Judgment of 21 November 2018 in case C-664/16 (Lucretiu Hadrian Vadan) regarding the deduction of input VAT where no invoice is available.
Summary
- Context and Legal Inquiry: The case involves a preliminary ruling from the Curtea de Apel Alba Iulia (Romania) regarding Mr. Lucrețiu Hadrian Vădan’s right to deduct VAT despite being unable to produce invoices for goods and services used in his construction projects. The court sought clarification on whether the VAT Directive allows for deductions based solely on a court-commissioned expert report.
- Key Questions to the Court: The referring court asked two primary questions: (1) Whether a taxable person can exercise the right to deduct VAT in the absence of invoices, and (2) If so, whether an indirect assessment through an expert report can determine the extent of the VAT deduction.
- Court’s Decision: The Court ruled that a taxable person cannot benefit from the right to deduct VAT solely based on an expert assessment if they cannot provide evidence of the input VAT paid, such as invoices or other acceptable documentation.
- Justification for the Decision: The Court emphasized the principles of VAT neutrality and proportionality, stating that strict adherence to formal invoice requirements should not prevent a taxable person from exercising their right to deduct VAT if substantive conditions are met. However, it also highlighted the necessity for the taxpayer to provide objective evidence of the transactions.
- Implications: This judgment reinforces the importance of maintaining proper documentation for VAT deductions while allowing some flexibility in the interpretation of what constitutes acceptable evidence, thereby balancing the need for fiscal compliance with the principles of fair taxation
Facts
- Background of Mr. Vădan’s Construction Activities: Mr. Lucrețiu Hadrian Vădan, a Romanian national, completed a construction project for a residential complex consisting of 16 buildings and 90 apartments between June 2006 and September 2008. During this period, he conducted a total of 99 real estate transactions and sold building land, accumulating significant revenues amounting to approximately 19.23 million RON (about 4.1 million EUR).
- Tax Registration and Liability: Due to exceeding the VAT exemption threshold from June 2006, tax authorities determined that Mr. Vădan was a taxable person required to register for VAT effective August 1, 2006. However, he failed to register and did not submit VAT returns, leading to a substantial tax assessment by the Romanian tax authorities.
- Tax Assessment and Appeals: The tax authorities assessed Mr. Vădan for a total of approximately 6 million RON (about 1.28 million EUR) in VAT, interest, and penalties for the period from August 2006 to December 2009. Following an administrative appeal, the tax payable was adjusted to approximately 5.74 million RON (about 1.22 million EUR), which Mr. Vădan contested in court.
- Judicial Proceedings and Re-examination: The Curtea de Apel Alba Iulia dismissed Mr. Vădan’s claims initially. However, the Înalta Curte de Casație și Justiție (High Court of Cassation and Justice) later overturned this decision, ruling that the appeal court incorrectly denied the right to deduct VAT based on the absence of original invoices, emphasizing the need to consider documents other than invoices to determine VAT deduction rights.
- Questions on VAT Deduction Rights: The case raised significant legal questions regarding whether a property developer, unable to provide invoices or maintain proper accounting, could still benefit from VAT deductions based on other evidence, such as expert assessments of work performed. The court sought clarification on the application of VAT neutrality and proportionality principles in such circumstances, particularly in light of previous ECJ rulings
Questions
(1) On a proper construction of the VAT Directive and Articles 167, 168, 178, 179 and 273 in particular, and the principles of proportionality and neutrality, may a taxable person who satisfies the substantive requirements for the deduction of VAT exercise his right to deduct in a situation where, in a particular context such as that of the dispute in the main proceedings, he is unable to provide evidence, by way of invoices, of input tax for the supply of goods and provision of services?
(2) If the first question is answered in the affirmative, on a proper construction of the [VAT] Directive and the principles of proportionality and neutrality, is an indirect assessment method (by means of a court-commissioned expert report), carried out by an independent expert and based on the amount of work/labour involved in the construction of buildings as stated in the report, an acceptable and appropriate measure for determining the extent of the right to deduct in a situation where the supply of goods (building material) and the provision of services (labour relating to the construction of buildings) originate from taxable persons liable to VAT?
Decision
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, in particular Articles 167, 168, 178(a) and 179, and the principles of the neutrality of value added tax (VAT) and proportionality, must be interpreted as meaning that, in circumstances such as those at issue in the main proceedings, a taxable person who is unable to provide evidence of the amount of input VAT he has paid, by producing invoices or any other document, cannot benefit from a right to deduct VAT solely on the basis of an assessment resulting from an expert report commissioned by a national court.
Judgment
- CJEU held that a taxable person who is unable to provide evidence of the amount of input VAT he has paid (e.g., with an invoice), cannot benefit from the right to deduct VAT.
- CJEU ruled in this case that a taxable person who is unable to provide evidence of the amount of input VAT he has paid, by producing invoices or any other document, cannot benefit from a right to deduct VAT.
- However, a taxable person is required to provide objective evidence that goods and services were actually provided as inputs by taxable persons for the purposes of his own transactions subject to VAT, in respect of which he has actually paid VAT.
- That evidence may include, inter alia, documents held by the suppliers or service providers from whom the taxable person has acquired the goods or services in respect of which he has paid VAT.
Deduction of VAT: Substance vs. Form
- Substantive conditions (article 168(a) of the VAT directive):
- the person concerned must be a taxable person within the meaning of that directive and
- the goods or services relied on to give entitlement to the right of deduction must be used by the taxable person for the purposes of his own taxed output transactions and those goods or services must be supplied by another taxable person as inputs.
- Formal condition (article 178(a) of the VAT Directive): an invoice drawn up in accordance with Article 226 of the VAT directive.
- From the fundamental principle of the neutrality and proportionality it follows that the tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions required by Article 226(6) and (7) of the VAT Directive if they have available all the information to ascertain whether the substantive conditions for that right are satisfied.
- It is for the taxable person seeking deduction of VAT to establish that he meets the conditions for eligibility.
Source
Reference to other ECJ Cases
- Case C‑183/14, Salomie and Oltean: This case is cited to establish the principle that the right to deduct VAT is fundamental to the common VAT system and should not be limited. The Court emphasized that the deduction is intended to relieve the trader of the burden of VAT on their economic activities and ensures neutrality in taxation.
- Case C‑516/14, Barlis 06 — Investimentos Imobiliários e Turísticos: The Court referenced this case to highlight that the principle of VAT neutrality requires that input VAT deductions be allowed if substantive requirements are satisfied, even if formal conditions, such as the issuance of compliant invoices, are not fully met. This case supports the notion that tax authorities cannot refuse VAT deductions solely based on issues with invoice compliance when the substantive conditions are met.
- Case C‑518/14, Senatex: This case is mentioned in relation to the conditions under which the right to deduct arises and the importance of holding appropriate invoices as stipulated in the VAT Directive. The Court has previously clarified the relationship between substantive and formal requirements for VAT deductions.
Other CJEU cases on VAT deduction and incompliant invoices
- In Barlis 06: Substance over form: Authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the VAT invoicing conditions.
- In Vădan, even while a taxable person does not have to be in the possession of an invoice that complies with all the EU VAT invoicing requirements in order to deduct input VAT, that taxable person should at least be in the possession of an invoice or any other piece of objective evidence
See also
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