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Over the years, many myths and claims have grown up around the right to deduct VAT. Although often expressed with great confidence, they are not entirely true. One frequently repeated belief is that a VAT invoice is the only document entitling a taxpayer to deduct VAT. Although an invoice is indeed the primary document confirming the right to reduce output tax by input tax, today's case law, both national and EU, shows that there are other ways to prove this entitlement.
The right to deduct VAT – legal basis (how does VAT deduction work, and is an invoice essential?)
Under Article 86(1) of the VAT Act: “to the extent that goods and services are used to perform taxable activities, the taxpayer […] is entitled to reduce the amount of output tax by the amount of input tax […]”.
This provision concerns active VAT taxpayers, who may deduct VAT if the goods or services they purchase are intended for use in their business.
Paragraph 10 of the same article states that “the right to reduce output tax by input tax arises in the settlement for the period in which the tax liability arose in respect of goods and services purchased or imported by the taxpayer”.
Article 86(10b)(1) states that, in the cases specified in the VAT Act, this right arises “no earlier than in the settlement for the period in which the taxpayer received an invoice or customs document”.
We therefore have a provision that, in the context of an active VAT taxpayer's right to deduct VAT, expressly refers to an invoice (or possibly a customs document). Does the absence of an invoice therefore rule out this entitlement?
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Polish case law on the basis for VAT deduction: no invoice does not necessarily mean losing the right to reduce output tax by input tax!
It turns out that the Provincial Administrative Court in Warsaw answered this question negatively. In its judgment of 7 November 2024, reference III SA/Wa 1498/24, it stated that “the absence of a VAT invoice may be remedied by the taxpayer presenting other documentation confirming that the substantive conditions for the right to deduct have been met”.
The court referred to Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, indicating that, for VAT deduction, possession of a VAT invoice by the taxpayer is purely a formal requirement. The court therefore held that a company's possession of documentation containing all the necessary information confirming fulfilment of the substantive conditions for VAT deduction is sufficient to retain that right. It also referred to Court of Justice of the European Union case law, particularly judgment C-235/21.
This judgment of the Provincial Administrative Court in Warsaw, to some extent, repeats the judgment of 8 December 2023, reference III SA/Wa 1473/23, issued by the same court.
In that judgment, the court also referred to European case law, expressly stating that a contract may be regarded as an invoice, on the basis of which the taxpayer may deduct the input tax specified in it. According to the court, the right to deduct input tax should be denied only when it is established that the economic event described in the contract did not occur and that the taxpayer was aware of fraud, abused the law or failed to exercise due diligence.
The decisive CJEU judgment stating that a contract may be the basis for VAT deduction
The Warsaw Provincial Administrative Court judgments cited above can be described as a continuation of the reasoning of the Court of Justice of the European Union.
The most important is the judgment of 29 September 2022, reference C-235/21, cited in both Polish decisions.
In its operative part, the Court expressly stated that the European VAT Directive must be interpreted as meaning that a contract (such as a sale-and-leaseback agreement), following which the parties did not issue an invoice, may be regarded as an invoice. According to the CJEU, this is possible where the contract contains all information necessary for the tax authority to establish whether the substantive conditions for VAT deduction have been met in the particular case.
In other words, the European Court established that a sufficiently detailed contract may be the basis for deducting VAT, even without an invoice.
If you found this article interesting, explore our tax advisory services and read how we can help you:
Summary
Have doubts about applying the law in practice? One way to protect yourself against the tax authorities may be to apply to the National Tax Information for an individual tax interpretation!
For years, the TaxCoach accounting firm has helped clients effectively safeguard their tax positions in accordance with applicable regulations, including the VAT Act.
Our advisers can also help with tax optimisation for your business, from choosing the best form of taxation and detailed CIT and VAT analysis to implementing other beneficial tax solutions.
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