The Supreme Court has made a referral to the Court of Justice of the European Union (the “CJEU“) of questions concerning the availability of input VAT deductions in circumstances where the relevant supplies were mistakenly treated as exempt for VAT purposes.
Zipvit Ltd, the appellant in this case, received supplies of services that Royal Mail had mistakenly treated as exempt, whereas under the legislation the supplies should have been standard rated. Zipvit claimed input tax deductions for the VAT element which Zipvit argued was deemed by law to be included in the consideration it paid to Royal Mail.
The focus of the reference is twofold:
- whether VAT was “due” from or “paid” by a taxable person as part of the price actually paid in circumstances where a supply of services was treated, mistakenly, as exempt, and no claims by the supplier or HMRC were made to recover the VAT when the mistake was discovered (the “due or paid requirement”); and
- whether a taxable person is entitled to claim input VAT deduction in circumstance where invoices for the supply of services did not show the relevant VAT amounts owing to services being treated, mistakenly, as exempt (the “invoice requirement”).
The outcome of this case will have significant fiscal consequences. Zipvit’s claim is a test case in respect of similar supplies made by Royal Mail, and its result will affect similar claims against HMRC worth in total between £500 million and £1 billion.
The entitlement of a taxable person to claim input VAT deductions is provided for in articles 167 and 168 of the Principal VAT Directive (2006/112/EC, the “Directive”).
The general rule is that a taxable person is entitled as against HMRC to deduct as input VAT the VAT “due or paid” by it on supplies of services to it used for its own supplies of goods or services to an ultimate consumer.
In order to claim deduction for input VAT, the taxable person would normally need to produce an invoice showing that VAT was due in respect of the supplies (and the amount of VAT so due). In the absence of such an invoice, under domestic legislation, HMRC have a discretion to accept alternative evidence of payment of VAT.
If a service is treated properly as exempt for VAT purposes, no VAT is due or paid by the taxable person on the supply of that service to it, and no input VAT deduction can be claimed by the taxable person in respect of that exempt service.
The relevant services in this case were supplies of business postal services by Royal Mail to Zipvit between January 2006 and March 2010. The contract for these services provided that the postage charges specified as payable by Zipvit were “exclusive of VAT”, and (as construed by the Court of Appeal whose construction was accepted by the Supreme Court) that the total amount payable by Zipvit for the supply of the services was the commercial price plus any applicable VAT.
Article 132(1)(a) of Directive provides that member states shall exempt “the supply by the public postal services of services other than passenger transport and telecommunications services, and the supply of goods incidental thereto”.
In implementing this provision, Parliament and HMRC interpreted it as covering all postal services supplied by Royal Mail, the public postal service in the UK. Schedule 9, Group 3, paragraph 1 of the Value Added Tax Act 1994 (“VATA”) contained a provision to this effect, and HMRC issued guidance notes confirming the exempt treatment of all postal services provided by Royal Mail.
The services were therefore treated, at the time of supply, according to domestic legislation, as exempt. The invoices issued by Royal Mail in relation to the services were marked “E” for exempt, showed no sum attributable to VAT to be due, and charged Zipvit only the commercial price of the services. Zipvit duly paid to Royal Mail the sums set out in the invoice and did not, at the time of the supplies, make any claim to recover input VAT in respect of them but this was, the Supreme Court decided, the result of a mistake common to Zipvit and Royal Mail.
The judgment of the CJEU of 23 April 2009 in R (TNT Post UK Ltd) v Revenue and Customs Commissioners (Case C-357/07) (“TNT Post”) revealed that HMRC’s treatment of business postal services was incorrect. TNT Post established that the postal services exemption contained in article 132(1)(a) of the Directive applies only to supplies made by the public postal services acting as such, and does not apply to supplies of services for which the terms had been individually negotiated, such as commercial and business postal services. Accordingly the services should have been treated as standard rated. Royal Mail should have charged Zipvit VAT at the relevant rate in addition to the commercial price of the services, and should have accounted to HMRC for that VAT. In the event, however, Zipvit was not charged and did not pay that VAT, and Royal Mail did not account to HMRC for any sum representing the VAT element in respect of the services.
Royal Mail could, when it became apparent that the services it supplied to Zipvit were standard rated, have issued claims against its business postal service customers for the VAT which should have been charged (as it was contractually entitled and within time to do so). However, it had decided not to for commercial reasons. Similarly, HMRC were also within time to issue assessments against Royal Mail for VAT in respect of at least some of the supplies of the services. HMRC decided not to do so because they considered that Royal Mail would have a good defence based on legitimate expectation.
On the basis of TNT Post, Zipvit made claims against HMRC for deduction of input VAT in respect of the services in the total sum of £415,746 plus interest. The claims were calculated on the basis that the prices paid by Zipvit included a VAT element at the relevant rate. These claims were rejected by HMRC and Zipvit appealed. By the time the appeal reached the First-tier Tribunal, both Royal Mail and HMRC were out of time to recover the VAT.
The decisions in the lower courts
The due or paid requirement
A preliminary issue is whether “due or paid” in the Directive means:
- due from or paid by the supplier to HMRC; or
- due from or paid by the customer to the supplier.
