VAT: The 10% penalty for not including self-charged tax on a tax return violates principle of proportionality

Spain - 13 / 07 / 2021

According to the National Appellate Court, this penalty cannot be imposed if no loss has arisen for the public purse.

Article 170.Two.4 of the VAT Law states that it is a tax infringement to fail to include in a VAT self-assessment any self-charged VAT on transactions in which the taxable person is the customer. The penalty is equal to 10% of the amount of VAT chargeable on the transactions that were not included.

In a judgment delivered on May 12, 2021 (on an appeal was handled by Garrigues), the National Appellate Court reviewed the case of an entity which had received an invoice for a transaction in which the self-charge mechanism should have been used. The company (which was fully entitled to deduct its input VAT) recorded the invoice in its invoice record book for VAT, but, by mistake, failed to include it in the self-assessment for the VAT period. The auditors found that the company's position had to be adjusted as follows:

By including the self-charged VAT.
By including also the input VAT arising from the self-charge.
By recognizing the right to deduct that input VAT, due to the taxable person being in possession of the invoice and having recorded the transaction in the record book.
By imposing the penalty, consisting of a fine equal to 10% of the VAT chargeable on the transactions not included in the self-assessment.

The National Appellate Court considered it reasonable to reprehend incorrect information on self-assessments to prevent fraud, under the case law of the Court of Justice of the European Union (CJEU). However, in line with that case law and under the basic principles underlying VAT, a penalty based on automatic parameters (in this case, a percentage penalty) without taking the circumstances of the case into account, in particular, the absence of a loss to the public purse, goes beyond what is necessary to ensure that purpose. For that reason, the court overturned the penalty.