The principle of ‘substance over form’ with respect to the exercise of the right to deduct input VAT – A critical analysis of the Barlis jurisprudence

ABSTRACT

In the autumn of 2016, the CJEU adopted a decision regarding formalism in the context of the exercise of the right to deduct input VAT which does not seem to have attracted the attention of VAT scholars, albeit that in the author’s view it constitutes a major development. In the Barlis case, the CJEU decided that Article 178(a) of the VAT Directive must be interpreted as precluding the national tax authorities from refusing the right to deduct value added tax solely because the taxable person holds an invoice which does not satisfy the conditions required by Article 226(6) and (7) of that directive, where those authorities have available all the necessary information for ascertaining whether the substantive conditions for the exercise of that right are satisfied. While this decision may, at first sight, be seen as a confirmation of the now established principle of ‘substance over form’ in relation to the exercise of the right to deduct, in this article the author highlights that this is the first time that this case-law based principle is being used to waive a clear and unconditional formal requirement provided for under the VAT Directive directly in relation to the exercise of the right to deduct.

KEYWORDS:

• VAT deduction
• formal requirements
• invoice requirements
• substance over form

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Council Directive 2006/112 of 28 November 2006 on the common system of value added tax, O.J. L 347/1, 11 December 2006.

2 AG Darmon Opinion in C-131/91 K Line Air Services, para 35; AG Cosmas Opinion in C-361/96 Société générale des grandes sources d’eau minérales françaises, para 21; AG Léger Opinion in C-185/01 Auto Lease, para 8.

3 See for example CJEU, X, C-284/11 EMS-Bulgaria Transport, EU:C:2012:458, para 43 and the case-law cited; CJEU, X, C-80/11 and C-142/11 Mahagében and Dávid, EU:C:2012:373, paras 37 and 38 and the case-law cited; CJEU, X, C-285/11 Bonik, EU:C:2012:774, paras 25 and 26; and CJEU, X, C-271/12, Petroma Transports and Others, EU:C:2013:297, para 22.

4 Ibidem.

5 Van Doesum, Van Kesteren and Van Norden, Fundamentals of EU VAT Law, Kluwer (2016), p. 348.

6 See for example CJEU C-95/07 and C-96/07 Ecotrade, EU:C:2008:267, para 39 and the case-law cited, and CJEU, 12 July 2012, C-284/11 EMS-Bulgaria Transport, EU:C:2012:458, para 44), CJEU, X, C-438/09 Dankowski, EU:C:2010:818, para 24; CJEU, X, C-324/11 Tóth, EU:C:2012:549, para 25; and orders in CJEU, X, C-563/11, Forvards V, EU:C:2013:125, para 27, and CJEU, X C-33/13, Jagiełło, EU:C:2014:184, para 25.

7 CJEU, 21 October 2010, C-385/09 Nidera Handelscompagnie, EU:C:2010:627, para 42; 1 March 2012, C-280/10 Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, EU:C:2012:107, para 43, and 9 July 2015, C-183/14 Salomie and Oltean, EU:C:2015:454, paras 58 and 59, Joined Cases C-95/07 and C-96/07 Ecotrade [2008] ECR I-3457, para 63, and Case C-392/09 Uszodaépítö [2010] ECR I-0000, para 39.

8 The CJEU rendered its decision in both the Barlis (C-516/14) and the Senatex (C-518/14) cases on the same day. The Senatex case is concerned with the retroactive effect of rectifications of invoices. In the author’s view, the extensive interpretation of the principle of substance over form in Senatex (along the same line as in Barlis) has allowed the CJEU to deviate from its Terra jurisprudence (where the facts are, in the author’s view, and contrary to what the CJEU decided, not so different if one adopts a stricter position regarding the formal requirements under the VAT Directive).

9 Court decision, para 26.

10 On the latter point, the Court made reference to the Opinion of the AG who pointed out that the invoice must clarify the ‘quantity’ of the services, which was lacking, and could not be replaced by an indication of the period during which the services were rendered. See para 27 with reference to points 30, 32 and 46 of AG Opinion.

