In its recent judgment (LVK-56 EOOD v. Bulgaria, C-643/11 –
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62011CJ0643:EN:HTML)
the ECJ held that in line with Article 203 of the VAT Directive suppliers must pay any VAT included in an invoice irrespective of whether there is an underlying taxable transaction.

The ECJ pointed out that the purpose of the above Article is to ensure that there is no loss of tax revenue, as VAT incorrectly charged can potentially be reclaimed by the recipient of the invoice. Issuers therefore can avail of the option of correcting any tax improperly charged, if they can prove they acted in good faith in doing so. As a result, if taxpayers do not correct these invoices, the tax authorities are not obliged to verify whether the VAT invoiced corresponds to actual transactions during a tax audit.

On the other hand, input VAT deduction by recipients of such invoices can be refused on the basis that the right to deduct VAT is based on the actual performance of taxable transactions, rather than on the fact that VAT was charged on an invoice. The Court also confirmed that the mere fact that the (Bulgarian) tax authority did not adjust the VAT liability of the issuer does not mean that the authorities acknowledge that the invoice relate to a taxable transaction. The ECJ (in line with other recent decisions) added that if the taxable transaction did not take place because of a fraudulent transaction by the issuer of the invoice or other upstream transaction, the authorities must first establish by objective factors whether the recipient of the invoice knew or should have known that the transactions were subject to VAT fraud before disallowing VAT deduction.

The ECJ therefore ruled that the different treatment of the issuer and the recipient of the invoice (i.e. VAT is payable by the supplier even in the absence a taxable transaction, but not deductible by the recipient) is not in breach with the principles of fiscal neutrality, legal certainty, equal treatment and right to deduct input VAT, in particular if the issuer does not correct its invoice.