CJEU - Recent Developments in Value Added Tax 2016

1. S. 296Introduction

The right to deduct lies at the core of the VAT system as “it is meant to relieve the operator entirely of the burden of the VAT paid or payable in the course of all his economic activities.” By so doing, it “ensures the neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject, in principle, to VAT.” As such, the right to deduct laid down in Arts. 167 and 168 of the VAT Directive thus forms an integral part of the VAT mechanism and in principle cannot be limited. Otherwise, this tax on consumption would in effect become a tax on production.

However, the implementation of the right to deduct is not so simple and litigation around this right represents almost one fifth of the cases decided by the CJEU. In the past year, a large number of decisions have again been taken that relate to the right to deduct. This contribution will focus on three cases that relate to the principle of “substance over form” in the context of the right to deduct:

• S. 297Case C‑516/14, Barlis concerns the case of an incomplete invoice subsequently complemented by an annex. It includes an interesting discussion regarding the level of detail that is expected in the invoice and may also mark a new stage in the application of the concept of “substance over form” under which the failure to hold an invoice that conforms with Art. 226 of the VAT Directive would no longer be an obstacle to the exercise of the right to deduct (section 2.);

• Case C‑518/14, Senatex (adopted the same day as Barlis) concerns the completion of invoices (on which the VAT number of the recipients was missing) and the question of the taxable period in relation to which the right to deduct may be exercised. It may also be seen as departing from previous case law (section 3.);

• Case C‑332/15, Astone concerns the exercise of the right to deduct input VAT in relation to one series of supplies when the taxable person has failed to declare output VAT on other supplies identified as having taken place in the context of an audit. It raises the question how far the principle of “substance over form” can be limited in the case of fraud (section 4.).

2. Case C‑516/14, Barlis

2.1. Facts of the Case and Question referred

Barlis is a Portugese company that, from 2008 to 2010, made use of the legal services of a firm of lawyers. These services were the subject of four invoices containing the following descriptions:

• invoice No 02170/2008 of 26 August 2008: “Legal services rendered from 1 December 2007 until the present date”

• invoice No 32100478 of 17 December 2008: “Fees for legal services rendered from June until the present date”

• invoice No 32101181 of 29 April 2009: “Fees for legal services rendered until the present date”

• invoice No 32104126 of 2 June 2010: “Fees for legal services rendered from 1 November 2009 until the present date”

The authorities took the view that Barlis was not entitled to deduct the VAT relating to the legal services in question, on the grounds that the descriptions in the invoices were insufficient. Before the tax authorities rendered their final decision, Barlis then submitted annexes to the invoices, giving a more detailed description of the legal services supplied to him. However, the competent authorities maintained their position, because the lack of legal form could, in their view, not be remedied by the annexes provided by the recipient of the services as they were not documents “equivalent” to invoices. According to the authorities, such “equivalent documents” indeed had to satisfy, in themselves, all the requirements of Art. 36(5) S. 298of the Portuguese VAT Code (implementing Art. 226(6) of the VAT Directive), which was not the case with a mere annex.

Following the dismissal of its administrative appeal, Barlis requested the constitution of a single-member arbitration tribunal (the referring court), which referred the following questions to the CJEU:

“Must Article 226(6) of [Directive 2006/112] be interpreted as permitting the Tax and Customs Authority to regard as insufficient a description on an invoice which states “legal services rendered from such a date until the present date” or merely “legal services rendered until the present date”, where 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?”

2.2. Decision

The Court replied to the question in two parts. The first part addressed the question related to the description of the services in relation to which a right to deduct input VAT was claimed. The second part related to the question of the exercise of the right to deduct in the case of failure to hold an invoice that conforms with Art. 226 of the VAT Directive.

2.2.1. On the Content of the Invoice

On the first part of the question raised by the referring court, the CJEU first restated that only the elements mentioned in Art. 226(6) and (7) of the VAT Directive must be included in invoices and that the Member States cannot make the exercise of the right to deduct VAT dependent on compliance with other conditions relating to their content. These elements include: the extent and nature of the services rendered. As pointed out by the Advocate General, the wording of Art. 226 of the VAT Directive does not make it possible to determine the level of detail that is expected in such description. In line with the opinion of its Advocate General, the Court then clarified that it is not necessary to give an exhaustive description of the specific services supplied in the invoice, because the objective of the details which must be shown on an invoice is limited to allowing the tax authorities to monitor payment of the tax due and, if appropriate, the existence of the right to deduct VAT. Accordingly, it is in the light of that objective that it should be examined whether invoices such as the invoices at issue in the main proceedings comply with the requirements of Art. 226(6) of the VAT Directive.

