Section I The right of deduction
3. Prerequisites for the right of deduction
3.2 Formal element: the issue of an invoice
3.2.1 The role of the invoice in a VAT system
A VAT invoice is simply a type of invoice that shows certain details of a sale or other supply of goods and services. In the European style credit invoice VAT, a VAT invoice plays a critical role in the functioning of the whole system. A purchaser must have a valid VAT invoice from the supplier in order to reclaim VAT it pays on a sale it makes subsequently. As elaborated above, the integrity of the chain of deduction ensures VAT as an indirect tax which is non-accumulative and enables the principle of neutrality to be realized. The VAT invoice secures the integrity of the deduction chain
as generally no deduction will be allowed without a qualified VAT invoice121. Therefore, the invoice is indispensable written proof (it could be in paper or electronic form) for a taxable person to exercise its right of deduction. Because of this feature, however, it is also easily used by some persons with intentions to obtain illegal benefits as it is easily falsified and difficult to detect—tax fraud and evasion in VAT is related to the invoice.
A VAT invoice received by one business is the primary evidence for it to recover VAT incurred as input tax. For the tax authority, the VAT listed on a seller’s tax invoice can be used to verify the sale being reported on the seller’s VAT return. It could also be cross-matched against the buyer’s claimed input credit on the same transaction122.
3.2.2 Who issues and who receives VAT invoices?
In a taxable transaction, there are at least two participants—transferor and transferee, or seller/supplier and buyer. In principle, the former should give the latter a VAT invoice for any standard-rated or reduced-rated items sold. The rules for a business to issue a VAT invoice vary in respect of the nature of the subjects involved in a specific taxable transaction. With regard to the supplier upstream, almost all VAT systems in the world have the qualification requirement that it must be a VAT-registered person. Only when a person meets the conditions for registration and becomes a general VAT taxpayer, can that person be eligible to issue VAT invoices123. In addition, normally, the invoice should be issued within a time limit. As Article 222 of the VAT Directive 2006 states: “Member States may impose time limits on taxable persons for the issue of invoices when supplying goods or services in their territory”.
In the United Kingdom, only VAT-registered businesses can issue VAT invoices and
121 But what is important is the substantial taxable transactions recorded on the invoice, rather the
invoice itself. Thus there exist the cases in which the deduction of input VAT is granted in the absence of VAT invoice.
122 This cross-match usually occurs in taxable transactions before the retail stage. See Schenk and
Oldman,Value Added Tax, p. 139.
123 As expressed previously, in most VAT systems, there exists a threshold to be a general VAT taxpayer,
the business with a turnover more than the amount of the threshold should make a mandatory
registration and the small business could make a voluntary registration to be a general taxpayer in some VAT systems.
normally a VAT invoice must be issued within 30 days of the date of the supply124. The situation in China is more or less the same, however, the taxable person is divided into two types: the general taxable person and the small-scale taxable person. Only a general taxable person may be qualified to issue a special VAT invoice, pursuant to Article 21 of PR-VAT, which provides:
(1) Taxpayers selling goods or taxable services shall issue special VAT invoices to the purchasers who ask for them. The sales amount and output tax shall be separately indicated in the special VAT invoices.
(2) Under any of the following circumstances, no special VAT invoice shall be issued:
(a) selling goods or taxable services to individual consumers; (b) selling goods or taxable goods that are free from VAT; (c) selling goods or taxable services by small-scale taxpayers.
As may be observed from the first paragraph, the invoice should be issued on the request of the purchaser, and in addition, based on the content of point (a) of the subsequent paragraph, it is the duty of the seller not to issue VAT invoices to individual consumers. This could be questionable, as it is not reasonable to impose on a taxable person the duty to know whether its purchasers are individual consumers or not.
