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The adjustment period
Growing businesses regularly make major investments, such as the purchase of machine tools, IT equipment and office furniture. VAT on such expenditure is, of course, immediately and fully recoverable.
However, VAT is only definitively deductible after a certain period (known as the "review" period), which varies from 5 yers for movable investments and maximum 20 years for immovable investments.
If, during this period, the company no longer uses these investment goods, an adjustment must be made i.e. repay part of the VAT initially deducted.
There are, however, situations in which investment goods are no longer used for reasons that are entirely beyond the company's control. This is particularly the case when goods are destroyed, stolen or lost. In such cases, the VAT Directive allows the VAT initially deducted to be definitively acquired and not subject to adjustment.
But what happens in the case of deliberate destruction?
The case that ended up before the court concerned a company operating in the telecommunications sector that had purchased various goods, such as equipment and appliances. After a certain period of time, the company decided that it no longer had any use for these items for a variety of reasons, including wear and tear, defects, obsolescence or unsuitability. The company manages to resell some of the equipment as spare parts, disposes of the unsold goods at a waste disposal site and writes them off its balance sheet.
However, the Bulgarian tax authorities consider that the destruction of goods, when voluntary, leads to the regularization of the VAT initially deducted. This was contested by the company. The case ended up before the Court of Justice.
The Court's response
The Court ruled in favor of the company. There is nothing in the VAT Directive to suggest that the concept of "destruction of goods" refers only to goods that are destroyed completely beyond the control of the business. The fundamental criterion of the VAT system is to take account of economic and commercial reality. There are therefore cases where the destruction of goods may be the result of voluntary action on the part of the business. In particular, in the case of the destruction of goods following a finding that they have become unfit for use in the taxable person's usual economic activities.
Thus, methods of disposing of an asset, such as landfilling it, must be considered as leading to its "destruction" if they actually result in the irreversible disappearance of the asset.
Source : Case C‑127/22, 4 May 2023, Balgarska telekomunikatsionna kompania EAD
The VAT expert's eye
If your company no longer has any use for some of its investment goods, it can decide to scrap or landfill them. But be careful. The destruction of such goods forming part of your company's assets must be duly proven or justified, and only the destruction of an asset decided on because of the objective loss of use of that asset can be taken into consideration. In other words, you need to be able to document their removal from your company's assets in accordance with the forms and deadlines applicable in each country in order to avoid any desire on the part of the local tax authorities to demand repayment of part of the VAT initially deducted.