S. 299On that basis, the Court decided that the words “legal services rendered from [a date] until the present date” or “legal services rendered until the present date” did not appear to indicate in sufficient detail the nature of the services concerned and in particular that the expression “legal services” covers a wide range of services, “including services not necessarily connected with economic activity”. The Court further held that the description was so general that it did not appear to disclose the extent of the services rendered either. On the latter point, the Court again made reference to the Opinion of the Advocate General who had pointed out that the invoice must clarify the “quantity” of the services, which was lacking in the case at hand and could not be replaced by an indication of the period during which these services had been rendered. In contrast, on the previous point it departed from the conclusions of the Advocate General. The Advocate General indeed opined that it would not be possible to describe a service in such a way that it would confirm its private or economic nature as most services could be utilized for both purposes. In the case of legal services more specifically, the Advocate General noted that even a clarification that a service consists in representing the client X before tribunal Y would not be enough and that a description of the object of the case might be necessary to determine whether or not it is related to an economic activity. These observations were not taken up by the Court which decided that because the term “legal services” did not make it possible to determine that the service was related to an economic activity, it would not a priori satisfy the conditions required by Art. 226(6) of the VAT Directive, which was for the referring tribunal to ascertain (without however clarifying what kind of description would enable determination of the economic or private nature of the supply).

Thereafter, the Court also restated that Art. 226(7) of the VAT Directive requires the invoice to show the date on which the supply of services was made or completed, which is again intended to enable the tax authorities to monitor payment of the tax due and, if appropriate, the existence of the right to deduct VAT. The reason for this is that the date of supply of the services which are the subject of the invoice makes it possible to check when the chargeable event for tax occurs. In accordance with Art. 64 of the VAT Directive, legal services that give rise to successive statements of account or payments are to be regarded as being completed on expiry of the periods to which the statements of account or payments relate. Consequently, to satisfy the requirements of Art. 226(7) of the VAT Directive, it is essential that those periods are mentioned in the invoices relating to such supplies. In the case at hand, some of the invoices specified the period of account, i.e. those S. 300referring to: “legal services rendered from [a date] until the present date”. However, one of them only mentioned “legal services rendered until the present date”. Regarding the latter, the Court ruled that it did not make it possible to determine the period to which the accounts in question related and therefore did not satisfy the conditions required by Art. 226(7) of the VAT Directive.

The Court then nuanced this position by adding that if the referring tribunal finds that the invoices at issue do not satisfy the requirements of Art. 226(6) and (7) of the VAT Directive, it should ascertain whether the annexes produced by the taxable person (the recipient of the services) provide a more detailed description of the legal services in question and may be treated as “invoices” under Art. 219 of the VAT Directive, which provides that: “Any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice”. In other words, the Court decided that additional information subsequently provided by the taxable person seeking to exercise the right to deduct should indeed be taken into consideration by the tax authorities when assessing whether the conditions of Art. 226 of the VAT Directive have been satisfied, provided this information can be treated as an invoice under Art. 219 of the VAT Directive.

2.2.2. On the Exercise of the Right to Deduct

The second part of the question dealt with the possible consequences of a failure to comply with Art. 226 of the VAT Directive regarding the exercise of the right to deduct VAT. Here, the Court recalled that both substantive and formal conditions must be met in order for the right to deduct to arise. As regards substantive conditions, the Court cited Art. 168(a) of the VAT Directive which provides that the goods or services relied on to give entitlement to that right must be used by the taxable person for the purposes of his own taxed output transactions and that those goods or services must be supplied by another taxable person as inputs. As regards formal conditions for the exercise of that right, the Court cited Art. 178(a) of the VAT Directive which requires the holding of an invoice drawn up in accordance with Art. 226 of the VAT Directive. The Court also noted that for the sake of neutrality, deduction of input VAT should be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with some formal conditions. In the words of the Court, this means that: “where the tax authorities have the information necessary to establish that the substantive requirements have been satisfied, they cannot, in relation to the right of the taxable person S. 301to deduct that tax, impose additional conditions which may have the effect of rendering that right ineffective for practical purposes”.

