If a description of service is not sufficiently detailed indicated in an invoice, can it deprive the right to input tax deduction of a service recipient? If the VAT registration number of recipient is not indicated in an invoice but added afterwards, can it impact the time of input tax deduction? European Court of Justice (‘ECJ’) provides answers to the above questions further in case C-516/14 and C-518/14 issued 15 September 2016.
Non-compliance of invoice with requirements defined and right of input tax
The situation described in the case C-516/14 concerned a company established in Portugal that used legal services of law firm. Description of services in the invoices referred to legal services or fees for legal services rendered in certain period of time i.e., several months or almost a year.
When carrying out tax audit, the Portuguese tax authorities considered that the company was not entitled to deduct VAT on legal services obtained since the description indicated in the tax invoices were not sufficient and did not meet national law requirements and provisions of the Directive 2006/112/EC ('VAT Directive'). During the tax audit, the company submitted supplementary documentation providing more detailed overview of the legal services acquired. However, the tax authorities disregarded it, because in their view invoices cannot be corrected by adding annexes confirming the missing information, as the annexes are not documents ‘equivalent’ to invoices.
In the case C-516/14, ECJ ruled the following:
1) The description of received services in the invoices does not comply with the requirements of VAT Directive.
2) However, to be entitled to deduct VAT, the substantive requirement is that the goods or services must be used for taxable transaction purposes and goods or services must be supplied by another taxable person. The existing VAT invoice issued in accordance with the requirements of the VAT Directive is a formal condition for entitlement to deduct VAT. The fundamental principle of the neutrality of VAT requires deduction of input VAT if the substantive requirements are met, even if the taxable persons have failed to comply with formal conditions defined. Consequently, if the tax authorities have all the necessary information justifying that substantive requirements are fulfilled, it cannot deny the tax payers right to deduct input VAT even when the invoice does not comply with formal requirements;
3) Failure to comply with the formal conditions regarding to the right to deduct VAT, the Member States shall be empowered to impose penalties. If necessity, the tax authorities may impose a fine or penalties proportionate to the level of the offence instead of refusal the right to deduct VAT.
Correction of invoice and timing for input tax deduction
In the case C-518/14, it was a dispute between the German company and its tax administration. The taxpayer in the tax declaration included VAT as input tax paid for the services received by its counterparties. During a tax audit, the tax authorities found that the customer's VAT registration number are not included in the invoices. Moreover, the invoices did not include the references to other document that might have provided the missing information.
Further during audit before issuing an administrative decision, the company supplemented invoices by adding VAT registration number. However, the German tax authority decided that the conditions for entitlement of input tax deduction are not met at the time of receipt of the invoices (in years 2008- 2011). Thus the right to deduct VAT is implemented only when the original invoices were adjusted (in year 2013). In this case the dispute was not related to the invoices not including required information according to the VAT regulations, but concerning the timing of the right to deduct VAT i.e., the date of receipt of the invoice or date it was supplemented with the missing information i.e. VAT number.
The ECJ stated that considering provision stated in the Articles 178 and 179 of the VAT Directive, the right to deduct VAT concerns, firstly, the period when the right had arisen and, secondly, the taxable person is in possession of an invoice.
In addition, the ECJ outlined that the fundamental principle of the neutrality of VAT requires deduction of input VAT to be performed if the substantive requirements are met even if the taxable persons have failed to comply with few formal conditions. Taking into account that information provided in the invoice is not substantive but formal condition, the entitlement for the right to deduct input VAT are applied at the time when substantive conditions are fulfilled, despite the fact that the invoices were supplemented with missing information later on.
The ECJ also stated that in case of incompliance with formal conditions, different penalty than the refusal of the right to deduct tax may be imposed which is contrary to attainment of objectives laid down in the VAT Directive.
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