It is a common practice in the legal sector, particularly in the
event of ongoing advice, that professionals (lawyers or practices)
include in their honoraria invoices a brief text such as, for
example, "legal services for Q1 " or "legal advice
between X date and Y date".
This practice, despite being a regularly accepted practice, will
now have to of necessity be reconsidered if we want to avoid having
the client, whether businessman or professional, the recipient of
the bill and with the right to deduct the Value-Added Tax (VAT),
find it difficult to recover the VAT levied.
The above confirmation is rooted in a recent judgment from the
European Court of Justice (ECJ). The decision in question is a
decision regarding the refusal of the Portuguese Tax Authorities to
return the VAT portion of a bill for legal services which followed
the aforementioned practice. This refusal comes even in spite of
the fact that the taxpayer demonstrated the truth and the breakdown
of the services provided with supporting documentation.
The Court determined that, in accordance with the VAT Directive,
an exhaustive description of the service performed is unnecessary,
but what is required is some detail as to the scope and nature of
the professional service used, since legal services cover a
"large amount of services provided", and therefore the
wording of the invoice must allow the services to be linked to the
commercial activity carried out and so establish the right to
recover the VAT.
The ECJ indicated, therefore, that when dealing with legal
advice provided as an ongoing service, the start and finish dates
of the period to which the service relates must be identified, so
that the Authorities can tell the period of settlement of VAT to
which it corresponds.
The ECJ thus understands that these two elements form a part of
all of the facts that must be brought together in order to assess
if the taxpayer is in possession of a complete invoice, which is a
valid certificate in order to claim the VAT charged.
All of this applies in the case of Spain, whose VAT regulation
as we know is based on the VAT Directive. Thus, our legislation
requires the possession of a complete invoice in order to deduct
the VAT paid, an invoice which, in accordance with the Rules on
Invoicing, must include a description of the service and the cost
thereof, as well as the payment date for the service, in the event
that it differs from the date when the invoice was issued.
In spite of the above, and in order to relieve the initial
"shock", it is fair to say that the decision means that
you have to "take the rough with the smooth". Therefore,
in spite of acknowledging the flaw in the invoice, the ECJ, in its
consistent and constant position of declaring the neutrality of VAT
(which allows the businessman to be freed of the charges involved)
establishes that although some formal requirements may have been
left out, if the essential requirements for the deduction of the
IVA charged are met and the Authorities have information to verify
that this is the case (such as supporting documentation that is
subsequently provided, then the deduction of these fees cannot be
denied to the client who has had to pay them.
Unfortunately, we have to advise that this extremely clear,
ongoing and particularly prescient position of the ECJ concerning
VAT neutrality is seldom arrangement simple matter when one
confronted by the Tax Authorities (especially Governance and
Inspection agencies), which frequently forget that the only VAT
charges that truly "belong" to the Tax Authorities are
those paid in by the end client, and not the VAT charges for the
rest of the previous stages that merely form part of the taxation
process and that the businessman does not have to bear as a cost,
provided that, of course, said businessman has the right to the
deduction or the refund of VAT.
With regard to these barriers to the deduction by clients of VAT
for legal services, we believe that they can be overcome easily
with a more detailed description of the services, or even with a
reference to the contract for the supply of services, if the
services provided are adequately described therein, and this is
cross-referenced as an Annex in the invoice.
Along these lines, and seeing that the ECJ wants us lawyers to
include more narrative in the description of legal services, before
the lawyer sits down to write the wording of the invoice, now more
than ever he has to bear in mind the words of Antonio Machado:
"Easy does it, it ain't what you do, it's how you do
it"; this way, the narrative will avoid future problems
regarding the deductibility of VAT borne by the client with the
right to reclaim the VAT charged.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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