In Zipvit Ltd v HMRC (Case C-156/20), the Court of Justice of the European Union (“CJEU”) has held that, where a contract for services provides for VAT to be charged in addition, a taxable person cannot claim to deduct an amount of VAT for which it has not been charged and which it has therefore not passed on to the final consumer.
This decision puts to rest a long-running test case in relation to claims for input tax recovery brought by Zipvit and other businesses which received postal services from Royal Mail which ought to have been treated as taxable. As Advocate General (“AG”) Kokott noted in her opinion, the total value of claims made against HMRC amounts to £500 million to £1 billion.
The decision means that, where a price is expressed to be exclusive of VAT and the supplier does not charge VAT in addition, but it is subsequently shown that the supply was taxable, the recipient of the supply cannot claim input VAT unless additional VAT is actually charged to it by the supplier.
The CJEU has left open the question of whether holding an invoice stating the amount of VAT charged is a necessary condition for a valid input tax claim.
The salient facts are as follows.
Between January 2006 and March 2010, Royal Mail made supplies of business postal services to Zipvit. The contract for these services provided that the postage charges specified as payable by Zipvit were “exclusive of VAT” as the services provided then were treated, according to UK domestic legislation, as exempt. The contract provided that Zipvit would be liable to pay any applicable VAT in addition.
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 only charged Zipvit the commercial price of the services. Zipvit duly paid to Royal Mail the sums set out in the invoices and did not, at the time of the supplies, make any claim to recover input VAT in respect of them.
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“) determined that certain business postal services provided by Royal Mail should not be exempt. Accordingly the services should have been treated as standard rated and Royal Mail should have charged Zipvit VAT at the relevant rate.
For commercial reasons, Royal Mail decided not to issue 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 then). In addition, HMRC decided not to issue claims against Royal Mail for the VAT that Royal Mail should have accounted for to HMRC because HMRC 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 £715,746 plus interest, on the basis that the prices actually paid by Zipvit to Royal Mail included a VAT element at the relevant rate. HMRC rejected the claims on the grounds that the services supplied had not been subjected to VAT and that Zipvit had not paid that tax. 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.
For a detailed recap of the facts of this case and the decisions in the UK tribunals and courts, please see our previous article here.
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” in the UK in respect of supplies of services to that person that are used for the purposes of taxable 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 referral to the CJEU
The UK 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 (the “due or paid requirement”); and
- whether a taxable person is entitled to claim input tax deductions in circumstances where invoices for the supply of services did not show the relevant VAT amounts, owing to the services being treated, mistakenly, as exempt (the “invoice requirement”).
The Supreme Court also asked the CJEU to confirm whether it was relevant to consider the following issues:
- whether the supplier (i.e. Royal Mail) would have a defence, such as legitimate expectation or limitation, to HMRC issuing an assessment to recover output tax due on the supply; and
- the fact that when the mistake was discovered, the recipient of the supply (i.e. Zipvit or other recipient of the relevant postal services) could have offered to pay the VAT to the supplier (to be passed on to HMRC), but had failed to do so.
Advocate General’s opinion
The due or paid requirement
In respect of the first question, AG Kokott opined that the amount of VAT “due or paid” in article 168(1) of the Directive was the VAT due or paid by the supplier, not the amount paid by the recipient of the supply. This is because article 168(a) concerned the deduction of input tax from an input supply and, at the stage when the input supply was purchased by the recipient, only one person was liable for VAT or could pay VAT, and that person was the supplier, not the recipient. AG Kokott noted that this is supported by the fact that whether the recipient of the supply was liable for or paid VAT depended solely on their output transactions, and it was not at all certain at the point of supply whether the recipient would ever be liable to pay VAT.
AG Kokott agreed with Zipvit that the amount actually received by the supplier included VAT where the supply was mistakenly thought to be exempt. In this regard, AG Kokott said that there would be no difference whether the supplier had the possibility to recover the VAT from the recipient.
The invoice requirement
AG Kokott decided the second question against Zipvit, opining that the possession of an invoice stating VAT separately was a substantive requirement for the deduction of input VAT. In reaching this conclusion, AG Kokott distinguished the right to deduct “in principle” and the right to deduct “in a given amount”. AG Kokott said that although article 167 of the Directive provided that the right to deduct “in principle” did not require an invoice, this was modified by article 178 which required possession of an invoice containing specific details (including the amount of VAT) in order to establish the deduction right “in a given amount”.
Judgment of the CJEU
The CJEU did not follow AG’s Kokott’s opinion.
