Out-Law News | 20 May 2022 | 2:58 pm | 2 min. read
The UK Supreme Court has confirmed that suppliers cannot recover input VAT from HM Revenue & Customs (HMRC) where VAT was not charged in the first place on the basis of a mistaken application of an exemption.
The Supreme Court’s ruling followed a decision by the Court of Justice of the EU (CJEU) in January this year in the case.
VAT is only deductible as input tax if it is “due or paid” in respect of supplies to the trader of goods or services by another taxable person.
The Supreme Court said in the light of the CJEU’s ruling it was able to make a short judgment in the case, dismissing the claim against HMRC for unpaid input tax. The ruling could set a precedent in a significant number of outstanding claims against HMRC, which the Supreme Court said were valued at between £500 million and £1 billion.
This case, treated as a test case, involved online vitamin company Zipvit which had purchased business postal services from Royal Mail under an individually negotiated contract over a three-year period beginning in January 2006. At the time, both parties believed that such services were exempt from VAT as postal supplies made by a public postal service, and therefore no VAT was charged and the invoices showed the supplies as being exempt from VAT.
However, in 2009, the CJEU ruled that the postal services VAT exemption only applies to supplies made by public postal services acting in a public capacity, and not to supplies made under an individually negotiated commercial contract. This meant that the services purchased by Zipvit should have been standard rated for VAT purposes, with Royal Mail paying VAT to HMRC and charging that VAT to Zipvit.
Zipvit argued that the commercial price it paid for the services should be treated as having included a VAT element, giving it the right to recover that amount in input VAT. Alternatively, it argued that if the embedded element of VAT was not “paid”, it should be regarded as being “due” within the meaning of the EU VAT Directive.
The UK Supreme Court heard the claim in early 2020 and decided that, as the case turned on matters of EU law, it should be referred to the CJEU.
With the CJEU having delivered its judgment, the Supreme Court adopted the same reasoning and concluded that in the circumstances, Zipvit had no right to recover from HMRC any element of input VAT.
Tax expert Jake Landman of Pinsent Masons said: “Because the Supreme Court has adopted the CJEU’s decision that VAT could not be regarded as being due or paid in the circumstances of the case, it decided that, again like the CJEU, it was not necessary to answer the question of whether a recipient may rely on the right to deduct where it does not hold invoices containing requisite details.”
Landman said the Supreme Court noted that because the position in this case turns on EU law, there was the possibility that there may need to be further debate on whether the CJEU decision has any bearing on the way the UK’s tax tribunals and the Court of Appeal have treated this issue in the earlier instances of this case.
The Supreme Court also considered the domestic law issue of whether HMRC, in the absence of VAT invoices, should have used its discretion to permit VAT recovery using other evidence. Like the lower courts before it, the Supreme Court had no difficulty in finding that HMRC was right not to exercise its discretion in Zipvit’s favour, since such an exercise of discretion would result in a windfall to Zipvit.
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