On that basis, the Court decided that the tax authorities could not refuse the right to deduct VAT on the sole ground that an invoice did not satisfy the conditions required by Art. 226(6) and (7) of the VAT Directive if they had available all the information to ascertain whether the substantive conditions for that right are satisfied. The Court added that the authorities could not restrict themselves to examining the invoice itself. They also had to take account of the additional information provided by the taxable person, in view of the fact that Art. 219 of the VAT Directive treats as an invoice any document or message that amends and refers specifically and unambiguously to the initial invoice. In the case at hand, the Court decided that it was for the referring tribunal to take account of all the information included in the invoices at issue and in the annexes produced by Barlis in order to ascertain whether the substantive conditions for its right to deduct VAT were satisfied. As to the Advocate General, she opined that it was not, in principle, sufficient that the recipient of the invoice, who wishes to exercise the deduction, supplements the missing data with other additional documents when these documents do not specifically and unambiguously refer to the initial invoice as is required under Art. 219 of the VAT Directive. Instead, a correction of the invoice would be required.

The Court further decided, first, that it is up to the taxable person seeking deduction to demonstrate that he meets the conditions for eligibility and therefore that the tax authorities are allowed to require him to produce the evidence that they consider necessary for determining whether or not the deduction requested should be granted. Second, the Court also ruled that the Member States have power to lay down penalties for failure to comply with the formal conditions for the exercise of the right to deduct VAT, in so far as these measures are meant to ensure the correct collection of VAT and to prevent evasion, that they do not go further than is necessary to attain those objectives and do not undermine the neutrality of VAT (for example a fine or financial penalty proportionate to the seriousness of the offence).

S. 302Summing up, the Court ruled that:

• Art. 226 of the VAT Directive must be interpreted as meaning that invoices mentioning only “legal services rendered from [a date] until the present date”, such as those at issue in the main proceedings, do not a priori comply with the requirements of point 6 of that article and that invoices mentioning only “legal services rendered until the present date” do not a priori comply either with the requirements of point 6 or with those of point 7 of that Art. which is, however, for the referring tribunal to ascertain.

• Art. 178(a) of the VAT Directive must be interpreted as precluding the national tax authorities from refusing the right to deduct VAT solely because the taxable person holds an invoice which does not satisfy the conditions required by Art. 226(6) and (7) of the VAT Directive, even though those authorities have available all the necessary information for ascertaining whether the substantive conditions for the exercise of that right are satisfied.

2.3. Comments

2.3.1. On the Need to provide Details regarding the taxable Supplies in Relation to which a Right to Deduct is claimed

As noted by the Advocate General in her Opinion, no one is happy to receive an invoice, except when that invoice is needed for deduction of input VAT. In the Barlis case, the Court was asked for the first time about the degree of detail that is expected regarding the description of a supply of services in an invoice, in this case “legal services”.

From the Court decision it appears that the mere expression “legal services” would not indicate in sufficient detail the economic or private nature of the services concerned so as to allow the tax authorities to ensure the correct application of the VAT. However, the Court left it to the national court to determine in the specific circumstances of the case but unfortunately did not clarify to what extent it is possible to obtain a sufficiently detailed description of the services. The point made by the Advocate General in her Opinion is indeed sound, that is, that most services can be used for either private or business purposes. In the case of legal services, too detailed a description might moreover be at odds with confidentiality requirements. This question is important as requirements tend to vary from one Member State to another. In the absence of harmonized requirements, businesses do face legal uncertainty (in particular when making cross-border supplies).

