Can formalism undermine VAT neutrality? Spanish courts take step in right direction

One of the cornerstones of the EU common VAT system is its neutrality. This principle ensures that the tax ultimately burdens the final consumer and should never become a cost for businesses or professionals who act merely as tax collectors. The VAT-able person is, ultimately, a collaborator with the tax administration in the collection of the VAT and should be treated as such. This fundamental idea lies at the heart of two recent judgments handed down by Spanish courts, which deserve special attention.

Both rulings focus on a key issue: the possibility of adjusting the taxable amount and, consequently, correcting the VAT originally charged when a commercial transaction is altered or ultimately not carried out, including cases of non-payment or insolvency proceedings. This possibility is provided for in Article 90 of the EU VAT Directive, as well as in the Spanish VAT legislation. Nevertheless, a recurring problem persists in Spain: excessive formalism, which in many cases makes it impossible, or unreasonably difficult, for taxable persons to exercise this right.

The court decisions in question address this point with clarity.

In the first case, a regional court annulled a decision by the Spanish Tax Agency that had rejected a request to adjust the taxable amount in a situation involving unpaid invoices due to insolvency proceedings, solely because certain strict procedural deadlines and formalities had not been met. The court, however, found that the company had made reasonable efforts such as issuing corrective invoices and notifying the insolvency administrator, and considered it disproportionate to deny the adjustment based on a minor formality that contradicted the logic of the EU VAT system.

The second judgment, issued by the Spanish Supreme Court, went even farther. It directly questioned a fundamental requirement of Spanish administrative practice: the need to prove the delivery of corrective invoices through formal, certified means (such as formal notification by registered mail). The Supreme Court ruled that no specific (and costly) means of proof are strictly required, as long as the taxpayer can demonstrate proper notification by other reasonable and reliable methods.

These two rulings should be understood as a call to action, for both the tax administration and the Spanish lawmakers. The current rules on adjusting the VAT-able base are filled with requirements that, rather than ensuring proper control, end up hindering the normal functioning of the VAT system. To be fair, in recent years some efforts have been made to simplify and clarify the process for modifying the taxable base. However, these steps may not be sufficient, and it is important to continue moving in that direction.

In many situations, businesses are required to pay VAT that they have never actually collected, without any real possibility of adjusting the taxable amount. This often occurs because they are unable to prove that a formal notification (such as a registered letter or certified delivery) was sent. Even more concerning is that, under current Spanish VAT law, it is not possible to reduce the taxable base when the recipient of the invoice is not established in Spain. This restriction is clearly not in line with EU law and undermines the principle of VAT neutrality.

The above clearly breaches fundamental principles of EU law and undermines the core principle of VAT neutrality. The case law of the Court of Justice of the European Union has consistently held that member states may not impose conditions that render the exercise of rights granted by the VAT Directive impossible or excessively difficult. Yet that still appears to be the reality faced by many businesses in Spain today.

We are therefore witnessing two court decisions that open the door to a more reasonable, proportionate, and EU-compliant interpretation of the rules. They present an opportunity to correct a formalistic drift that no longer makes sense in the digital age, where requiring proof of delivery via certified post feels like a relic of the past. Today, electronic notifications, email delivery receipts, or digital audit trails offer more than sufficient safeguards.

It is time to reconsider the VAT framework in Spain and in other countries. Businesses should be allowed to adjust the taxable amount when the substantive conditions for doing so are met, without having to navigate a procedural obstacle course that only leads to frustration and legal uncertainty.

Ultimately, improving the VAT system is not merely a technical matter. It is a necessary step towards a fairer, more efficient, and economically relevant tax system for the 21st century. These judgments point in the right direction.