ECJ 11 December 2014, case C-590/13 (Idexx Laboratories)

After a tax audit, the Italian tax authorities took the view the Idexx has carried out intra-community transactions instead of VAT-exempt transactions from a French and a Dutch company. In that respect, Idexx did not comply with the formal requirements imposed by national law, including the non-compliance of registering the invoices issued by the French company in the national VAT-register and the non-compliance of registering the invoices supplied by the Dutch company in the register of invoices issued by Idexx. The right to deduct this imposed VAT relating to the reverse charge mechanism has been ignored by the authorities. Idexx filed an appeal against this adjustment. Eventually, the national judges file preliminary questions to the European Court of Justice (hereafter: ECJ).

The ECJ emphasizes the starting principle of the European VAT system, being that VAT taxable persons can deduct the input VAT paid. In principle, this starting point cannot be limited. Where the reverse charge procedure applies, member states are allowed to lay down formalities in respect of the rules governing the exercise of the right to deduct. However, these formalities should not exceed what is strictly necessary for the purposes of verifying the correct application of the reverse charge mechanism. Such measures must not go further than is necessary to attain the objectives and cannot undermine the neutrality of VAT.

In this regard, a distinction between formal and substantive requirements should be made. Formal requirements concern the rules governing its exercise and monitoring thereof and the smooth functioning of the VAT system. Substantive requirements are the right to deduct input VAT paid itself and the scope of this right.

It is clear from previous case law that the fundamental principle of fiscal neutrality requires deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements. Where tax authorities have the information necessary to conclude that the substantive requirements have been satisfied, it cannot impose additional conditions which refuse that right. In the case of Idexx, the tax authorities had all the information to conclude that Idexx met these substantive requirements. Therefore, the right to deduct the VAT payable regarding intra-community transactions cannot be denied on the ground that Idexx did not satisfy the formal requirements laid down by national law.