S. 303Beyond the distinction between services used for private and those used for business purposes, the Advocate General also noted that specific clarifications may be needed in some cases to allow the tax authorities to ascertain that the correct amount of VAT has been paid, for example where a specific rate may be applicable. As noted by the Advocate General, if the VAT Directive does not include specific rules regarding the VAT applicable to legal services, Portuguese law provides the application of a reduced rate for certain legal services and therefore, in the case of Barlis, a more specific description would have been needed to exclude the application of the reduced rate. On that basis, the Advocate General opined that it is only where national law provides a specific rate for some legal services that the general expression “legal services” would not be enough to satisfy the requirements of Art. 226(6) of the VAT Directive. It is noteworthy, however, that it is not only the possible application of a reduced rate that might render the general term “legal services” too vague for the purposes of the correct application of the VAT system, at least as of 1 January 2017. As a matter of fact, as of that date, “legal services relating to the transfer of a title to immovable property, to the establishment or transfer of certain interests in immovable property or rights in rem over immovable property (whether or not treated as tangible property), such as notary work, or the drawing up of a contract for the sale of immovable property, even if the underlying transaction resulting in the change of ownership is not made” will be located according to the rule laid down in Art. 47 of the VAT Directive on services connected with immovable property. Other legal services are not covered by this special rule regarding location and therefore a more specific description than “legal services” is needed to exclude the application of that specific rule.

2.3.2. On the Qualification of the Requirement to hold an Invoice as a “formal Requirement”

A distinction is routinely made in the case law of the Court between the so-called “substantive” and “formal” requirements for exercising the right to deduct. In respect of this distinction, the Court consistently decides that failure to comply with some of the formal requirements cannot be an obstacle to the exercise of the right to deduct if the substantive requirements have been satisfied. In the words of the Court at para. 42 of the Barlis decision, and based on previous decisions such as Nidera, Polski Trawertyn or Salomie and Oltean, this means that: “where the tax S. 304authorities have the information necessary to establish that the substantive requirements have been satisfied, they cannot, in relation to the right of the taxable person to deduct that tax, impose additional conditions which may have the effect of rendering that right ineffective for practical purposes”. On that basis, the Court decides, in para. 43 of the Barlis decision, that the right to deduct cannot be refused on the sole ground that an invoice does not satisfy the conditions required by Art. 226(6) and (7) of the VAT Directive if the tax authorities have all the information to ascertain whether the substantive conditions for that right are satisfied. In the author’s opinion, the conclusion drawn in para. 43 of the Barlis decision goes beyond what can be inferred from the settled case law cited in para. 42 of the same decision. As a matter of fact, in the author’s view, para. 42 is concerned with “additional conditions” typically imposed by the Member States that should not be an obstacle to the right to deduct, while para. 43 is concerned with a clear requirement made in Art. 178 of the VAT Directive. The two may not, in the author’s view, be put on the same level (see also the Petroma and the Pannon cases where a clear distinction is made between the requirements included in the VAT Directive and the additional requirements imposed by the Member States). Summing up, the author is of the opinion that the case law based principle of substance over form should not be used to waive clear requirements imposed under the VAT Directive. This principle should only concern “additional” formalities imposed by the Member States.

A key question is actually whether the annexes submitted by Barlis should have been considered, under Art. 219 of the VAT directive, as part of the invoice initially submitted and whether that was a key condition for the Court when reaching its decision. If this is not the case, then the Court’s decision in Barlis means that the principle of substance over form now means that the holding of an incomplete invoice complemented by any other document, submitted by the taxable person, providing relevant information but not necessarily to be considered as part of the invoice under Art. 219 of the VAT Directive is enough to grant the taxable person the right to deduct, which basically means that the crystal clear requirement under Art. 178 of the VAT Directive to hold an invoice that conforms with Art. 226 of the VAT Directive can be overlooked in the same way as “additional formal conditions” imposed by the Member States. Otherwise, the decision means that an invoice that has been completed through the submission, by the taxable person, of an additional document that should be considered as forming part of the initial invoice under Art. 219 of the VAT Directive is enough to satisfy the requirement of Art. 178 of the VAT Directive. In this case, the Court should perhaps have made a clearer reference to Art. 219 of the VAT Directive in its dictum. S. 305In any case, however, the author is of the opinion that the CJEU is going too far when allowing the taxable person itself to amend the invoices on the basis of which the right to deduct is exercised.

3. Case C‑518/14, Senatex

3.1. Facts of the Case and Questions referred

Senatex operates a wholesale textile business. In each of its tax returns for 2008 to 2011 it included deductions of input VAT in respect of commission statements issued to its commercial agents and the invoices of an advertising designer. However, in the course of an audit procedure which started in 2013, the tax office took the view that the deduction of input tax in respect of these commission statements and invoices was not possible, because they did not constitute regular invoices for the purpose of exercising the right to deduct for the reason that neither the invoice nor its annexes contained the addressee’s tax number or VAT registration number. In addition, they did not refer to any other document from which those details could be deduced.

