On 29 June 2018, the Court of Appeal1 held that input tax could not be recovered by the recipient of a supply which, originally, was treated as VAT-exempt.

The appellant was a fully taxable business but, in respect of the supplies in question (for which the appellant was now seeking VAT recovery), all parties (including HMRC) had originally treated the supplies made to it as exempt for VAT purposes. Crucially, the supplier (the Royal Mail) did not at the time issue VAT invoices to the appellant. It took a subsequent ECJ decision to determine that this (VAT-exempt) treatment was, in fact, wrong.

The appellant did not, following this ‘correction’ of the VAT treatment, make a further payment to the Royal Mail equal to the VAT properly chargeable. Instead, the appellant now wished to treat the payments originally made to the Royal Mail as comprising an element of VAT, and recover an equal amount by way of input tax recovery.

The Court held the lack of a VAT invoice to be fatal to the appellant’s claim for input tax recovery. The requirement for a VAT invoice to support input tax recovery claims is mandatory in order to enable HMRC to monitor payment by the supplier of the output tax for which input tax recovery is sought. The appellant in this case was in possession of invoices which evidenced exactly the opposite (that no output tax was paid because the supplies were treated – albeit incorrectly – as exempt).

Given the Court’s decision on the VAT invoice point, it remains uncertain whether in cases where (as here) consideration is expressed to be VAT-exclusive, but the supply in question is mistakenly treated as VAT-exempt, the necessary requirement for input tax recovery for VAT to be “due or paid” would have been satisfied.

This case is a lead case with, it is thought, around £1 billion-worth of VAT resting on the outcome. Given the numbers involved, an appeal is likely.

The decision can be viewed here.