11 Court decision, para 28.

12 The AG had opined that it would not be possible to describe a service in such a way that the description would confirm its private or economic nature (for the purchaser) as most services could be used for both purposes (AG Opinion, point 53). In the case of legal services more specifically, the AG noted that even a clarification that a service consists of representing client X in front of tribunal Y would not be enough, and a description of the object of the case might be necessary to determine whether or not it relates to an economic activity of the purchaser (AG Opinion, point 54).

13 For example, the French Conseil d’Etat holds that the invoice should include the name of the client but not the exact nature of the service, for the sake of confidentiality, while in Belgium the Bar recommends that only the nature of the services should be mentioned and not the name of the client, again for the sake of confidentiality.

14 See paras 29 and 30.

15 See paras 30 and 31. In accordance with Article 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 Article 226(7) of the VAT Directive, it is essential that those periods are mentioned in the invoices relating to such supplies.

16 Court decision para 33.

17 Court decision para 34.

18 Court decision para 40 and reference to (see, to that effect, judgment of 22 October 2015, PPUH Stehcemp, C-277/14, EU:C:2015:719, para 28 and the case-law cited).

19 Court decision, para 41 and reference to CJEU, 1 March 2012, C-280/10 Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, EU:C:2012:107, para 41, and 22 October 2015, C-277/14, PPUH Stehcemp, EU:C:2015:719, para 29.

20 CJEU C-385/09, X, Nidera Handelscompagnie, EU:C:2010:627, para 42; CJEU, 1 March 2012, C-280/10 Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, EU:C:2012:107, para 43, and 9 July 2015, Salomie and Oltean.

21 Court decision, para 42 and reference to CJEU 21 October 2010, C-385/09 Nidera Handelscompagnie, EU:C:2010:627, para 42; 1 March 2012, C-280/10 Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, EU:C:2012:107, para 43, and 9 July 2015, C-183/14 Salomie and Oltean, EU:C:2015:454, paras 58 and 59 and the case-law cited.

22 C-280/10 Kopalnia Odkrywkowa Polski Trawertyn P. Granatowicz, M. Wąsiewicz, EU:C:2012:107, para 42 and reference to Pannon).

23 Paragraph 43, with reference to Nidera. See also point 68 of the AG opinion: ‘By making the issue and submission of invoices excessively difficult, a Member State risks hindering the exercise of the right of deduction or even making it impossible, leading to a result which is diametrically opposed to the objectives sought by Directive 2006/112. Consequently, the case-law of the Court of Justice has developed a variant of the principle of proportionality for this type of situation and has stated on several occasions that ‘the formalities thus laid down by the Member State concerned, which must be complied with by a taxable person in order to be able to exercise the right to deduct VAT, should not exceed what is strictly necessary for the purposes of verifying the correct application of the reverse charge procedure’.

24 Paragraph 47.

25 Paragraph 48, with reference by analogy, Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, para 51.

26 Decisions in Uszodaepito and Ecotrade are also sometimes referred to when discussing the question of substance over form in relation to the exercise of the right to deduct. However, they concern cases where the reverse charge procedure applies and for that reason are not relevant. As a matter of fact, as recalled by the Court in Uszodaepito, when the reverse charge is applicable, Article 178(f) of the VAT Directive applies (and not 178(a)), which provides that: ‘(f) when required to pay VAT as a customer where Articles 194 to 197 or Article 199 apply, he must comply with the formalities as laid down by each Member State’. This provision does not include the clear condition to hold an invoice conform to Article 226 of the VAT Directive.

27 Court decision, para 44.

28 Court decision, para 45.

29 Paragraph 48 with reference to (see, to that effect, Case C-90/02 Bockemühl [2004] ECR I-3303, paras 51 and 52).

30 Routinely having to verify additional documents in order to confirm that substantive conditions have been met will cost time and effort to the tax administration and will eventually reduce the number of controls that the administration is able to perform. It will also cost more time and effort to the invoice recipients as compared to a situation where a complete invoice is being provided. More leniency on formalism may therefore not only be bad news for the tax administration. It may also be a poisoned gift for businesses.