Formal defects on the invoice and the right to deduct VAT
On 15 September 2016, the Court of Justice of the European Union gave a judgment in Case C-516/14 Barlis 06 – Investimentos Imobiliarios e Turisticos SA v Autoridade Tributaria e Aduaneira, involving the right of the Portuguese company to deduct VAT from invoices documenting legal services provided to it by a firm of lawyers.
The tax authorities in Portugal refused the company the right to deduct VAT, arguing that the invoices issued by the lawyers did not meet formal requirements laid down by national legislation, i.e. descriptions on the disputed invoices were insufficient. In response, the company presented annexes giving a more detailed description of the legal services in question. The authorities found, however, that the submission of documents confirming the missing information did not remedy formal deficiencies – as the annexes were not “documents equivalent” to invoices because they did not satisfy the conditions imposed by legal regulations. The CJEU was to resolve whether in view of the provisions of Directive 2006/112 the tax authority may regard as insufficient a description on an invoice, even if that body may, in accordance with the principle of collaboration, obtain the additional information which it deems necessary to confirm the existence and detailed characteristics of the relevant transactions.
The Court noted two important issues:
- It is not open to Member States to make the exercise of the right to deduct VAT dependent on compliance with conditions relating to the content of invoices which are not expressly laid down by the provisions of Directive 2006/112. Pursuant to Article 226(6) of Directive 2006/112, only the details mentioned in that Article are compulsory on invoices. One of such conditions is that an invoice should mention the extent and nature of the services rendered. At the same time, Directive does not specify whether an exhaustive description of the specific services supplied is necessary. Furthermore, it should be emphasised that invoices should contain the date on which the supply of services was made or completed, enabling thus the authorities to check when the chargeable event for tax occurred.
- According to settled case law of the Court, the right of taxable persons to deduction of VAT constitutes a fundamental principle of the common system of VAT. That right is an integral part of the VAT scheme and as such may not be limited. The common system of VAT is to ensure that all economic activities, whatever their purpose or results, provided that they are in principle themselves subject to VAT, are taxed in a neutral way. The substantive condition for the right of deduction is that goods and services should be used for taxed output transactions and supplied by another taxable person as inputs. While the formal condition requires the taxable person to have an invoice drawn up in accordance with Directive 2006/112.
According to the CJEU, the principle of the neutrality of VAT requires deduction of input VAT to be allowed if the fundamental (substantive) requirements are satisfied, even if some formal conditions have not been complied with. The CJEU took similar position already in the past. In view of the foregoing, tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the formal conditions if they have available all the information to ascertain whether the substantive conditions for that right are satisfied. The authorities cannot restrict themselves to examining the invoices themselves but must take account of all information provided by the taxable person. What is important, Article 219 of Directive 2006/112 treats as an invoice any document or message that amends and refers specifically and unambiguously to the initial invoice.
Consequently, in the case at issue the Portuguese authorities should take into account in their assessment also the annexes to the invoices submitted by the taxable person, and the burden of proving that the conditions for deduction have been met will rest on the taxable person.
In the judgment under discussion the Court confirmed its position taken to date with respect to the superiority of the principle of neutrality of VAT. The tax authority may not challenge the right of deduction of VAT by taxable persons in connection with formal deficiencies, if the substantive conditions are satisfied.