With the exception of the Spanish special cash accounting scheme, the VAT charged as a result of the supply of goods or services must be paid to the Spanish tax authorities, regardless of whether it has been paid by the recipient of the goods or services.
Notwithstanding the above, the Spanish VAT Law sets forth the possibility to recover the VAT on bad debts, provided a series of strict formal requirements are met.
EU legislation
Some of these requirements are not aligned with the EU VAT legislation; in particular, with Article 90 of the VAT Directive. This article gives member states the option that in cases of total or partial non-payment or reduction of the price of a transaction, the taxable amount shall be reduced by the corresponding amount.
The Court of Justice of the European Union’s (CJEU's) interpretation of that article is that it is the expression of one of the fundamental principles of the VAT Directive, according to which the taxable amount is the consideration actually received. Therefore, the tax authorities may not collect an amount of VAT exceeding the tax that the taxable person received (C-588/10, Kraft Food Polska; C-672/17, Tratave; C-398/20, Elvosporl sro).
According to Article 273 of the VAT Directive, member states are free to establish control mechanisms to verify that VAT has not been received by the taxable person. However, these mechanisms may 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 member states to make it impossible or excessively difficult to recover the VAT.
Some of the requirements established by the Spanish rules make it impossible in practice to recover VAT on bad debts and therefore they are not in line with EU legislation and EU case law. This is a reference to:
Strict time limitations;
The requirement that the recipient of the transaction must be a Spanish entity; or
Very strong formal and bureaucratic requirements that the Spanish rules provide for in order to be able to recover the VAT on bad debts.
Spanish Supreme Court ruling
In this regard, on June 2 2022, the Spanish Supreme Court issued an important ruling rejecting the excessive formalism required by the Spanish VAT Law. The case referred to the possibility of requesting collection from the recipient of the transaction by any notarial procedure, without the need for a specific and concrete procedure, as the tax authorities were claiming.
Without going into the details of the notarial procedure chosen, what is relevant in this ruling is that the Supreme Court categorically stated that the excessive formalities required by the Spanish VAT legislation undermine the principle of neutrality, which is a basic principle for the functioning of the common VAT system.
According to the Spanish court, an automatic refusal of a VAT refund of VAT on bad debts based solely on a failure to comply with excessive formalities without the administration having made a minimum evidentiary effort is not acceptable.
Moving towards alignment
The Supreme Court’s decision to follow the line maintained by the CJEU was a positive move. It was not the first time that there have been pronouncements in Spain in this sense, amending through court rulings the excessive formalism of the procedure established by the Spanish legislation. In view of all this, the next step to be taken should be to adapt the Spanish VAT Law to all the doctrine and case law that is applying EU VAT legislation where the Spanish administration has decided not to do so.
It makes no sense to be obliged to engage in lengthy and costly litigation with the administration to recover VAT on bad debts when the EU legislation is clear on the matter. The principle of legal certainty should prevail in these cases and the Spanish lawmaker should accept this as a matter of course.
