In Oval Estates (Bath) Limited v HMRC  UKFTT 403 (TC), the First-tier Tribunal (FTT) held that input tax was attributable to an identifiable supply and was recoverable despite allegations of deliberate and concealed behaviour.
Oval Estates (Bath) Limited (OEB) is one of a number of property companies under common control, many of which are single purpose vehicle companies set up for the purposes of carrying out specific developments and most, if not all, contain the name Oval.
OEB carried out a commercial development of a warehouse premises and engaged Oval Building Contracts Limited (OBC), a related company, to provide design and build construction services. As the project progressed OBC invoiced OEB from time to time for the services it provided.
During August 2012, a supplier issued a winding up petition against OBC, and the group applied for a Creditors Voluntary Arrangement (CVA). On 30 September 2012, OBC raised invoice number 265 for services provided to OEB, so that it could be in place for the meeting of creditors. This was a standard invoice with a general description, it did not refer to the payment certificate, however, due to an oversight this invoice was raised later than it should have been and was also issued to the wrong Oval business. On 29 November 2012, OBC's application for a CVA was rejected at the creditors' meeting and OBC went into liquidation.
OEB made a claim to deduct input tax of £33,349.58 in relation to invoice number 265. However, due to an administrative error this claim was made in the 03/13 VAT return.
HMRC disallowed OEB's input tax claim on the basis that it was (1) not directly attributable to an identifiable supply, (2) the description on the supply was inaccurate, (3) the invoice was not a valid VAT invoice and (4) there was no evidence the invoice had been paid. It also raised allegations of deliberate and concealed behaviour on the part of the taxpayer.
OEB appealed to the FTT.
FTT's decision OEB's appeal was allowed.
The FTT considered the decision of the Court of Justice of the European Union (CJEU) in Barlis 06 C-516/14, a case which concerned the description of supplies shown on a VAT invoice. The CJEU in that case drew a distinction between the formal conditions for deduction of input tax and the substantive requirements for the right of deduction of input tax. In Barlis the formal conditions had not been complied with and the judgment of the CJEU confirmed the invoices were deficient. However, the CJEU went on to explain that tax authorities cannot refuse the right to deduct VAT on that ground alone if they have all the information available to validate a claim.
In the view of the FTT, the invoice had failed to meet the formal conditions laid down by Article 226(6) and (7) of the VAT Directive 2006/112/EC, or the VAT Regulations. However, on a review of the evidence, the FTT concluded that HMRC had information specific enough to demonstrate that the substantive conditions for recovery had been satisfied and that a supply of taxable services had been received. The taxpayer had established its right to deduct the VAT. The FTT also concluded that there was evidence that the taxpayer had paid the amount shown on the invoice.
With regard to the allegations of deliberate conduct and fraud, the FTT considered that these allegations could only succeed if the evidence established, on the balance of probability, that there was such conduct. In this case, the evidence indicated that there was confusion among the accounting staff of the taxpayer but not dishonesty. Accordingly, the FTT held that the delay was innocent and not the result of any dishonest arrangement or intent.
The FTT's decision is good news for taxpayers. It means that a taxpayer may deduct VAT even if there is a formal mistake in an invoice provided that sufficient evidence is available to demonstrate that the substantive conditions for recovery have been satisfied. Businesses facing challenges from HMRC should review all the available evidence and if appropriate, robustly challenge any assessment issued by HMRC.
A copy of the decision can be found here.
This blog is based on an article first published in Tax Journal on 28 June 2017, a copy of which can be found here.