The due or paid requirement
On the first question, the CJEU found that a taxable person in the position of Zipvit was not entitled to claim input VAT in these circumstances (on a supply charged at a price expressed to be exclusive of VAT and treated as exempt, and subsequently found to be a taxable supply) unless an amount of VAT was actually charged by the supplier after the amount was found to be taxable.
As mentioned above, the relevant contract between Zipvit and Royal Mail expressly provided that the price of the supply was exclusive of VAT and that, if VAT were nevertheless due, Zipvit should bear the cost of it. Despite of being able to do so, Royal Mail did not seek to recover the VAT from Zipvit, and HMRC waived recovery of VAT from Royal Mail. In these circumstances, given that VAT is a tax which must be charged at each stage only on added value and must ultimately be borne by the final consumer, the CJEU held that Zipvit could not claim to deduct an amount of VAT for which it had not been charged and which it had therefore not passed on to the final consumer.
In respect of the question whether VAT could nevertheless be regarded as being “due” under article 168(a) (therefore giving rise to a right of deduction), even if it was not charged to Zipvit, the CJEU said that the term “due” referred to an enforceable tax claim and required the taxable person to have an obligation to pay the amount of VAT which that person sought to deduct as input VAT. Although VAT was to become chargeable when a supply was made (article 63 of the Directive), VAT found to be chargeable after the time of supply on a supply that was previously thought to be exempt would not be deductible if no request for payment of VAT was made by the supplier.
The CJEU said that two additional issues raised by the Supreme Court (at points 3 and 4 above) did not affect its analysis.
The CJEU’s judgment discusses Zipvit’s argument that the price it paid to Royal Mail should be treated as inclusive of VAT on the basis of the principles arising in the case of Tulică (C-249/12 and C-250/12), and held that Tulică was distinguishable on the facts. In Tulică, the Romanian tax authority had assessed suppliers to VAT which they had failed to charge their customers (on the mistaken assumption that the supplies in question were not taxable, and under contracts which made no provision for VAT), and calculated the VAT due as if the consideration for the supplies were exclusive of VAT; on referral, the CJEU held that treating the consideration received as exclusive of VAT would lead to a situation where the supplier had to bear the VAT burden, thereby conflicting with the principle that VAT is a tax on consumption to be borne by the end consumer. The CJEU in Zipvit also noted that the Court held, in Tulică, that the analysis would be different in the case where the supplier had the possibility under national law of recovering the VAT from the recipient.
The invoice requirement
Given the Court’s decision in respect of the due or paid requirement, the CJEU did not consider it necessary to decide whether the right to deduct was subject to a requirement to hold an invoice showing that the relevant VAT amount had been charged.
The test case in these proceedings has now run its course after three defeats for the test claimant in the domestic tribunals and courts, with the CJEU conclusively determining that there is no right to recover input tax in circumstances of this kind, where the parties to a contract which provides for VAT to be charged in addition proceed on the mistaken assumption that no VAT is due, and the supplier does not in fact seek to recover the VAT from the recipient after the true VAT position has become known (even if the supplier could have sought recovery at some point in time).
It is notable that, although both the AG and the CJEU decided against Zipvit, they did so for different reasons.
A question that the CJEU has left open, but which the AG decided in the affirmative, is whether holding an invoice stating an amount of VAT charged is a necessary perquisite to recovery of input tax. Given the AG’s views, and the decision of the Court of Appeal that the absence of such an invoice was fatal to Zipvit’s claim, taxpayers should proceed on the basis that an invoice will always be required.
Contrary to the AG’s opinion that the entitlement to an input tax deduction arises in respect of VAT due from or paid by the supplier to the tax authority, the CJEU’s decision is that the Directive instead requires that the recipient of the supply has an obligation to pay VAT to the supplier. Interestingly, the CJEU said that it was following the decision in Véleclair (C-414/10) where the CJEU followed the decision of the same AG (AG Kokott) in holding that a person seeking to deduct input tax must have an obligation to pay that amount of VAT, even though the facts in Véleclair were materially different, as it involved a claim for a deduction in respect of VAT on imports (in respect of which Véleclair SA was the taxable person, rather than the supplier in the Zipvit case). However, the CJEU was careful to confine its ruling to the particular facts and circumstances of Zipvit’s case, essentially saying that the right to an input tax deduction does not include a right to claim a windfall in circumstances where the supplier was mistaken in treating a supply as exempt, and did not exercise a contractual right to require VAT to be paid in addition.