these requirements are not aligned with EU VAT legislation; in particular with Article 90 of the VAT Directive. This article gives Member States the possibility that in the event of total or partial non-payment or reduction of the price of a transaction, the tax base is reduced by the corresponding amount.

The interpretation of the Court of Justice of the European Union (CJEU) of this article is that it expresses one of the fundamental principles of the VAT Directive, according to which the tax base is the consideration actually received. Therefore, the tax authorities cannot collect an amount of VAT higher than the tax collected by the taxable person (C-588/10, Kraft Food Polska; C-672/17, Tratave; C-398/20, Elvosporl sro).

In accordance with Article 273 of the VAT Directive, Member States are free to establish control mechanisms to verify that VAT has not been collected by the taxable person. However, these mechanisms can never be contrary to the principles of neutrality and proportionality. In other words, it is not possible for the control mechanisms put in place by the Member States to make it impossible or excessively difficult to recover VAT.

Some of the requirements established by Spanish regulations make it impossible in practice to recover VAT on bad debts and are therefore not in line with EU legislation and case law. This is a reference to:

  • Strict time limits;

  • The requirement that the recipient of the transaction must be a Spanish entity; Where

  • Very strong formal and bureaucratic requirements that Spanish regulations foresee in order to be able to recover VAT on bad debts.

Judgment of the Spanish Supreme Court

In this regard, on June 2, 2022, the Spanish Supreme Court issued an important judgment rejecting the excessive formalism required by Spanish VAT law. The case referred to the possibility of requesting collection from the recipient of the operation through any notarial procedure, without the need for a specific and concrete procedure, as claimed by the tax authorities.

Without going into the details of the notarial procedure chosen, what is relevant in this judgment is that the Supreme Court stated categorically that the excessive formalities required by Spanish VAT legislation violate the principle of neutrality, which is a basic principle for the operation of the common system of VAT.

According to the Spanish courts, an automatic refusal to refund VAT on irrecoverable debts based solely on non-compliance with excessive formalities without the administration having provided a minimum of probative efforts is not acceptable.

The Supreme Court’s decision to toe the line maintained by the CJEU was a positive step. It was not the first time that there were declarations to this effect in Spain, modifying by court decisions the excessive formalism of the procedure established by Spanish legislation. Given all this, the next step to take should be to adapt Spanish VAT law to all the doctrine and case law that apply European VAT legislation when the Spanish administration has decided not to do so. .

It makes no sense to be forced into long and costly litigation with the administration to recover VAT on bad debts when EU law is clear on the matter. The principle of legal certainty should prevail in these cases and the Spanish legislator should accept it as a matter of course.