When it comes to the time limit for the issue of a VAT invoice, detailed regulations are found in the “Provisions for the Use of Special Invoice of Value-added Tax”125 (the Provisions). In amending the Provisions, significant changes were made to the time limit for the issue of the invoice. In its previous version, the time limits varied according to the manner in which the taxable transactions were carried out and the ways by which the purchase price was paid126. In the amended version, the time limit
124 See UK,VAT Notice 700/21: Keeping VAT Records,article 4.1 para. 2.
125 The “Provisions for the Use of Special Invoice of Value-added Tax”, was initially formulated by
State Administration of Taxation on December 27, 1993. It was then amended on October 17, 2006, and came into effect on January 1, 2007.
126 See article 6 of the Provision:
The time limit for issuance of special invoices is prescribed as follows:
(1) If accounts are settled by the methods of advance payment, bills of collection and acceptance, or by authorizing banks to collect payments, it is the day when the goods are dispatched;
(2) If accounts are settled by the method of payment on delivery, it shall be the day when the payment is received;
is expressed as follows: the special VAT invoice shall be issued in accordance with the time of the occurrence of VAT tax liability. And the precise time of occurrence of VAT tax liability is provided in Article 19 of PR-VAT:
(1) The time at which the liability to pay VAT arises:
(a) for the sale of goods or taxable services, it is the date on which the sales sum is received or the documented evidence of right to collect the sales sum is obtained. (b) for imported goods, it is the date of import declaration of customs.
(2) The time at which the liability to withhold VAT is the date on which the liability for the taxpayer to pay VAT arises.
Article 38 of DRI-VAT, which gives the detailed explanation of the above article, and its contents are similar to the previous version of the Provision.
Actually, not all the regulations are related to the time limit, but the exact issue time point of a VAT invoice. No space for the flexibility is not practicable here.
With regard to the recipient of VAT invoices, in many VAT systems, a registered person must issue a VAT invoice for all taxable sales, which means the issue of a VAT invoice is mandatory regardless of the nature of the recipient. In other systems, in order to reduce the opportunity of cheating in the VAT invoice, the VAT invoice can be issued only on sales to other registered persons. This means a supplier does not need to issue VAT invoices to customers who are not registered VAT persons. In practice, this rule is usually implemented by the issue of a VAT invoice to customers who ask for one, as the supplier does not usually know if its customers are VAT registered or not and does not have the obligation to check. This rule is typically
(3) If the accounts are settled by the methods of credit sales or hire purchase, it is the day of collection prescribed in contracts;
(4) If goods are sold through consignment agents, it is the day when the bills of consignment sales are received from consignee;
(5) For the transfer of goods from one establishment to another for sale by a taxpayer who maintains two or more establishments and keeps their accounts on a consolidated basis, if Value-Added Tax shall be levied on such goods according to the provisions, it is the day when the goods are transferred; (6) For goods provided to other units or individual business operators in the from of investment, it is the day when the goods are transferred; or
(7) For goods distributed to shareholders, it is the day when the goods are transferred. General taxpayers must issue special invoices at the prescribed time, neither earlier nor later.
applied to retailers. A retailer does not need to issue a VAT invoice or receipt unless asked to do so by the customer.
According to general VAT rules, VAT is due by a seller of goods or services. For this reason, the VAT invoice which includes VAT is issued by the seller. However, there is a first exception to this rule—self-invoicing; under this method the customer is able to prepare the invoice and then provides the supplier with the invoice. It could also be called “self-billing”. A prior agreement between the supplier and customer is a precondition for the adoption of the self-invoicing method127. Article 224 of the VAT Directive 2006 authorizes the EU Member States to determine the terms and conditions of such prior agreements and of the acceptance procedures between the taxable person and the customer128. In Italy, in the case of sales of goods or services made within Italian territory by foreign VAT subjects to Italian VAT subjects/customers, VAT is applied by the Italian resident customer issuing a self-invoice129.
