Richard Cornelisse reports on a recent ruling of the European Court of Justice, see http://tinyurl.com/c3ywg3r or
Court Of Justice: Invoice Requirements Versus VAT Deduction.
Under the current rules buyers are expected to perform some due diligence into their vendor’s activities. Did the buyer know or should he have known that the transaction was fraudulent? This ruling is pretty specific about the extent of this due diligence – as Richard writes:
[...], the tax authority cannot, as a general rule, require the taxable person wishing to exercise his right to deduct VAT to satisfy himself that there were no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction.
It is for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud and to impose penalties on the taxable person who has committed them.
Consequently, those authorities cannot transfer their own investigative tasks to taxable persons and refuse the latter the right to deduct if they do not carry out those tasks.
The practical impact of this ruling is that the buyer does not have to dig too deep into the vendor’s intentions to secure input VAT recovery. I would suggest that the general vendor due diligence that most procurement departments put in place is sufficient, and that no additional tax review needs to be done.
The jury is still out on how this doctrine applies to transactions that are perhaps not fraudulent, but seek to avoid tax (“abuse of law”). If the buyer is not aware that the seller instigated the (otherwise valid) transaction for the sole purpose of minimizing taxes, would the invoice still be valid, and allow for a VAT deduction?
The text of the court ruling is below, or at http://us-vat.com/blog/mahageben.pdf.