On this preliminary issue, the two Tax Tribunals (First-tier and Upper) differed in their approach. The First-tier Tribunal held that it was necessary to look at whether VAT was due or paid by the supplier, i.e. Royal Mail, to HMRC (and not whether it was paid by Zipvit to Royal Mail). This approach was later disapproved by the Court of Appeal and the Supreme Court.
The Court of Appeal analysed the application of the VAT legislation in a case where a supplier – Royal Mail – makes a mistake and charges his customer less VAT than is legally due, and then – having the contractual right to do so – rectifies his mistake by claiming a further amount from the customer.
- Suppose for instance that the VAT rate is 20% and the price for the supply, agreed by the parties to be exclusive of VAT, is £120. Because of the mistake, the supplier initially claims only £120 from the customer, which the customer pays.
- Relying on the CJEU decision in joined cases C-249/12 and C-250/12 (“Tulica”), Zipvit argued that, in circumstances where the supplier (realising his mistake) later claims a further £24 (£120 grossed up at 20%) from the customer, the further payment of £24 does not represent the VAT on the supply (which, otherwise, would mean that the initial payment of £120 did not comprise any VAT). Rather, the analysis would be that the total amount paid (£144) should be regarded as comprised of two instalments: the first of £100 plus £20 VAT, and the second of £20 plus £4 VAT.
- Zipvit went on to argue that it should not make a difference if, for whatever reason, the supplier failed to invoice the customer when it became clear that the supply was indeed taxable. The analysis and the dissection of the initial £120 which it involves is important because it determines such issues as when the VAT should be paid by the supplier, and whether and how any limitation period applies.
The Court of Appeal held that Zipvit’s argument was supported by Tulica only to the extent that the supplier is unable to recover the tax from the customer as a matter of national law. In the present case, however, recovery from the supplier was at least possible for some time (both Royal Mail and HMRC were in time to recover the VAT when it became clear following TNT Post that the supplies were taxable). In Tulica, the supplier did not have a right to recover the tax from the customer and therefore the CJEU did not directly address the issue of the practical possibility of recovery by the supplier (for example, as in the present case, when the supplier has a contractual right to recover but fails to do so and is then prevented from exercising that right by the passage of time). The Court of Appeal therefore held that the “due or paid requirement” was not acte clair in the present case (but no reference was made to the CJEU because, in the Court of Appeal, Zipvit’s claim failed on the “invoice requirement”). In particular, the Court of Appeal found that the supplier’s ability to recover VAT from the taxable person is relevant to the “due or paid requirement”:
- If a supplier is unable to recover the tax from the customer, there is clear CJEU authority (Tulica) that the price paid for each supply must be treated as VAT-inclusive, and the taxable person would have “paid” the VAT element contained in those prices if the invoices have been paid in full.
- If a supplier is able recover but does not enforce that right (as in Zipvit), the position is not acte clair and a reference would be needed.
The invoice requirement
Both Tax Tribunals found that Zipvit failed to produce the required invoices for claiming input VAT deductions, and that had HMRC properly considered whether to exercise its discretion to accept alternative evidence of the payment of input VAT, it (HMRC) would nonetheless have decided not to exercise that discretion.
The Court of Appeal held that the inability of Zipvit to produce the required VAT invoices (to show that VAT had been charged), or alternative evidence showing payment of the relevant tax by Royal Mail to HMRC, was fatal to its claim. It agreed with the two Tax Tribunals that if HMRC were to exercise its discretion to allow the claim for deduction, it would constitute an unmerited windfall for Zipvit where the input VAT had never been paid into the public purse.
The Court of Appeal did not accept Zipvit’s argument that there are two kinds of statutory requirements for the contents of a VAT invoice: substantive requirements and formal requirements. The Court concluded that failure to specify in the invoice the amount of the VAT charged was (on the facts) a requirement which was fundamental and, as it was not met, the statutory requirement to issue a VAT invoice had not been complied with.
The Supreme Court
The Supreme Court held that neither the due or paid requirement nor the “invoice requirement is acte clair.
Accordingly, the Supreme Court asked the CJEU to consider the following two main questions:
- whether VAT was “due” from or “paid” by a taxable person as part of the price actually paid in circumstances where a supply of services was treated, mistakenly, as exempt, and no claims from the supplier or HMRC were made to recover the VAT when the mistake was discovered; and
- whether a taxable person is entitled to claim input tax deductions in circumstance where invoices for the supply of services did not show the relevant VAT amounts due to services being treated, mistakenly, as exempt.
In answering both questions, the Supreme Court also asked the CJEU to confirm whether it is relevant to consider:
- HMRC’s ability to successfully recover the VAT from the supplier, i.e. whether the supplier would have a defence, such as legitimate expectation or limitation, to HMRC issuing an assessment; and
- the fact that when the mistake was discovered, the taxable person could have offered to pay the VAT to the supplier (to be passed on to HMRC), but failed to do so.
This case raises a number of important questions of principle in VAT law: in particular, the application of the principle of fiscal neutrality in claims for input VAT deductions.
Businesses whose supply contracts provide for prices exclusive of VAT should be alert to the outcome of this reference, as it will provide helpful guidance for claiming retrospective input tax deductions in respect of supplies received with historically incorrect VAT treatment. In light of the questions posed by the Supreme Court, it may be prudent to establish (in these circumstances) a practice of requesting correct VAT invoices from the supplier and paying the VAT to be passed on to HMRC in order to support claims for input VAT deduction.