CJEU – is it required to make adjustments to input VAT in the case of destruction of goods?

In the judgment of 4 May 2023 in Case C-127/22 ‘Balgarska telekomunikatsionna kompania’ EAD [hereinafter: Company] v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Sofia [hereinafter: tax authority], the CJEU ruled on the obligations of taxpayers to make adjustments to input tax in relation to the acquisition of goods when those goods are not used in a business activity but are destroyed, disposed of or sold as waste.

What the case is about

The case before the CJUE concerns a Bulgarian Company operating in the telecommunications sector. For the purposes of its operations, the Company purchased various capital goods and, for its resale, mobile phones and other equipment necessary or ancillary to the use the services it provides. The Company deducted input VAT on these goods. Some of the purchased goods were wrote off (removed from the balance sheet) by the Company as unusable due to their physical wear and tear, defectiveness, obsolescence. Subsequently, some of the goods were sold as waste by way of taxable transactions to third-party companies and others were destroyed or disposed of. The Bulgarian tax authority took the position that in the present case the Company should make an adjustment to the VAT deduction made on these goods.

CJEU position

Pursuant to Art. 185(1) of the VAT Directive, the obligation to adjust the deduction of input VAT arises also whenever a change in the factors taken into account in determining the amount of that deduction occurs after the submission of a VAT return. By way of derogation from the above rule, an adjustment shall not be made, i.e., in the event of duly proven or confirmed destruction of goods.

In view of the aforementioned regulation, the Court found that the writing off of the goods which, in the opinion of the taxpayer, have become unusable in the course of his usual business activities and the subsequent sale of those goods as waste subject to VAT, does not constitute a ‘change in the factors used to determine the amount to be deducted’ within the meaning of Art. 185(1) of the VAT Directive. Given that the goods were ultimately sold by the Company as part of transactions subject to VAT, the goods were used in the course of a taxable economic activity and the Company therefore retained the right to deduct VAT on those goods.

Moreover, the Court decided that the destruction of the goods by the Company does not give rise to adjust the VAT deducted. Such a situation constitutes “destruction” within the meaning of Art. 185 (2) of the VAT Directive, irrespective of its voluntary nature. The obligation to make adjustments will not arise insofar as this destruction is properly proved or confirmed and the goods have objectively lost all utility in the course of the taxpayer’s economic activity. Properly proven disposal should be treated as equal to their destruction, as long as it specifically involves the irreversible disappearance of the goods.

Therefore, the CJEU opted for a wide range of activities related to the writing off of goods, which, inasmuch as constitute a change in the factors taken into account while determining the amount of deduction, do not give rise to adjustments to deducted input VAT. It also confirmed that a disposal may be treated as a destruction of goods under certain conditions.

When the CJEU decided on the requirement to make adjustments to deducted VAT

By way of discussing the judgment in question, it is worth recalling the recent judgment of the CJEU of 6 October 2022 in case C 293/21 UAB ‘Vittamed technologijos’. In the aforementioned judgment, the Court referred to the obligation to make adjustments to the VAT deducted on purchased capital goods in the event these goods not being used in business activities due to the liquidation of the taxpayer. The Court decided that the failure to use the capital goods, although resulting from the poor condition of the business and its final liquidation, resulted from a decision taken by the taxpayer. In such a situation, it is necessary to make an adjustment to the VAT deducted on these goods. Therefore, it is worth to bear in mind that in certain situations the failure to use goods in the course of business activities may require an adjustment of the VAT deducted.