Conditions for claiming VAT deduction: does the business have to prove the so-called declared supplier?
Every VAT payer is well aware of the basic conditions that must be met to qualify for a VAT deduction. He or she must receive the supply from another VAT payer and subsequently use it for his or her taxable economic activity. In both cases, the VAT payer bears the burden of proof. For the last few years, there has been talk of an additional condition without which the recipient of the supply is not entitled to claim a VAT deduction. This is proof of the so-called declared supplier, i.e. the person named on the invoice. This condition is the subject of the following article.
As I already indicated in the introduction, the right to deduct VAT arises for the taxpayer at the moment the so-called substantive conditions of entitlement are fulfilled. These include: (i) the supplier of the supply is another VAT payer; (ii) the supply in question actually exists (it is not a fictitious supply); and (iii) the supply received is used by the recipient of the supply within the scope of their taxable economic activity.
The view of the tax authorities, which has persisted for many years, is that the above conditions also include the condition of a so-called declared supplier. And since the burden of proof is on the recipient of the supply, the burden of proving this fourth condition is also on the VAT payer. At first glance, it might seem that in practical terms this is not so fundamental, but the opposite is usually true. A prudent business (the recipient of the supply) will usually have evidence (probably contractual documentation and other documents) which will prove the actual existence of the goods or services received. At the same time, it should not be difficult to prove that it was used in the course of their business. In the overwhelming majority of cases that I encounter in my practice today, these archived documents can no longer reliably prove that the person named on the invoice as the supplier of the goods or services has provided the supply in question. The essence of the fourth substantive condition is precisely to prove that the goods or services were actually supplied by the payer named on the invoice and by no one else (e.g. another payer). In practice, it is extremely difficult to bear the burden of proof of this fact. It should be added that the tax authorities are also aware of this, and most VAT inspections today are focused on proving the so-called declared supplier.
The dispute between the legal opinion of the Czech tax administrators (under the methodological control of the General Financial Directorate) and domestic VAT payers had to logically end up before the Court of Justice of the European Union, which is the only authority providing a binding interpretation of the harmonised value added tax system in the EU. The Court of Justice addressed this burning issue in its judgment of 9 December 2021 in Case C-154/20 Kemwater ProChemie s.r.o. The decision of the CJEU leads to the following conclusions:
- the mere inclusion of the supplier's name on the tax document is not a substantive condition;
- on the contrary, the status of the supplier is already a substantive condition.
According to the Court of Justice, it is crucial for maintaining the principle of neutrality of value added tax that a situation does not arise where the actual supplier of goods (service provider) is a non-taxable person (in this case a tax non-payer), but the recipient of the supply deducts VAT because another VAT payer is indicated on the invoice, but the supply is not actually made. Therefore, the Court of Justice clearly concludes that the recipient of the supply is entitled to deduct VAT only if the supply was actually made by the taxable person (in Czech terms, the VAT payer), regardless of who is indicated on the invoice.
At the same time, it can be inferred from the judgment that the burden of proving the actual supplier (the taxable person) is on the recipient of the supply. However, if it is apparent from all the circumstances of the case that the nature (technological complexity) or the price (more than EUR 1 million once, or for repeated performance over 12 consecutive months) had to be supplied by a taxable person (a VAT payer), then the Court of Justice clearly adds that in such a case this condition for entitlement to deduct VAT is deemed to be satisfied.
So, what about proving the so-called declared supplier for the Kemwater decision? The onus will still be on us to ensure that we take the utmost care to provide the tax authorities with evidence to prove, if necessary, that we have received the supply from a VAT payer. However, the tax authorities will no longer be entitled to deny us a deduction if it turns out that the supply was actually provided by a VAT payer other than the one shown on the invoice. This is a big plus!