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Diluting the fundamental right to recover input VAT

Posted on 19 August 2016

Diluting the fundamental right to recover input VAT

Indirect Tax

The Upper Tribunal (UT) in Zipvit [2016] UKUT 294 (reported in Tax Journal, 8 July 2016) upheld in part the decision of the First-tier Tribunal (FTT) that the taxpayer was unable to recover VAT that it had claimed was embedded in amounts paid to Royal Mail for postal services.

The facts in this case were as follows: Zipvit paid for postal services supplied by Royal Mail and was provided with an invoice, which stated that there was no VAT paid, as the supply was exempt (1). The CJEU in the case of TNT Post subsequently clarified that the postal exemption for VAT which Royal Mail had been relying on was limited. It could only apply to supplies by the universal postal service operator operating as such; and, therefore, could not apply to services for which terms had been ‘individually negotiated’. The ‘MailMedia’ services supplied to Zipvit were treated by Royal Mail as exempt, but were in fact, standard rated. There were, however, two main issues in dispute:

1. Whether VAT was ‘due or paid' (2) so as to entitle Zipvit to deduct input tax; and

2. Whether the absence of VAT invoices from Royal Mail is fatal to Zipvit’s claim, in circumstances where HMRC had the discretion to direct otherwise.

The UT recognised on the one hand the fundamental nature of the right to deduct; and, on the other hand, a discretionary power for HMRC to refuse to accept evidence of receipt of a supply, on the ground that it will lead to exercise of that fundamental right.

The function of a VAT invoice is to provide, inter alia, evidence of the supply and the amount of VAT for which the supplier is liable to account to HMRC and which the customer is entitled to claim as input tax. However Proudman J seems to be confirming that if a customer does not know that the sum it pays includes an amount of VAT because it thinks that the price does not carry VAT, it cannot be said to have ‘borne an economic burden’. This analysis suggests that the customer would only be able to recover its input tax if and when HMRC collects VAT from the supplier. There does not appear to be a basis for this in domestic or European law and it is inconsistent with the general concept of VAT as charged down the chain of transactions until it is eventually borne by the final consumer (the Elida Gibbs case).

It is hoped that the Court of Appeal (should this matter be appealed) will expose Proudman J’s error, as otherwise it could (perhaps unintentionally) lead to HMRC considering further ways to dilute the right to recovery of input VAT in other areas.

Originally produced in Tax Journal on 22 July 2016


(1) In accordance, purportedly, with article 13A(1)(a) of the Sixth Directive (now the Principal VAT Directive)

(2) Within the meaning of article"168(a) of the Principal VAT Directive,

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