Can a written agreement be considered as a VAT invoice?

Bart Buelens
The European Court of Justice (C-235/21) was requested to deal with this interesting question.

In his Opinion, the Advocate General concludes that an agreement can constitute an invoice within the meaning of the European VAT Directive.
The case concerned two Slovenian companies that have concluded a sale-lease-back agreement.

The simplified facts are the following.

Party A (Red) sold immovable property to party B (Raiffeisen) to finance construction works; B leased the property back to A.

A has issued an invoice with VAT for the “sale”, but B failed to issue an invoice for the “lease back”.

Party A argued that it can deduct VAT on the basis of the agreement, which included a separate mentioning of the sales price and the VAT amount. However, the Slovenian tax authorities denied the VAT deduction for party A. Based on the factual pattern, it was not clear on what basis the VAT deduction was rejected, but this may have to do with the termination of the agreement by A.

The tax authorities subsequently presented party B with a significant VAT assessment:

  • On the one hand, the deduction of VAT on the purchase of the property was refused, only because the formalities to tax the sale were not fulfilled. Apparently, for a taxed sale, a formal option should have had to be exercised.
  • On the other hand, VAT was claimed from B on the basis of article 203 of the European VAT Directive. This provision states that VAT is payable by anyone who mentions VAT on an invoice. And for the tax authorities the agreement had to be regarded as an invoice, resulting in VAT becoming payable as from the moment the contract was concluded.

The Advocate General started with reminding us of some VAT principles on the concept of a VAT invoice and its importance for monitoring whether VAT debts have been paid and as justification of VAT deduction.

VAT stated on an invoice is due, regardless of whether or not the underlying transaction is subject to VAT. The principle “wrongly charged VAT is not deductible” has everything to do with avoiding “VAT leakage.” The aim is to avoid that the supplier does not pay VAT, but that the customer can still recover the VAT. The risk of a VAT loss exists as long as the customer can use an invoice on which VAT is incorrectly mentioned.

Member states must also provide the possibility of correcting any VAT incorrectly invoiced, where the person who issued the invoice shows that he acted in good faith.

As far as VAT deduction is concerned, the fundamental principle of VAT neutrality is important. This principle implies that VAT deduction should be allowed, provided the substantive conditions are met. This is even when the invoice does not meet all formal requirements. Therefore, non-compliance with formal VAT invoice requirements itself should not necessarily result in non-deductibility of input VAT.
The Advocate General eventually agrees with the viewpoint of the Slovenian tax authorities and concludes that a written agreement can be regarded as an invoice within the meaning of the VAT Directive, even if the agreement does not contain all the legally prescribed information.

Sufficient information must, however, be included on the basis of which the authorities can verify whether the VAT due has been paid and whether a right to deduct VAT may arise.

In other words: even if the agreement does not contain all mandatory invoicing statements, it can still be used to review the VAT payment liability of the supplier and to justify the VAT deduction position of the customer.

In theory, VAT should be neutral. In practice, VAT can easily become a costly affair if the VAT treatment of transactions is not correctly determined, or when VAT formalities are not handled correctly. Therefere, proper attention should be paid to VAT, especially with real estate transactions where the VAT exposures quickly can add up!

On the other hand, depending on the outcome, the case may also represent an opportunity to recover VAT for taxpayers which are in a situation where VAT was paid without receiving a (valid) VAT invoice.

Even though the European Court usually endorses the opinion of the Advocate General, we need to wait for the final verdict to draw conclusions. To be continued!