The ECJ recently published an Order in response to questions referred by Bulgaria concerning when VAT deduction may be refused on the basis that a supply did not take place. In this particular case, the question was asked where it was not disputed that the supplier accounted for Output VAT, and as such there would be no loss to the tax authority.
The question the Bulgarian tax authorities asked was:
“Is Article 203 in conjunction with Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax to be interpreted, in cases like the main proceedings and having regard to the principles of fiscal neutrality and protection of legitimate expectations, to the effect that a deduction of VAT may be refused, despite the elimination of the risk of any loss in tax revenues, if that risk was eliminated only with respect to the accounting of the VAT shown in a supplier’s invoice with the State Treasury, without the elimination of the risk of loss in tax revenues affecting the actions or intentions of the supplier which resulted in the fraudulent content of an invoice in which the VAT was shown as payable by the supplier.”
The ECJ issued the following Order as their response:
“Article 168(a) and Article 203 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, and the principles of fiscal neutrality and the protection of legitimate expectations, must be interpreted as not precluding the recipient of an invoice from being refused the right to deduct VAT mentioned on that invoice where the transactions to which the invoice relates have not actually been performed, even if the risk of any loss in tax revenue has been eliminated on the ground that the issuer of that invoice has paid the VAT mentioned thereon. It is for the referring court to carry out, in accordance with the national rules relating to evidence, an overall assessment of all the facts and circumstances of the dispute before it in order to determine whether the transactions to which the invoices at issue in the main proceedings relate were actually carried out.”
The ECJ has therefore stated that it is possible for the recipient of an invoice to deduct Input VAT even where the supplier may not have made a supply, in cases where the Output tax has been paid to the tax authorities. The ECJ did however leave the facts of the cases to be determined by the national court in respect of whether the supply was made according to the local rules on evidence. This case will be important to customers who are challenged by tax authorities on Input VAT deduction where Output VAT should not have been charged but has been paid to the tax authorities and there is no remedy available from the supplier.