The VAT system is a formal tax system, in which compliance with all legal requirements and formalities is considered crucial. While the VAT rules mainly impose obligations on the VAT payers, the latter also have one fundamental right: the right to deduct input VAT. However, this right is also subject to formalities, as the exercising of the right to deduct input VAT requires a compliant invoice. While traditionally the VAT authorities have refused the right to deduct input VAT in the event of an irregularity in the invoice, the European Court of Justice takes a more pragmatic approach. The case law of the Court of Justice has now led the Belgian VAT authorities to change their point of view.
Context
Every VAT payer has the right to recover input VAT due or paid on goods purchased or services received, provided that the substantive and formal requirements of article 45 of the Belgian VAT Code are satisfied. According to the substantive requirement, the VAT payer must use the goods and services acquired for the purposes of his taxed output transactions (destination principle). According to the formal requirement, the VAT payer must hold a valid invoice mentioning all mandatory elements as provided for in article 5 RD No. 1 (such as the date on which the invoice was issued, the delivery date, the VAT identification numbers of the VAT payer and of the customer, etc.)
Although the Minister of Finance advocates a certain degree of flexibility in this regard, in practice the Belgian VAT authorities have often taken a fairly formalistic approach and have often rejected the right to deduct input VAT merely on the basis of the invoice not being fully compliant with the requirements.
Case law of the Court of Justice
Such a formalistic approach conflicts with the case law of the Court of Justice which, based on the principle of VAT neutrality, favours a more pragmatic approach (see ECJ 15 September 2016, C 518/14, Senatex GmbH; ECJ 15 September 2016, C-516/14, Barlis; ECJ 1 March 2012, C 280/10, Trawertyn). According to the Court, the principle of VAT neutrality requires deduction of input tax to be allowed if the substantive requirements are satisfied, even if the VAT payer has failed to comply with some formal conditions. In this regard, the Court has specified that the Member States have the power to impose penalties for failure to comply with formal conditions for exercising the right to deduct VAT. However, these penalties cannot result in the mere denial of the right to deduct input VAT and should be proportionate to the seriousness of the offence.
New circular letter 2017/C/64
Following this case law, the Belgian VAT authorities have now decided to review their position. Their new approach is set out in a circular letter, 20117/C/64, issued on 12 October 2017.
Henceforth, if an invoice is not compliant with all the legal requirements, the VAT authorities will no longer automatically reject the right to deduct input VAT if, based on a corrective invoice and/or additional evidence which unambiguously relates to the invoice concerned (e.g. contracts, order forms, tender forms, correspondence, etc.), it is clear that the substantive requirements for the right to deduct VAT are satisfied. Obviously, this substance-over-form approach can only be applied where there is no (evidence of) tax abuse or tax fraud. Furthermore, the corrective and/or additional evidence should be provided to the VAT authorities by the VAT payer in a timely manner, specifically before the end of the VAT audit.
VAT payers thus no longer risk being refused the right to deduct input VAT based on the slightest mistake or error in an invoice, and more emphasis will be put on the fulfilment of the substantive requirements. Thus, VAT payers will have the opportunity, even during a VAT audit, to obtain corrective invoices or circumstantial evidence from their suppliers in order to preserve their right to deduct input VAT.
Outstanding issues
Although the administrative clarification is very welcome, there remain a number of outstanding issues.
In the circular letter, the VAT authorities require that the additional evidence be submitted in a timely manner, and specifically "before the VAT audit has ended". In Belgium, the administrative procedure with regard to VAT is not legally regulated. Therefore, it is not entirely clear when a VAT audit ends. We believe, however, that the moment at which the VAT authorities issue a notice of enforcement ("dwangbevel"/"contrainte") is the relevant time, as that notice is the last stage of the administrative procedure (thereafter, the VAT payer can only challenge the claim of the VAT authorities before the courts).
Furthermore, the question arises whether a penalty may be imposed by the VAT authorities – and if so, what penalty – if the right to deduct input VAT was initially exercised on the basis of a non-compliant invoice. The new circular letter does not address this issue.
Where the VAT payer corrects the irregularity spontaneously, before any VAT audit, it seems logical that no penalty should be imposed. The situation may be different, however, if the invoice is corrected or additional evidence is gathered during an audit by the VAT authorities. Taking into account, among other things, the case law of the Court of Justice – which requires the penalty to be proportionate to the seriousness of the offence – it is unlikely that such a purely formal irregularity would be sanctioned with a proportional administrative penalty. In our view, only a (limited) non-proportional penalty could be imposed in such event. In a recent court decision, the Antwerp Court of Appeal seems to have indicated that it shares this point of view.