While the audit was still in progress, Senatex corrected the commission statements and the invoices, so that the tax number or VAT identification number of each addressee was included. But the tax authorities nevertheless reduced the sums which Senatex was entitled to deduct as VAT, on the grounds that the conditions for deduction had not been satisfied during the tax period to which they referred but only from the time of correction of the invoices in 2013. It then appeared that it had not corrected the commission statements for the year 2008, which was eventually done in 2014.

In March 2014, the tax office dismissed Senatex’s objection and maintained its view that, since the conditions for the deduction of VAT were satisfied only from the time of correction of the invoices (in 2013 and 2014), the correction of an invoice could not have retroactive effect from the date of supply of the service to which the invoice related. Senatex appealed that decision before the Finance Court of Lower Saxony, Germany, which referred the following questions to the CJEU for a preliminary ruling:

3.2. Decision

The Court considered the first two questions together. It started by restating that the right to deduct arises at the time when the deductible tax becomes chargeable and that both substantive and formal conditions must be met. As regards the formal conditions for the right of deduction, the Court restated that the exercise of that right is subject to holding an invoice drawn up in accordance with Art. 226 of the VAT Directive. Under Art. 226(3) of that Directive, the invoice must mention inter alia the VAT identification number under which the taxable person made the supply of goods or services.

The Court also recalled that the VAT Directive provides for the possibility of correcting an invoice from which certain mandatory details have been omitted (in accordance with Art. 219 of the VAT Directive, which indicates that “any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice”). It also recalled previous case law in which it confirmed, that the VAT Directive does not prohibit the correction of incorrect invoices and noted that the invoices at issue were properly corrected. However, the Court also noted that, as also observed by the Advocate General in paras. 36 and 37 of his Opinion, the question of the temporal effect of such a correction on the exercise of the right to deduct VAT had never been addressed.

To answer this question, the Court started by recalling that in accordance with the first para. of Art. 179 of the VAT Directive, the deduction is to be made by subtracting from the total amount of VAT due for a given tax period, the total amount of VAT “in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178”. Accordingly, the right to deduct VAT must in principle be exercised in respect of the period during which, first, the right has arisen and, secondly, the taxable person is in possession S. 307of an invoice. However, the Court decided that the application of interest for late payment on the amounts of VAT it considered to be due before correction of the invoice originally drawn up, imposed a tax burden deriving from VAT on those economic activities even though the common system of VAT guarantees the neutrality of that tax (the Court here referred to settled case law that the right to deduct is an integral part of the VAT scheme and in particular that it is meant to relieve the operator entirely of the burden of the VAT due or paid in the course of all his economic activities). The Court further restated 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, such as holding an invoice showing the details mentioned in Art. 226 of the VAT Directive.

The Court then also clarified that the situation of Senatex was different than the situation of the taxable person in the Terra case, in which it had decided that the right of deduction must be exercised in respect of the tax period in which the goods or services are supplied and in which the taxable person is in possession of the invoice, because in the Terra case the taxable person “did not hold an invoice at all” at the time when it exercised the right of deduction, and therefore the Court did not rule on the temporal effect of a “correction” of the original invoice.

Finally, the Court also reiterated that 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. At the hearing, the German Government submitted that the postponement of the right to deduct VAT until the year in which the invoice is corrected was the equivalent of a penalty. However, the Court held that other penalties might be considered to penalize the failure to comply with formal requirements, such as the infliction of a fine or financial penalty that would be proportionate to the seriousness of the offence, while the postponement of the right to deduct (entailing the application of interest for late payment in any event without account being taken of the circumstances necessitating the correction of the invoice originally drawn up) went further than was necessary to S. 308ensure the correct collection of VAT and to prevent evasion. Accordingly, the Court decided that the correction of an invoice in relation to a detail which must be mentioned, namely the VAT identification number should have retroactive effect, so that the right to deduct VAT exercised on the basis of the corrected invoice could relate to the year in which the invoice was originally drawn up.

