For many years, a civil servant purchased personal goods at his employer’s expense. To do so, he used an office fit-out company as an intermediary. That company paid the suppliers, invoiced the local authority with a mark-up, and deducted the VAT shown on the purchase invoices. The tax inspector refuses to allow the deduction and levies the VAT invoiced to the local authority retrospectively. The Court of Appeal in 's-Hertogenbosch rules in favour of the inspector. The company is not a customer of the suppliers and cannot rectify the VAT that has been incorrectly invoiced.
Over eight tonnes of private purchases
The civil servant is head of internal services at a local authority. In this role, he is authorised to issue procurement orders and authorise the payment of invoices. He abuses this position on a large scale. He orders personal goods from suppliers and has the invoices addressed to an office fit-out company that is a regular supplier to the local authority. He then asks that company to pay the invoices, draw up a new invoice with a mark-up of approximately 10%, and send it to the local authority. To this end, he issues order confirmations with vague descriptions such as ‘work carried out’ or ‘materials supplied’. The total amount involved for the years 2013 to 2016 inclusive is over €862,000.
No customer, no deduction
The court ruled that the company is not a customer of the suppliers. The civil servant himself made contact with the suppliers and concluded the agreements. The company was involved only in the administrative and financial processing. This means that the company is not a commission agent. After all, its involvement does not relate to the provision of the services, but to the settlement of services that had already been provided. The company is therefore not entitled to deduct the VAT charged by the suppliers.
No review on the grounds of unjust enrichment
The company charged the local authority VAT even though it had not itself provided any services. It is required by law to pay that VAT. The Court of Appeal has rejected the application for a review of that VAT. The company has not corrected the invoices. If the VAT were to be revised, the company would receive that VAT as revenue, even though it had informed the local authority that the VAT would be paid via its tax return. This would constitute unjust enrichment.
The Court’s suggestion
The result is a heavy financial burden for the company: no deduction of input VAT, whilst at the same time having to pay the VAT invoiced to the local authority. Furthermore, the local authority is claiming damages in civil proceedings. The Court of Appeal suggested to the tax inspector that any compensation payable to the local authority might be deducted from the additional tax assessment. After all, that amount would then no longer constitute unjust enrichment. However, no compromise was reached.