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Invoice? A key document
In the complex labyrinth of taxation, the invoice occupies a central place for businesses.
But this essential document is often seriously neglected by the parties involved: summary description of the goods and services sold, absence of the customer's VAT number, incomplete name of the customer, inaccurate address, and so on.
And it is when a VAT audit comes up several years later that the lack of attention initially paid to the invoice is bitterly regretted. Accepting a defective invoice from your supplier means exposing yourself to a loss of VAT deduction, a penalty that can quickly weigh heavily on a company's finances.
The case
A case brought before the ECJ illustrates this problem. It concerned a Portuguese company that had purchased IT services. It paid the invoices to its service provider and deducted the VAT in its VAT return.
However, the service provider had worded his invoices in rather general terms, such as "application development service". Naturally, the Portuguese tax authorities took advantage of this to refuse the deduction of the VAT on the sole grounds that this general wording did not comply with the law, which requires a sufficiently precise description of the services.
What the European Court said?
In a fairly short order, the Court reiterated its position, giving the Portuguese tax authorities yet another lecture on tax law:
1) the right to deduct VAT is a fundamental principle of the VAT system.
2) the possession of an invoice containing the compulsory information is a formal condition and not a material condition for the right to deduct VAT.
It follows that the tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not contain all the compulsory particulars, if they have all the information they need to verify that the material conditions (in particular the use by the business of the services for its taxed activities) relating to that right are satisfied.
The VAT expert's eye
Although invoices should normally be clear and complete documents, they are regularly neglected by the parties and become enigmas that even specialists struggle to decipher. The result is that invoices, which should be an ally of every business, are becoming a source of dispute with the tax authorities.
The above-mentioned case, although favorably concluded, remains a powerful warning signal for all companies. In the end, it took the company more than 13 years to recover € 80,000 in VAT !
In order to avoid costly and time-consuming disputes over the right to deduct VAT, it is essential for a company's tax and accounting department to request - from the outset - correct invoices from suppliers. One of the best ways of achieving this is to draw up sufficiently clear and precise purchase orders in advance, in consultation with the purchasing department.