Can you recover as input tax VAT which you haven’t paid and which HMRC haven’t received?
That the case of Zipvit [2022] UKSC 12 reached the Supreme Court, having meanwhile required a reference to the Court of Justice of the European Union (‘CJEU’), might be regarded by some as evidence that VAT operates in a parallel universe governed by an alternative reality. That Zipvit failed in its claim might be regarded as evidence that it doesn’t. Well, not always, at any rate.
The facts were simple.
Zipvit purchased some services from Royal Mail. Everyone – Zipvit, Royal Mail and HMRC – believed that the services were VAT-exempt, and Royal Mail’s invoice stated that the supply was exempt.
Litigation in an unrelated case years later caused everyone to realise that they had been wrong: the supply in question was chargeable at the standard rate. Royal Mail could in principle have sought to recover VAT from Zipvit and other similarly affected customers, but it ‘would have been costly and administratively burdensome for Royal Mail and it had no commercial interest in doing this, and so did not pursue such claims.’
HMRC did not attempt to collect the VAT from Royal Mail, partly because ‘HMRC considered that they had created an enforceable legitimate expectation on the part of Royal Mail that it was not required to collect and account for VAT in respect of the services, so that Royal Mail would have a good defence to any attempt to issue assessments against it to account for VAT in respect of the services.’
So, in a nutshell, VAT was due on the supply but there was no question of Zipvit paying it or HMRC receiving it. Could Zipvit nonetheless recover it as input tax?
The amount at stake for Zipvit was only some £400,000, but Zipvit’s position was not unique: this was a test case for claims estimated at up to £1 billion.
Zipvit had to overcome a number of hurdles.
The first was the need to show that the VAT in question was ‘due or paid’. Zipvit argued that, as this was a standard-rated supply made by a registered trader, VAT was inevitably ‘embedded’ in the price paid and therefore had been ‘paid’. The CJEU said no:
‘[The EU legislation] must be interpreted as meaning that VAT cannot be regarded as being “due or paid” within the meaning of that provision where the trader and the supplier have mistakenly assumed, on the basis of an incorrect interpretation of EU law by the national authorities, that the supplies at issue were exempt from VAT, with the result that the relevant invoices did not refer to it, in a situation where the contract between the trader and the supplier provides that, if such tax were due, the recipient trader should bear the cost of it, and where no step to recover the VAT was taken in good time, with the result that any action by the supplier and the tax authorities (HMRC) to recover the unpaid VAT is time-barred.’
Having fallen at that hurdle, Zipvit’s case was lost. But there were other points.
The first was the question whether, if there had been a substantive right to recover the VAT as input tax, it was also necessary under EU law to hold a VAT invoice (which, of course, Zipvit didn’t have). Here, the Supreme Court elected to duck the issue (‘it is likewise not necessary for this court to determine whether Zipvit’s appeal should fail for an additional reason based on the invoice issue. Nor do we think it is appropriate that we should rule on the invoice issue. It is academic and turns on a point of EU law which is not clear and has not been the subject of a definitive ruling by the Court of Justice.’)
The second was in relation to the discretion that UK law purports to grant HMRC to allow recovery of input tax without an invoice. HMRC admitted that they had not considered exercising that discretion. The question for the Courts was whether HMRC would have exercised it if they had considered it. To the Supreme Court, the answer was clear: ‘had HMRC considered the exercise of their discretion under regulation 29(2), they would have been bound to have concluded that no payment should be made to Zipvit. There was no sound basis on which it would have been appropriate to use public monies to make any such payment.’
To answer, then, the question with which we started. It would be rash of us to say that there are no circumstances in which you can recover as input tax VAT you haven’t specifically and identifiably paid: stranger things have happened in the world of VAT. But Zipvit couldn’t.
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