Spain: Is The Deductibility Of VAT On Legal Services Proportional To The "Narrative" Contained In Its Invoice?

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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