In a ruling issued on November 8th 2018 (case C-502/17), the Court of Justice of the European Union (the “ECJ”) had to rule on the question whether a real estate property developer who did not register for VAT purposes, despite being under the obligation to do so, and who has failed to keep accounting records and invoices, is entitled to benefit from an input VAT deduction, solely on the basis of an assessment resulting from an expert report ordered by a national court.
In order to reach its conclusions, the ECJ recalled that the right to deduct input VAT is a fundamental principle of the common system of VAT, which in principle may not be limited and is exercisable immediately in respect of all the taxes charged on the taxable person’s input transactions. Two types of conditions are however required for the right of deduction to be available. Regarding, on the one hand, the substantial conditions, the person concerned must be a taxable person and the goods or services must (a) be used by the taxable person for the purpose of his own taxed output transactions and (b) be supplied by another taxable person as inputs. Regarding, on the other hand, the formal conditions, the exercise of the right to deduct input VAT is subject to holding an invoice drawn up in accordance with the provisions of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “VAT Directive”).
In the past, the ECJ had consistently found that the fundamental principle of neutrality of VAT requires deduction to be allowed if the substantive requirements are satisfied, even though the taxpayer may have failed to comply with some of the formal conditions. Nevertheless, the burden of proof to establish that the conditions for eligibility to deduct input VAT are met rests with the taxpayer, who is thus required to provide objective evidence that goods and services were actually provided as inputs by taxable persons for the purpose of his own transactions subject to VAT, in respect of which he has actually paid VAT. The evidence may include, according to the ECJ, documents held by the suppliers or service providers from whom the taxable person had acquired goods or services in respect of which he had paid VAT.
As the taxpayer in question was unable to produce invoices and only submitted illegible documents, which were not sufficient to determine the existence and scope of the right to deduction, an expert report, commissioned by a national court, was the only way to support the taxpayer’s case. The ECJ however found that, while such a report may supplement the evidence collected by the taxpayer and/or support his credibility, it could not replace such evidence, as it would not, by itself, be able to establish that the taxpayer actually paid the tax in respect of the input transactions carried out for the purpose of its construction activities.
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