The Court decided not to answer the third question by which the referring court asked, in essence, whether the VAT Directive must be interpreted as precluding national legislation or a national practice under which a taxable person is refused the right to deduct VAT where the correction of an invoice takes place after the tax authorities have adopted a decision refusing the deduction of VAT. It was not necessary to answer this since in Senatex, the correction of the invoice had taken place before the authorities had adopted a decision refusing the deduction of VAT.

Summing up, the Court ruled that: Art. 167, Art. 178(a), Art. 179 and Art. 226(3) of the VAT Directive must be interpreted as precluding national legislation, such as that at issue in the main proceedings, under which the correction of an invoice in relation to a detail which must be mentioned, namely the VAT identification number, did not have retroactive effect, so that the right to deduct VAT exercised on the basis of the corrected invoice related not to the year in which the invoice was originally drawn up but to the year in which it was corrected.

3.3. Comments

The Court held that the Senatex case was different from the Terra case (in which it had decided that the right of deduction has to be exercised in respect of the tax period in which the goods or services are supplied and in which the taxable person is in possession of the invoice - in other words: without retroactive effect) because in the Terra case the taxable person “did not hold an invoice at all” at the time when it exercised the right of deduction, and therefore the Court did not rule on the temporal effect of a “correction” of the original invoice. It is noteworthy, however, that para. 34 of the decision in the Terra case reads as follows: “although the German version of that provision is ambiguous on that point, it is apparent from the French and English versions of the Sixth Directive that the deduction referred to in Article 17(2) thereof must be made in respect of the tax period in which the two conditions required under the first subparagraph of Article 18(2) (now Art. 179 of the VAT Directive which refers to the satisfaction of Art. 178 of the VAT Directive) are satisfied”. In the author’s view, a strict application of this same finding in the context of the Senatex case, before the adoption of the far-reaching S. 309interpretation of the principle of “substance over form” in the Barlis case under which Art. 178 of the VAT Directive can be overlooked, would probably have resulted in a different decision.

4. Case C‑332/15, Astone

4.1. Facts of the Case and Question referred

Mr Astone, in his capacity as the authorized representative of the Italian company Del Ferro, was unable to produce the accounts or the VAT register for the tax years 2010, 2011, 2012 and 2013. He was then charged in criminal proceedings before the Criminal Chamber of the Tribunale di Treviso in relation to the failure to submit a VAT return for the 2010 tax year. More precisely, he was sued for having infringed Art. 5(1) of the Italian Legislative Decree No 74, which only applies in the case of tax fraud exceeding EUR 30 000 (the evaded VAT was estimated at EUR 64 041 for that year). During the proceedings, Mr Astone produced invoices issued in the 2010 tax year by third party undertakings to Del Ferro; invoices which were paid, inclusive of VAT, but were not entered into that company’s accounts. On the basis of those invoices, it was calculated that VAT amounting to EUR 30 590 would have been deductible. Mr Astone argued that those invoices should be taken into account to determine his tax liability. Taking into account that amount of deductible VAT and a previous tax credit, the amount of tax evaded would not have exceeded the EUR 30 000 threshold laid down in Art. 5(1) of the Italian Legislative Decree No 74 and, in Mr Astone’s view there would consequently no longer be any infringement which could be punished under that provision. Mr Astone claimed that he should, therefore, be acquitted of the criminal charge. The Public Prosecutor also sought Mr Astone’s acquittal.

The Criminal Chamber of the Tribunale di Treviso was of the opinion that the “tax due”, including that due for the purposes of determining whether criminal proceedings could be brought under Art. 5(1) of the Italian Legislative Decree No 74, was the VAT resulting from the invoices issued. According to the Italian court, the possibility of taking into account the VAT paid as input tax presupposed that the right to deduct had been exercised when the annual return was made and was only in respect of the purchase invoices that were recorded in the relevant register. The Italian court made reference to the VAT Directive, which also makes the exercise of the right to deduct contingent on compliance with certain obligations and to case law of the CJEU confirming that the principle of fiscal neutrality requires deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements. However, the Italian court considered that clarificaS. 310tion from the CJEU was necessary in order to rule on Mr Astone’s criminal liability because those judgments did not specify the requirements in question and in particular they did not make it clear which formal obligations had to be discharged in each case in order for the taxable person to be able to enjoy his right to deduct. Accordingly, the Italian court referred the following questions for a preliminary ruling:

