ECJ C-690/22 (Shortcut) – Order – Authorities can not restrict right to deduct VAT if invoices include a generic description of the services provided

On May 24, 2023, the ECJ issued its order in the case C-690/22 (Shortcut).

Context: Reference for a preliminary ruling — Article 99 of the Rules of Procedure of the Court — Common system of value added tax (VAT) — Directive 2006/112/EC — Article 178(a) — Right of deduction — Rules for exercising — Article 226, point 6 – Particulars which must appear on the invoice – Scope and nature of the services rendered – Invoices including a generic description of the services provided

Article in the EU VAT Directive

Articles 178(a), 219, 220(1), point 1, 226, point 6, and 273 of Council Directive 2006/112/EC

Article 178 (Rules governing exercise of the right of deduction)
In order to exercise the right of deduction, a taxable person must meet the following conditions:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;

Article 219
Any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice.

Article 220 (Issue of invoices)
1. Every taxable person shall ensure that, in respect of the following, an invoice is issued, either by himself or by his customer or, in his name and on his behalf, by a third party:
(1) supplies of goods or services which he has made to another taxable person or to a non-taxable legal person;
(2) supplies of goods as referred to in point (a) of Article 33 except where a taxable person is making use of the special scheme in Section 3 of Chapter 6 of Title XII;
(3) supplies of goods carried out in accordance with the conditions specified in Article 138;
(4) any payment on account made to him before one of the supplies of goods referred to in points (1) and (2) was carried out;
(5) any payment on account made to him by another taxable person or non-taxable legal person before the provision of services was completed.

Article 226 (Content of invoices)
Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221:
(6) the quantity and nature of the goods supplied or the extent and nature of the services rendered;

Article 273

Member States may lay down other obligations which they deem necessary to ensure the correct collection of VAT and to prevent fraud, subject to compliance with equal treatment of domestic transactions and transactions carried out between Member States. by taxable persons, and provided that these obligations do not give rise in trade between Member States to formalities linked to the crossing of a border.

The option provided for in the first paragraph cannot be used to impose additional invoicing obligations to those set out in Chapter 3.

Facts

Shortcut, a company incorporated under Portuguese law, carries out computer consultancy activities. It is subject to VAT in Portugal.
Following an audit relating to the year 2011, the tax authorities drew up a report in which they concluded that four invoices issued by companies which had provided Shortcut with services in the field of IT (see -after the “invoices in question”) were based on simulated transactions and that, therefore, the VAT appearing therein had been unduly deducted by Shorcut.
In the same report, the tax authorities also considered that, due to the very generic description of the services provided to Shortcut that they contained, these invoices did not comply with the formal requirements laid down in Article 36(5), (b) of the VAT Code, so that, under Article 19(2) and (6) of that code, the VAT had been wrongly deducted.
In that regard, it is apparent from the order for reference that the invoices at issue contained the following particulars:
- invoice no ^. 2011001 of 31 January 2011: quantity: 631 hours; description: “application development services”;
- invoice no ^. 2011003 of 25 February 2011: quantity: 1,780 hours and 210 hours; description: “application development services” and “application development consulting”, respectively;
- invoice no ^. 2011002 of 31 May 2011: quantity: 545 hours; description: “application development services”, and
- invoice no ^. 2011007 of 6 June 2011: quantity: 2,400 hours; description: “application integration services”.
The tax authorities corrected the VAT corresponding to these invoices, which it considered unduly deducted, and issued, on February 21, 2015, two additional VAT assessments as well as two compensatory interest assessments, for a total amount of 76,085.91 euros.
Shortcut brought an action against those liquidations before the Tribunal Administrativo e Fiscal do Porto (Administrative and Tax Court, Porto, Portugal), which, in a judgment of 16 October 2019, found that the information gathered by the tax authorities in his report did not make it possible to conclude, with the required degree of probability, that the transactions covered by the invoices in question had been simulated. Consequently, he ruled that the said liquidations could not be maintained on the basis of the simulation of the transactions.
However, that court considered that the same settlements should be maintained and that, therefore, Shortcut was not entitled to the deduction of the VAT mentioned on the invoices in question, because of the failure to comply with the formal requirements laid down in Article 36(5)(b) of the VAT Code as regards the description of the services provided to him.
Shortcut appealed against this judgment to the Tribunal Central Administrativo Norte (Central Administrative Court of the North, Portugal) which, in a judgment of 27 October 2021, dismissed this appeal, considering that the invoices in question did not comply with those requirements formalities concerning the description of the services provided and that other documents presented by Shortcut did not make it possible to go back on this finding.
Shortcut brought an appeal against that judgment before the referring court, the Supremo Tribunal Administrativo (Supreme Administrative Court, Portugal), arguing, inter alia, that, by virtue of the principle of neutrality of VAT, the tax administration cannot refuse the right to deduct VAT on the sole basis of formal criteria relating to the invoices. Moreover, the invoices in question included all the formal elements required, in particular as regards the indication of the services provided, which is demonstrated by the fact that, in its report, the tax authorities did not test the less difficulty in identifying the quantity and the usual denomination of the services provided, by examining in detail the description and scope of these services.
Before that court, the Procurador-Geral Adjunto (Deputy Public Prosecutor, Portugal) maintains that the generic descriptions of the services provided appearing on the invoices at issue do not meet the requirements laid down in Article 36(5)(b), of the VAT code, compliance with which would be essential in order to be able to exclude any tax evasion taking the form of a double deduction of VAT.
The referring court observes that, since the simulation of the transactions covered by the invoices at issue could not be established, the only question which arises before it is whether the descriptions of the services provided appearing on those invoices invoices comply with the requirements laid down in Article 36(5)(b) of the VAT Code, which involves interpreting Article 226(6) of the VAT Directive. That court also indicates that, in the event that those descriptions were considered not to comply with those requirements, it would have to be determined whether such an assessment would prevent the deductibility of the VAT mentioned on those invoices.
In that regard, the referring court recalls that it is apparent from the case-law of the Court, and in particular from the judgment of 15 September 2016, Barlis 06 – Investimentos Imobiliários e Turísticos(C‑516/14, EU:C:2016:690, paragraph 27), that the purpose of the particulars which must appear on an invoice is to enable the tax authorities to check payment of the tax due and, where applicable, the existence of the right to deduct VAT. However, given that objective, the particularity of the case before the referring court is that, during a tax audit, the tax authorities, although having considered that the invoices in question did not describe sufficiently details the services provided, concluded, albeit incorrectly, that the transactions therein were simulated.

