Right to deduct VAT paid for services supplied by a person who was not registered for VAT

The taxpayer was the owner of an undertaking and another trader (P) had supplied him with a number of taxable marketing services. However, P had not complied with the requirement to register for tax, nor paid VAT, despite issuing invoices documenting the services provided and specifying thereon that VAT was payable.

The tax authorities refused the taxpayer the right to deduct the input VAT as detailed on the invoices drawn up by P. The stated grounds for that decision were that the person who had issued the invoices concerned was not registered as a taxable person for VAT and that, because of the failure to comply with the requirement of registration imposed by the relevant provisions of Polish national law, the invoices issued by that trader therefore did not give rise to a right to deduct the input VAT.

The taxpayer applied to annul that decision, arguing that the registration of a trader as a taxable person liable to pay VAT was nothing more than a technicality having no effect on the right to deduct input tax. The administrative court involved dismissed the action which the taxpayer appealed on the basis that the application of the provisions of Polish tax law were not compatible with Community law, and furthermore that art. 17(6) of the sixth directive had not been interpreted correctly.

Appeal proceedings were stayed with the matter being referred to the European Court of Justice for a preliminary ruling.

The Third Chamber of the ECJ ruled it was common ground that the services concerned were provided by P as input transactions and that those services were used by the taxpayer for the purposes of his taxed output transactions. As a result, the substantive conditions governing the origin of the right of deduction, provided for in art. 17(2) of the sixth directive, were satisfied.

The right of deduction rules in art. 18(1)(a) provided that the taxpayer had to hold an invoice drawn up in accordance with art. 22(3). The referring court agreed that the invoices contained all the information required by that provision. The invoices also contained the tax identification number of the person providing the services concerned, that number being automatically allocated to traders by the Polish tax authorities, irrespective of whether an application for registration had been made.

Despite art. 22(3)(b) referring to the ‘VAT identification number’, it was clear that the tax identification number allocated in this case ensured that the taxable person concerned could be identified and therefore this was sufficient to meet this particular requirement of art. 22(3)(b).

Irrespective of the importance of VAT registration, if the VAT system was to operate properly a failure on the part of a trader to meet that requirement could not impinge on the right of deduction conferred on another taxpayer by art. 17(2).

Article 22(1) provided only that there was an obligation on taxpayers to state when their activity commenced, changed or ceased. However, that provision did not confer on member states, in the event of such a declaration not being submitted, to defer the exercise of the right to deduct until the time at which taxable transactions actually began to be carried out on a regular basis, or to deprive the taxpayer of that right.

Such a right would be viewed as imposing additional conditions which might have the effect of rendering the right to deduct ineffective for practical purposes. Therefore, any failure by the service provider to register did not call into question the right of deduction to which the recipient of those services was entitled to.

The Court further stated that the same principle could be applied to art. 22(8) pursuant to which member states might impose other obligations which they deemed necessary for the correct collection of the tax and for the prevention of evasion. Although that provision did allow member states to take certain measures, those measures should not go any further than was necessary to attain that objective and could not be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, a fundamental principle of the common system of VAT.

Therefore the Polish legislation contained a restriction on the right to deduct VAT beyond what was authorised by art. 17(6).

The full text of this case is available at http://www.bailii.org/eu/cases/EUECJ/2010/C43809.html