4.2. Decision

On the first question the Court reiterated that in accordance with Art. 167 and the first para. of Art. 179 of the VAT Directive, the right to deduct is generally exercised during the same period as that during which it has arisen, namely, at the time the tax becomes chargeable. However, the Court also pointed out that pursuant to Arts. 180 and 182 of the VAT Directive, a taxable person may be authorized to make a deduction even if he did not exercise his right during the period in which the right arose subject, however, to compliance with certain conditions and procedures determined by national legislation. The Court reasoned that the possibility of exercising the right to deduct without any temporal limit would be contrary to the principle of legal certainty and pointed to previous case law showing that a limitation period, the expiry of which has the effect of penalizing a taxable person who has not been sufficiently diligent and has failed to claim deduction of input tax, cannot be regarded as incompatible with the regime established by the VAT Directive, in so far as, first, that limitation period applies in the same way to S. 311analogous rights in tax matters founded on domestic law and to those founded on EU law (principle of equivalence) and, second, that it does not in practice render impossible or excessively difficult the exercise of the right to deduct (principle of effectiveness). The Court then decided that the question of whether a two-year limitation period would fulfil the conditions set out in that previous case law was for the national Court to determine. However, it made suggestions to the referring Court on how to decide on the matter by noting that, as regards the principle of equivalence, it did not appear from the file, nor had it been argued before the Court, that the limitation period provided for in Art. 19(1) of Decree No. 633 did not comply with that principle. The Court also referred to its decision in Ecotrade which concerned, in particular, the same limitation period as that at issue in the main proceedings. With respect to the principle of effectiveness, the Court also suggested that a two-year time limit, such as that provided for in Art. 19(1) of Decree No. 633 could not, in itself, render the exercise of the right to deduct virtually impossible or excessively difficult, since Art. 167 and the first para. of Art. 179 of the VAT Directive allow Member States to require that the taxable person exercises his right to deduct during the same period as that in which it has arisen (again with reference to Ecotrade).

On the second question, and based on settled case law, the Court reflected that the fundamental principle of VAT neutrality requires deduction of input tax to be allowed if the substantive requirements are satisfied even if the taxable person has failed to comply with some of the formal requirements, except if non-compliance with such formal requirements effectively prevents the production of conclusive S. 312evidence that the substantive requirements have been satisfied. The VAT Directive contains several formal requirements (such as to keep accounts in sufficient detail, or the obligation to store all invoices and to submit returns by a given deadline) but the Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, it being understood that the measures which the Member States may adopt under that provision must not go further than is necessary to attain such objectives and in particular cannot be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT.

The question whether, in the light of objective factors, that right is being relied on for fraudulent or abusive ends, is a question for the Member State to decide. The Court however clarified that the competent tax authorities should establish that the objective evidence establishing the existence of a fraud or abuse is present and that the national courts should subsequently determine whether the tax authorities concerned have established the existence of such objective evidence. With a view to giving the national court a useful answer and, in the words of the Court: “in a spirit of cooperation with national courts”, the Court noted that Astone had not only failed to fulfil the obligation to file a VAT return with the authorities and to pay the amount of tax owed by the company of which he was the authorized representative, but had also been unable to produce accounts or a VAT register for that company and had further failed to fulfil the obligation under Italian law S. 313to register sequentially the invoices issued or paid by it. According to the Court, even if the infringement of those formal obligations did not necessarily prevent the production of conclusive evidence that the substantive requirements giving rise to the right to deduct input VAT were satisfied, it had to be found that such circumstances might establish the simplest case of tax evasion, in which the taxable person deliberately fails to fulfil the formal obligations incumbent upon him with the aim of evading payment of the tax.

Therefore, the Court concluded that EU law does not prevent Member States from treating such infringements as amounting to tax evasion and from refusing to grant the right to deduct in such cases, in particular in view of the fact that similar infringements were allegedly committed during several successive tax years (such factual circumstances could be taken into account by the referring court in the context of the overall assessment).

Summing up the Court ruled that:

• Arts. 167, 168, 178, the first para. of Art. 179, and Arts. 180 and 182 of the VAT Directive must be interpreted as meaning that they do not preclude national legislation which provides for a limitation period for exercising the right to deduct, such as the limitation period at issue in the main proceedings, provided that the principles of equivalence and effectiveness are observed, which it is for the referring court to ascertain.