Questions

Are the descriptions used in the invoices at issue in this case (“application development services”), for the purposes of identifying the scope and characteristics of the services provided, sufficient in view of the correct interpretation of Articles 178(a), 219, 220, [paragraph 1,] point 1, Article 226, point 6, and Article 273 of the [VAT Directive], these descriptions not having prevented the [tax administration], during a tax audit, from assessing whether the services described there corresponded to reality, and from concluding that the “invoices were false”?

AG Opinion

None

Decision

Article 178(a), Article 219 and Article 226(6) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax,

should be interpreted as:

they object to national tax authorities being able to refuse the right to deduct value added tax on the grounds that invoices bearing terms such as “application development services” do not comply with the formal requirements referred to to this last provision.

Summary

In this case, the Supreme Administrative Court of Portugal referred a question to the Court of Justice of the European Union (CJEU) regarding the deduction of VAT on invoices that did not comply with formal requirements. The tax administration in Portugal claimed that the invoices contained insufficient descriptions of the services provided and were based on simulated transactions. The referring court sought clarification on whether the invoices met the formal requirements set out in the VAT Directive and whether the tax administration could refuse the right to deduct VAT based on the invoice descriptions.

The CJEU determined that the formal conditions for the right to deduct VAT should not be used to refuse the deduction if the material conditions are satisfied. The court emphasized that the right to deduct VAT is a fundamental principle of the common VAT system and should not be limited, even if certain formal conditions have been omitted by the taxable person. The objective of invoice information is to enable tax administrations to monitor tax payment and the right to deduct VAT. The CJEU further noted that the tax administration should take into account any additional information provided by the taxable person.

The CJEU stated that the tax administration cannot impose additional conditions that reduce the exercise of the right to deduct VAT. However, the deduction can be refused if the violation of formal conditions prevents the provision of proof that the material conditions are satisfied or if the deduction is invoked fraudulently or abusively. In this case, the simulation of transactions was not demonstrated, and the CJEU held that the tax administration could not refuse the right to deduct VAT based on the invoice descriptions.

Therefore, the CJEU concluded that the VAT Directive precludes national tax authorities from refusing the right to deduct VAT based on invoices that do not comply with formal requirements, such as generic descriptions of services. The referring court will need to verify whether the material conditions for the right to deduct VAT are satisfied based on the facts of the case.

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