3.2.3 The required contents in VAT invoices
As an appropriately issued VAT invoice is crucial to the exercise of the right of deduction, it is a foundation on which the authority makes its determination of the VAT due and the value of any refund, it is particularly important that the precise and unambiguous contents are noted in a VAT invoice. Thus, the central rules for VAT invoices are usually specified in detail in the relevant legislation. In the EU, the VAT Directive 2006 regulates the content of invoices in a separate section130. The following information should be contained in a standard VAT invoice:
127 Paragraph 1 of Article 224: Invoices may be drawn up by the customer in respect of the supply to
him, by a taxable person, of goods or services, if there is a prior agreement between the two parties and provided that a procedure exists for the acceptance of each invoice by the taxable person supplying the goods or services.
128 Paragraph 2 of Article 224: The Member States in whose territory the goods or services are
supplied shall determine the terms and conditions of such prior agreements and of the acceptance procedures between the taxable person and the customer.
129 See Article 17 para. 3 and Article 21 para. 5 of Presidential Decree 633/72 (DPR 633/72). 130 Title XI Chapter 3 Section 4 of the VAT Directive 2006.
a. General contents
♦ An invoice number which is unique and follows on from the number of the previous invoice;
♦ The seller’s name or trading name and address ♦ The seller’s VAT registration number
♦ The invoice date
♦ The tax point—the time when a sale is treated by tax authority as taking place132—if this is different from the invoice date
♦ The customer’s name or trading name and address ♦ A description of the goods or services
From this list, the general information on a VAT invoice could be classified into three broad categories: information related to the invoice itself; information about the transaction; and information on the subject/s of the transaction. The basic information contained in the VAT invoice is the first line of defense to combat VAT fraud related to the invoice.
b. Information related to item sold ♦ Unit price or rate, excluding VAT
♦ Quantity of goods or the extent of the services ♦ Rate of VAT that applies to the items being sold ♦ Total amount payable, excluding VAT
♦ Rate of any cash discount
132 Due to Article 226 (7) of the VAT Directive 2006, it is the date on which the supply of goods or
services was made or completed or the date on which the payment on account referred to in points (4) and (5) of Article 220 was made.
♦ Total amount of VAT charged
All the information above is about the particular goods sold or service supplied, either about the nature of the product itself or the related VAT scheme applied.
c. Information about special arrangements, if any
In VAT Directive 2006 Article 226 paragraphs (11)—(15) list some special situations. Most of the special arrangements are determined in the national provisions. For example, in the United Kingdom, if a business issues a VAT invoice that includes zero-rated or exempt items, the invoice shall include the information that shows clearly there is no VAT payable on those items and the total of those values separately.
3.2.4 Simplified VAT invoice
Despite the requirements listed above, a tax invoice may contain less information under certain situations. An example is the regulations prescribed in Article 238 (1) of the VAT Directive 2006:
Member States, in respect of supplies of goods or services in their territory, could simplify a VAT invoice in accordance with conditions after consulting the VAT Committee: (a) where the amount of the invoice is minor; (b) where commercial or administrative practices in the business sector concerned or the technical conditions under which the invoice are issued make it difficult to comply with all the obligations referred to in article 226 and 230.
For example, in the United Kingdom, a registered taxpayer can issue a less detailed VAT invoice if the consideration (including VAT) for the goods sold or services rendered is £250 or less.
However, even in a simplified VAT invoice, there is some information that could not be removed from a VAT invoice, therefore, Article 238 (2) of the VAT Directive 2006 states:
Invoices must, in any event, contain the following information: (a) the date of issue; (b) identification of the taxable person; (c) identification of the type of goods or services supplied; (d) VAT amount payable or the information needed to calculate it. In principle and in theory, a VAT invoice is an indispensable element in the exercise of
the right of deduction, in practice, however, in view of commercial or administrative costs, it may be simplified or even waived. Nevertheless, the VAT invoice is an intelligent design to ensure the smooth functioning of the deduction mechanism in VAT. It delivers taxpayer compliance motivated by the deduction chain and creates the audit trail for the authority as well. If the right of deduction is the “pivot” in a VAT system, then the VAT invoice is the “lubricant” for the so-called “pivot”.