• Arts. 168, 178, 179, 193, 206, 242, 244, 250, 252 and 273 of the VAT Directive must be interpreted as meaning that they do not preclude national legislation, such as that at issue in the main proceedings, which allows the tax authorities to refuse a taxable person the right to deduct VAT when it is established that that person has fraudulently failed to fulfil most of the formal obligations incumbent upon him in order to be able to benefit from that right, which it is for the referring court to ascertain.

4.3. Comments

As in most Member States, the Italian legislation makes the right to deduct VAT contingent on compliance with formal obligations relating in particular to the submission of the relevant returns and to the fact that the invoices concerned have been recorded in the respective register. Accordingly, a taxable person is not entitled to deduct input VAT where there has been a failure to file VAT returns. In accordance with consistent case law, however, the non-fulfilment of “formal requirements” cannot be an obstacle to the exercise of the right to deduct if the S. 314substantive requirements for that right to arise have been satisfied. In this case, however, the Court decided that even if the infringements of the formal obligations do not prevent the production of conclusive evidence that the substantive requirements giving rise to the right to deduct input VAT are satisfied, such circumstances may establish the simplest case of tax evasion, in which the taxable person deliberately fails to fulfil the formal obligations incumbent upon him with the aim of evading payment of the tax.

While this may sound coherent on first reading, it should, however, be highlighted that in this case, the input VAT, of which deduction was claimed, related to one series of invoices while the fraudulent behaviour consisted in not declaring output VAT in relation to another series of invoices. In this case, therefore, the exception to the principle of substance over form in the case of fraud was applied in a very broad sense: fraud in relation to one series of invoices is used to deny deduction of VAT in relation to another series of invoices. The author raises the question whether this was the appropriate (and a legally correct) penalty or sanction in Astone.

5. Conclusions

The following conclusions can be drawn from the analyses of the cases Barlis, Senatex and Astone:

From Barlis it can be concluded that:

• A more detailed description of the services rendered than a mere reference to “legal services” seems necessary for an invoice that conforms with Art. 226(6) of the VAT Directive, the criterion used by the Court being that the description should allow the tax authorities to monitor the payment of the tax due. Since, according to the Court, this includes the need to enable the tax authorities to confirm the economic use of the services rendered (and therefore the eligibility for a deduction), the expected level of detail could be quite high, given most services could be used for either private or business purposes. In the case of legal services, requiring too high a level of detail may moreover be incompatible with the need to preserve confidentiality.

• The right to deduct cannot be refused on the sole ground that an invoice does not satisfy the conditions required by Art. 226(6) and (7) of the VAT Directive if the tax authorities have all the information to ascertain whether the substantive conditions for that right are satisfied. The question remains open whether this means that, from the principle of substance over form it follows:

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  that the holding of an incomplete invoice complemented by the taxable person himself by any other document providing relevant information but not necessarily to be considered as part of the invoice under Art. 219 of the VAT Directive is enough to grant the taxable person the right to deduct, S. 315which basically means that the crystal clear requirement under Art. 178 of the VAT Directive to hold an invoice that conforms with Art. 226 of the VAT Directive can be overlooked in the same way as “additional formal conditions” imposed by the Member States; or

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  that an invoice that has been completed through the submission of an additional document, by the taxable person, that should be considered as forming part of the initial invoice under Art. 219 of the VAT Directive is enough to satisfy the requirement of Art. 178 of the VAT Directive.

In both cases, the author finds the conclusion disputable.

From Senatex it can be concluded that, although it may seem to contradict the Court’s interpretation of Art. 179 of the VAT Directive (then Art. 18(2) of the Sixth VAT Directive) in the Terra case, taxable persons are allowed to deduct the VAT included in a corrected invoice in the year in which the invoice was originally drawn up.

From Astone it can be concluded that EU law does not prevent Member States from treating non-compliance with formal infringements as amounting to tax evasion and from refusing to grant the right to deduct in such cases, and that this principle may receive a broad application up to the denial of the right to deduct input VAT in relation to invoices alien to the fraudulent situation. The question is: how far, exactly, can the Member States can go when sanctioning a case of fraud?