In its judgment 988/2026 of 23 July 2026, the Supreme Court has confirmed that the Tax Agency may verify VAT balances pending set-off arising from periods for which the limitation period has expired when these are carried forward and applied to a subsequent period that is still open for assessment. The decision is particularly relevant for businesses with accumulated VAT balances to be offset.
What has the Supreme Court decided?
The case concerned a company whose VAT periods for the first three quarters of 2015 had become time barred. However, the balance generated in those periods was carried forward to the fourth quarter of 2015, which was still subject to assessment. The company argued that the limitation period prevented the Spanish Tax Agency (AEAT) from re-examining the underlying transactions: according to its argument, the Agency could only verify that the balance had been carried forward correctly but could not review its origin or amount.
The Supreme Court rejects this distinction. It considers that an outstanding VAT balance awaiting set-off constitutes a tax credit. Where such a credit affects the calculation of VAT for a period not subject to the limitation period, the AEAT may verify its existence, origin and amount, even though it can no longer issue an assessment relating to the period in which it arose. This does not mean that the historical period is reopened. The tax authorities cannot demand an additional tax liability relating to a period for which the limitation period has expired. They may, however, reduce or eliminate the historical credit when it is used to determine the amount to be paid or refunded in a subsequent open period.
Four years and ten years: two different time limits
The judgement highlights a key distinction in the General Tax Law. The AEAT’s right to determine a tax liability generally becomes time-barred after four years. However, following the reform introduced by Law 34/2015, the power to verify certain tax bases, tax liabilities, deductions and tax credits is subject to a specific ten-year time limit.
Both time limits serve different purposes. The four-year time limit determines whether a specific period can be assessed. The ten-year time limit defines the scope for auditing a historical tax credit that continues to have an effect on an open period. The Supreme Court expressly applies this distinction to VAT balances pending offsetting.
There is, furthermore, another four-year period which should not be confused with the previous ones. Under VAT regulations, where deductible input VAT exceeds output VAT, the excess may be offset against subsequent self-assessments provided that four years have not elapsed since the submission of the self-assessment in which it arose. This is the time limit for the taxpayer to utilise the credit, not the time limit for the tax authorities to verify its validity.
Why is this ruling significant?
The accumulated VAT balance to be offset, as shown on Form 303, is not automatically validated simply because the original return is old. If the Spanish Tax Agency (AEAT) audits a subsequent period, it may request the invoices, accounting records and business evidence justifying the carried-forward amount.
The risk is particularly significant for:
- companies that accumulate VAT credits during construction phases, when starting up operations or during investment;
- property companies with high refurbishment or development costs;
- groups that have changed their accounting software; and
- entities involved in mergers, demergers, business transfers or liquidations.
Conclusion
Judgment 988/2026 confirms that the limitation period prevents a closed VAT period from being reassessed but does not automatically render any credit arising from that period valid. For businesses, the conclusion is clear: a VAT credit is only as sound as the documentation supporting it. Retaining and organising historical records is, therefore, an active measure of tax compliance.