Analysis of the European Court of Justice (ECJ) judgment in Case C-518/14, Senatex GmbH v Finanzamt Hannover-Nord, concerning the deduction of input VAT when invoices lack a VAT identification number and the retroactivity of corrections.
Executive Summary:
The ECJ ruling in Senatex GmbH v Finanzamt Hannover-Nord addresses whether a Member State can deny the retroactive effect of invoice corrections regarding the VAT identification number for input VAT deduction purposes. The court ruled that EU VAT law precludes national legislation preventing the retroactive application of such corrections. This means that if an invoice is corrected to include a missing VAT identification number, the right to deduct VAT should relate back to the original year the invoice was issued, not the year of the correction. This aims to uphold the fundamental principle of VAT neutrality.
Background:
Senatex GmbH, a textile wholesaler in Germany, sought to deduct input VAT based on commission statements and advertising designer invoices. The Finanzamt Hannover-Nord (tax office) disallowed the deductions because the original invoices lacked the recipient’s tax number or VAT identification number (VAT ID). Senatex subsequently corrected the invoices. German law dictated that corrections to invoices are effective ex nunc (from now on), meaning the deduction could only be claimed from the year of the correction, not the original issue date of the invoice. This triggered additional financial burdens through interest for late payment.
Key Issues and Court’s Findings:
Retroactivity of Invoice Corrections: The central question was whether the correction of an invoice, specifically the addition of a missing VAT ID, should have retroactive effect for VAT deduction purposes.
- The Court ruled against the German practice, stating that Article 167, Article 178(a), Article 179 and Article 226(3) of Directive 2006/112 preclude national legislation that denies retroactive effect to such corrections.
Neutrality of VAT: The Court emphasized the fundamental principle of VAT neutrality.
- “The deduction system is intended to relieve the operator entirely of the burden of the VAT due or paid in the course of all his economic activities. The common system of VAT therefore ensures 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.” (Paragraph 27).
- Denying retroactive effect and applying interest for late payment imposes a tax burden that contradicts VAT neutrality.
Formal vs. Substantive Requirements: The Court distinguished between substantive and formal requirements for VAT deduction.
- While holding an invoice is a formal requirement, the substantive requirements (taxable person, goods/services used for taxed output transactions, supply by another taxable person) were met in this case.
- “Holding an invoice showing the details mentioned in Article 226 of Directive 2006/112 is a formal condition, not a substantive condition, of the right to deduct VAT.” (Paragraph 38).
Member State Penalties: The Court acknowledged Member States’ power to impose penalties for non-compliance with formal requirements but stressed that these penalties must be proportionate and not undermine VAT neutrality.
- “Member States can adopt measures to ensure the correct collection of VAT and to prevent evasion, provided that those measures do not go further than is necessary to attain those objectives and do not undermine the neutrality of VAT” (Paragraph 41).
- The German practice of postponing the right to deduct VAT and applying interest was deemed disproportionate in this case.
Quotes:
- “A right of deduction shall arise at the time the deductible tax becomes chargeable.” (Article 167 of Directive 2006/112)
- “In order to exercise the right of deduction, a taxable person must meet the following conditions: (a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240” (Article 178 of Directive 2006/112).
- “Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221: …(3) the VAT identification number referred to in Article 214 under which the taxable person supplied the goods or services” (Article 226 of Directive 2006/112)
- “Any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice.” (Article 219 of Directive 2006/112).
Implications:
- This ruling clarifies the scope of Article 167, Article 178(a), Article 179 and Article 226(3) of Directive 2006/112, reinforcing the principle of VAT neutrality.
- Member States cannot automatically deny the retroactive effect of VAT invoice corrections solely based on missing formal elements like the VAT ID, especially if the substantive conditions are met.
- The ruling may impact national VAT legislation and practices in Member States with similar restrictive rules on invoice corrections. Taxpayers may be able to reclaim VAT deductions that were previously denied due to similar national regulations.
Open Questions:
- The ruling does not explicitly define the minimum requirements for an invoice to be capable of correction with retrospective effect, beyond the necessity to include the VAT ID.
- The Court avoided answering the question of whether a correction to an invoice is in time if it’s only made during objection proceedings.
Next Steps:
- Monitor the implementation of this ruling in Member States, particularly in Germany.
- Analyze how tax authorities interpret and apply this judgment in practice.
- Consider the potential implications for businesses operating across EU borders.
See also
- Roadtrip through ECJ Cases – Right to Deduct VAT and ”Substance over form” concept
- C-518/14 Senatex – VAT deduction for non-compliant invoices
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
