The First-tier Tribunal (FTT) has held that a taxpayer was not entitled to VAT input tax deductions as it had operated self-billing arrangements in relation to unregistered suppliers, having failed to verify the VAT registration numbers provided by its suppliers or regularly to check the suppliers’ VAT status. Given the risks posed to the revenue by the self-billing system, the restrictions inherent in the UK self-billing rules were not disproportionate and it was reasonable for HMRC to exercise its discretion to narrowly allow deductions, in the absence of compliance with the rules.

The facts

One of the requirements of input tax is the production of a valid VAT invoice (regulation 29, Value Added Tax Regulations 19955 (VAT Regulations)). The VAT Regulations provide for the recipient of a supply to provide to himself a self-billing invoice that purports to be a VAT invoice in respect of a supply made to him. That document, if relating to supplies made by a person that is registered for VAT purposes, is treated as the required VAT invoice so long as the other conditions in regulation 13 of the VAT Regulations are met. Regulation 13 provides, among other things, that a self-billing invoice must be made under a prior agreement between the recipient and the supplier and that meets certain requirements set out in regulation 13 (known as a self-billing agreement). Regulation 29 provides that HMRC has discretion to accept alternative evidence of a charge to VAT if there is no valid invoice under regulation 13.

The taxpayer operated road transport, warehousing and container hire business. It operated a self-billing system for small local haulage companies and owner drivers (Suppliers). Before making supplies to the taxpayer, the Suppliers had to sign two forms provided by the taxpayer:

  • A supply agreement, terminable on seven days’ notice but otherwise perpetual.
  • A self-billing agreement, which was expressed to end on 1 November 2009 (except in one case, where it was expressed to end on 1 November 2011).

The relevant depot would complete the self-billing agreement (including the Supplier’s VAT registration number) and fax it to the taxpayer’s head office. The taxpayer did not check the validity of the VAT registration numbers, taking them on trust, having satisfied itself that the Suppliers were reputable.

The taxpayer completed self-billing invoices in relation to the Suppliers’ supplies. In a number of cases, the VAT registration number was not entered because (according to the taxpayer) supplies were needed urgently.

During a routine visit, HMRC established that the taxpayer had no system to check the validity of VAT registration numbers or review the Suppliers’ VAT status. The taxpayer claimed input tax in relation to the self-billed supplies. HMRC allowed input tax deductions for supplies for which it was satisfied that the Suppliers were registered for VAT purposes and VAT had been paid. However, HMRC refused input tax deductions in relation to 18 Suppliers that were not registered for VAT purposes. The taxpayer appealed to the FTT.

The decision

The tribunal dismissed the appeal, holding that the taxpayer was not entitled to input tax recovery.

The FTT applied the following principles:

  • It was a fundamental principle of EU law that a taxable person could claim an input tax deduction if they received taxable supplies from another taxable person. A failure to meet formal requirements (such as the Supplier needing to be registered for VAT purposes) could not impinge this right (Dankowski v Dyrektor Izby Skarbowej w Lodzi 6).
  • Formal requirements on which exercise of the right to input tax deduction was conditional had to be proportionate. This meant that such requirements must not go beyond what was necessary to substantiate the claim (Collée v Finanzamt Limburg an der Lahn 7).
  • While not the subject of direct authority, a state should be prevented from imposing disproportionate requirements as conditions to obtaining an input tax deduction in the absence of a valid (self-billing) invoice.
  • EU law did not prevent UK domestic law prescribing that the right to deduct input tax in cases of non-compliance with prescribed formalities (as set out in regulation 13) was at HMRC’s discretion (as provided for in regulation 29) provided that the exercise of that discretion was narrowly confined and consistent with the principle of proportionality.
  • Self-billing gave rise to risks to the revenue and it was permissible for this to be strictly controlled and policed (UDL Construction plc v HMCE  8). It was legitimate for HMRC to bear this in mind when exercising its discretion under regulation 29.

The FTT commented that regulation 13 provided that a self-billing arrangement had to be for a specified period of no more than 12 months (which was not the case here) or ending on the same date as the underlying supply contract. As the underlying supply contracts in the present case had no expiry date (terminating only on notice), the expiry date of the self-billing agreement (usually 1 November 2009) did not meet this condition. The FTT rejected the taxpayer’s argument that it was entitled to operate the self-billing arrangements for the first 12 months as regulation 13 only provided for self-billing agreements without an end date that was the same as the end date of the underlying supply contract to be valid if they actually had a specified period of less than 12 months. Further, regulation 13 required self-billing agreements to end when the supplier ceased to be registered for VAT purposes. The FTT stated that self-billing invoices could not be valid if the relevant supplier was not, or had ceased to be, VAT registered. Therefore, on the grounds of UK domestic law, the FTT held that HMRC was correct to deny input tax deductions and that any deductions permitted had to be under the discretion in regulation 29.

EU law stipulates that it was mandatory to have a valid VAT invoice to recover input tax and, under the principles referred to above, regulation 13 was proportionate. The risk of the Suppliers ceasing to be registered for VAT purposes rested with the taxpayer but the taxpayer could have mitigated this through regular checks of the VAT position of the Suppliers.

Finally, the FTT held that HMRC had exercised its discretion reasonably. The tribunal was of the view that HMRC had considered whether to exercise its discretion. It was reasonable, in the opinion of the FTT, for HMRC not to accept as sufficient alternative evidence as to the supplies, the taxpayer’s assertion that the Suppliers were “clearly” taxable persons (as the taxpayer inferred from the Suppliers’ businesses that they exceeded the registration thresholds) and to require additional evidence that the output tax had been paid. In reaching this conclusion, the FTT took into account the fact that the taxpayer had not been as diligent as it should have been in taking all reasonable steps to minimise the potential for revenue loss. The taxpayer should have checked the VAT registration numbers provided and it was implicit in the rules and HMRC’s guidance that the taxpayer should have reviewed the VAT status of the Suppliers regularly. Some supplies took place before any VAT registration numbers were provided and, on one occasion, a second self-billing agreement was entered into without any checks. The discretion under regulation 29 was narrow (University of Sussex v HMCE 9) but, in the special circumstances of self-billing and the risks posed to the revenue, the basis on which it was exercised in the present case was reasonable.


While self-billing arrangements may be administratively easier and, therefore, appealing to taxpayers, this decision is a reminder that taxpayers taking advantage of this facility must be diligent in verifying and regularly checking the VAT status and registration numbers of their suppliers.

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