CJEU: conditions for denying right to deduct VAT if invoice includes fictitious supplier

Ferimet purchased recyclable material (scrap) from Reciclatges. In their VAT return, Ferimet declared the received supply in the reverse charge regime. During a tax inspection, the Spanish tax authority found that the supplier indicated in the invoice did not have the resources to make the supply and concluded that the supplier was fictitious. Subsequently, the tax authority did not accept Ferimet's right to deduct VAT and issued a tax assessment notice in this respect.

Ferimet appealed the tax assessment notice arguing that they had demonstrably received the supply and that there had been no loss of tax revenue. The Spanish court, on the other hand, accepted the argument that in the case in question a fictitious supplier may not be a mere formal error and referred the question to the CJEU.

The CJEU confirmed that the right to deduct VAT is subject to compliance with material as well as formal conditions. Among the material ones, the CJEU classified the condition that, when providing the supply, the supplier must act as a taxable person. The CJEU also reiterated its previous conclusions that the right to deduct VAT must be allowed if the material conditions are satisfied, even if the taxable person has failed to comply with some of the formal conditions. However, this is not the case if, because of non-compliance with formal requirements, it is impossible to verify that substantive requirements have been satisfied.

According to the CJEU, indicating a fictitious supplier in an invoice may constitute a breach of material conditions. If the tax authority cannot otherwise verify whether when providing the supply the supplier had the status of a taxable person, the right to deduct VAT may not be granted. The tax authority may also deny the right to deduct VAT if it is established that the supply recipient has committed VAT fraud or knew or ought to have known that the transaction was part of a chain affected by such fraud. 

With regard to the CJEU’s conclusions above, we recommend that companies always check whether the data in invoices correspond to business reality. According to current administrative practice, any discrepancy may have negative tax consequences for the parties involved. In particular, the right to deduct VAT will very likely be denied if the facts or evidence do not support that the supplier was a taxable person.