Briefing Document & Podcast C-664/16 (Vadan) – No VAT Deduction without invoices

Briefing Document: VAT Deduction and Evidentiary Requirements

This briefing summarises key themes and facts regarding VAT deduction rights, particularly in the absence of traditional invoicing, based on the provided European Court of Justice (ECJ) judgment in Lucreţiu Hadrian Vădan v Agenția Națională de Administrare Fiscală (C‑664/16) and the context provided by VATupdate.com.

Source Overview:

CURIA – Documents (Case C-664/16, Judgment of the Court, 21 November 2018): This is the primary legal source, detailing a preliminary ruling request from a Romanian court regarding a taxable person’s right to deduct VAT without invoices. It sets out the relevant EU VAT Directive articles and principles, the specifics of the Vădan case, the questions referred, and the ECJ’s final judgment.

Main Themes and Key Ideas:

Fundamental Nature of VAT Deduction and Neutrality:

The right to deduct VAT is a “fundamental principle of the common system of VAT” and, “in principle, may not be limited.” (CURIA, para 37)
This system aims to “relieve the trader entirely of the burden of the VAT due or paid in the course of all his economic activities,” ensuring that “all economic activities… are taxed in a wholly neutral way.” (CURIA, para 38)
Fiscal neutrality is a core principle, meaning that the burden of VAT should ultimately fall on the final consumer, not on the taxable person in the supply chain.

Substantive vs. Formal Conditions for VAT Deduction:

Substantive Conditions: For the right to deduct to arise, two main conditions must be met:
The person must be a “taxable person” within the meaning of the VAT Directive. (CURIA, para 39)
The goods or services 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.” (CURIA, para 39)
Formal Conditions: The exercise of the right to deduction is “subject to holding an invoice drawn up in accordance with Article 226 of that directive.” (CURIA, para 40) Article 226 lists detailed requirements for invoices, including date, sequential number, VAT identification numbers, names and addresses, quantity and nature of goods/services, taxable amount, VAT rate, and VAT amount payable. (CURIA, para 9)
Flexibility on Formalities: The Court has held that “the fundamental principle of the neutrality of VAT requires deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with some formal conditions.” (CURIA, para 41) This applies if tax authorities “have available all the information to ascertain whether the substantive conditions for that right are satisfied.” (CURIA, para 41)
Proportionality: Strict application of formal requirements (like producing invoices) would “disproportionately prevent the taxable person from benefiting from fiscal neutrality” if the substantive conditions are met. (CURIA, para 42)

Burden of Proof for VAT Deduction:

It is “for the taxable person seeking deduction of VAT to establish that he meets the conditions for eligibility.” (CURIA, para 43)
The 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.” (CURIA, para 44)
This evidence “may include, inter alia, documents held by the suppliers or service providers.” (CURIA, para 45)

Limitations of Expert Reports as Sole Evidence:

In the Vădan case, the key issue was whether a court-commissioned expert report could be the sole basis for determining the right to deduct VAT when no invoices or other legible documents were available.
The ECJ ruled that an “assessment based on an expert report commissioned by a national court may, if necessary, supplement that evidence or reinforce its credibility, but may not replace it.” (CURIA, para 45)
Crucially, such an expert report, based on the amount of work/labour, “would not be able to establish that Mr Vădan actually paid that tax in respect of the input transactions carried out for the purposes of constructing those buildings.” (CURIA, para 47)
Conclusion: 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.” (CURIA, para 48, 1st operative paragraph)

Key Facts of the Vădan Case (C-664/16):

Parties: Lucreţiu Hadrian Vădan (appellant) vs. Romanian National Tax Administration Office.
Background: Mr. Vădan undertook a large construction project (16 residential buildings, 90 apartments) between 2006 and 2008, and also sold building land. His turnover exceeded the VAT exemption threshold, making him a taxable person liable for VAT from August 2006.
Issue: Mr. Vădan did not register for VAT or submit returns. Tax authorities assessed him for significant VAT, interest, and penalties (totaling approx. EUR 1.28 million). He argued he wasn’t obligated to register or keep accounts and couldn’t produce invoices for his input costs.
Evidence Presented: He could not produce invoices, stating that till receipts were illegible due to poor ink quality. He sought to rely on a court-commissioned expert report to assess deductible VAT based on work/labour involved.
Referral to ECJ: The Romanian court asked whether VAT deduction could be exercised without invoices, especially given the context (e.g., no mandatory invoicing for natural persons at the time, illegible documents), and if an expert report could be an acceptable indirect assessment method.
ECJ Ruling: The ECJ’s jurisdiction applied from Romania’s accession (1 January 2007). The Court confirmed that while formal requirements are flexible for neutrality, the substantive proof of actual payment of input VAT is essential. An expert report alone cannot replace the necessary objective evidence that VAT was actually paid.

Implications:

The judgment reinforces that while the principle of VAT neutrality allows for flexibility regarding formal invoice requirements, there remains a strict obligation on the taxable person to provide objective evidence that the input VAT was genuinely incurred and paid.
Court-commissioned expert reports can supplement or reinforce existing evidence but cannot be the sole basis for proving input VAT payment when primary documents (invoices or other reliable records) are absent or illegible.
This case is particularly relevant for situations where taxable persons, for various reasons (e.g., lack of awareness of obligations, poor record-keeping), fail to maintain proper VAT documentation. It highlights the importance of robust accounting records for VAT purposes.
VATupdate.com, as a resource, would presumably provide concise summaries and analysis of such complex ECJ rulings, helping professionals understand the nuances of the law and its practical application.

Briefing Document & Podcast C-664/16 (Vadan) – No VAT Deduction without invoices

Source Overview:

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