Supreme Administrative Court on proving right to deduct VAT on subcontracted supplies
Is an invoice and a contract enough to prove the right to deduct VAT? In its recent judgment, the Supreme Administrative Court (SAC) concluded that they are not. If the tax administrator challenges the scope or nature of the services received, the taxable person must be able to prove not only that the service existed, but also what exactly was supplied, to what extent and by whom.
In the case at hand, the company provided part of its cleaning services through supplies subcontracted from other VAT payers. It claimed input tax on these supplies in its VAT returns. During a tax inspection, the company submitted invoices, contracts, timesheets, customer confirmations and witness statements to the tax administrator. Nevertheless, the tax administrator denied the right to deduct VAT.
The tax administrator justified this by stating that the company had not proved that it had received the cleaning services from the declared suppliers or from other VAT payers. Nor did it substantiate that the services had been received in the declared scope and subject matter as stated in the tax documents presented. The deficiencies in the tax documents were considered by both the tax administrator and the Municipal Court sufficient to give rise to doubts as to the subject matter, scope and declared supplier of the supplies.
The SAC dismissed the company’s cassation complaint as unfounded but commented on how the right to deduct VAT should be proved in this case. In its statement of grounds, it referred to the conclusions of the CJEU judgment in Kemwater ProChemie case: even where it is clear that a certain supply actually took place, this may not in itself be sufficient. Failure to prove the scope of the supply received may also be an independent reason for denying the deduction.
According to the SAC, the company argued that its primary supplier provided workers, that the prices reflected reality, that the workers could work for several entities and that remuneration was paid in cash. However, these assertions do not prove that this particular supplier provided the specific supply in the declared scope and at the declared price. At the same time, cash payments do not allow to prove the amount of the consideration or who provided it.
The tax administrator acknowledged that the disputed supplies were not entirely fictitious and that certain supplies had in fact taken place in some form and had been used in the company’s economic activity. However, the tax administrator challenged the subject matter, scope and specific supplier (VAT payer) who was supposed to have provided the supplies.
The SAC judgment confirms that the mere existence of an invoice (a tax document) may not suffice. If the tax administrator challenges the actual scope or subject matter of the supply received, the taxable person should be able to document exactly what was provided, to what extent and by whom. In addition to properly issued tax documents, we therefore recommend also retaining related contracts, orders, handover protocols, timesheets, photographic documentation or other evidence allowing to prove the actual performance of the supply. Particular attention should be paid to cases where services are provided through subcontractors or where payments are made in cash. Practice also shows that documents prepared on an ongoing basis in the course of the contract performance of the contract carry the greatest evidentiary value.