Zipvit Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 June 2016 |
| Neutral Citation | [2016] UKUT 294 (TCC) |
| Date | 27 June 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mrs Justice Proudman DBE
Roger Thomas QC, instructed by Mishcon de Reya LLP solicitors, appeared for the appellant
Sam Grodzinski QC and Eleni Mitrophanous, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Supply of individually-negotiated postal services – Whether appellant company entitled to recover input tax in respect of Mailmedia supplies to it from Royal Mail, notwithstanding that Royal Mail did not pay VAT on those supplies, the parties thought the supplies were exempt and the supplies were shown as exempt in the invoices – No – Company's appeal dismissed.
The Upper Tribunal (UT) dismissed the company's appeal against the decision of the First-tier Tribunal (FTT) ([2014] TC 03773) that a taxable person receiving supplies of postal services, which were wrongly treated by Royal Mail as exempt, was not entitled to input tax credit in respect of those supplies.
The company supplied vitamins and minerals by mail order. It used Royal Mail to despatch the orders and to distribute advertisements. When the postal services were supplied, Royal Mail and HMRC considered that they were exempt from VAT. However, in R (on the application of TNT Post UK Ltd) v R & C Commrs ECASVAT(Case C-357/07) [2009] BVC 389, the ECJ held that postal services supplied by the UK's universal postal provider (Royal Mail) were not exempt if they were individually negotiated.
HMRC rejected a claim for input tax credit in respect of VAT alleged by the company to have been incurred in the period March 2006 to June 2009. The claim was based on the proposition that Royal Mail had wrongly treated its services as exempt, but they were standard-rated. The extent of “individually negotiated” services was still to be resolved under separate litigation. It was common ground, however, that Royal Mail's “Mailmedia” supplies were standard-rated as a matter of EU law and the FTT considered the company's claim in principle in so far as it related to those services. It was agreed that the FTT would decide, as a preliminary issue, whether a taxable person, who received services which were treated by Royal Mail as exempt, but which were standard-rated, was entitled to input tax credit in respect of those supplies.
HMRC accepted that, as a matter of EU law, Royal Mail's supplies of Mailmedia services should have been standard-rated. The company submitted that the supplies were standard-rated as a matter of UK law as well and, accordingly, that it was entitled to recover as input tax the output tax that Royal Mail should have accounted to HMRC for, but had not. Alternatively, if the company was wrong on that point, it claimed that it could rely on the direct effect of Directive 2006/112 (the VAT Directive), which made the supply of Mailmedia services-standard and entitled it to recover the VAT which should have been accounted for by Royal Mail. Although the company was unable to provide a VAT invoice to substantiate its input tax claim, it submitted that HMRC should accept alternative evidence that the supplies had taken place.
The FTT found that the principles established in Marleasing SA v La Comercial Internacional de Alimentation SA ECAS(Case C-106/89) [1990] ECR I-4135 required it to adopt a conforming construction of the UK's postal exemption, which meant that the Mailmedia supplies were standard-rated as a matter of UK law. Moreover, on the company's alternative submission, the FTT found that the company could invoke direct effect of the postal exemption against HMRC, so that even if the FTT had not adopted a conforming interpretation, it would not be open to HMRC to defend the appeal on the grounds that Royal Mail's supplies of Mailmedia services were exempt under UK law.
The difficulty for the FTT was that art. 168 of the VAT Directive entitles a taxable person to deduct from the VAT he has to pay “the VAT due or paid” in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person. So, the right to deduct arose, even if the customer had not paid any part of the contract price, so long as the VAT was “due or paid” by the supplier. It was agreed that VAT had not been paid to HMRC by Royal Mail on supplies of Mailmedia services, so the question was whether the VAT was “due” at the time of the company's voluntary disclosure.
The FTT found the authority of Véleclair SA v Ministre du Budget, des Comptes publics et de la Réforme de l'État ECAS(Case C-414/10) [2012] ECR 0000 to be decisive. The ECJ in that case held that there must be an “enforceable tax claim”. It was not enough, therefore, to show that the supply was subject to VAT. There was no enforceable tax claim against Royal Mail. The FTT decided that the company was not entitled to input tax credit in respect of the supplies, because VAT was not “due or paid”. In any event, the company did not hold a VAT invoice and HMRC's decision not to accept alternative evidence could not be impugned.
On appeal from the FTT, there were two issues before the UT:
1) whether VAT was “due or paid” within the meaning of art. 168(a), so as to entitle the company to deduct input tax; and
2) whether the absence of invoices from Royal Mail was fatal to the company's claim where HMRC had a discretion to direct otherwise.
The UT did not find that the FTT's reasoning in deciding that “due or paid” means due from or paid by the supplier was convincing, but agreed with both the company and HMRC that “due or paid” means due or paid by the customer, not the supplier (para. 25 and 33 of the decision).
The UT held that the company had not borne the economic burden of VAT, yet claimed it must be treated as if it had paid VAT. Royal Mail priced its services to include the VAT on inputs which it could not recover as its services were exempt. Thus, the company has not borne the economic burden of VAT, because the supply was assumed to be exempt and priced without VAT (para. 66 of the decision).
Where HMRC may exercise their discretion to allow input tax recovery where no VAT invoice is held, the UT must consider why a VAT invoice was not held. This was because the supply was treated as exempt and the company did not pay any amount representing VAT. Even if the UT was wrong about the meaning of “due or paid” in art. 168(a), the UT held that HMRC need not consider “other evidence” of the charge to VAT when deciding whether to exercise their discretion to accept a claim to deduct input tax (para. 69 of the decision). Thus, the company's appeal failed.
As the lead case in the long-running “postal services” dispute, this decision affects those who made similar claims or who are waiting to claim. Since VAT of about £1bn rests on the outcome of this case, there may be a further appeal.
For commentary on whether input tax can be reclaimed, see the CCH VAT Reporter at 19-010.
[1] This is an appeal from the decision of the First-tier Tribunal (“FTT”) (Judge Barbara Mosedale) released on 3 July 2014. The appellant made a claim on 15 September 2009 under regulation 29 of the Value Added Tax (“VAT”) Regulations 1995 (1995/2518) (“the Regulations”) for input tax which it claimed to have incurred in the period 31 March 2006 to 30 June 2009, and it made a further claim on 8 April 2010 for the next two accounting periods. The respondents (“HMRC”) rejected the claims on 7 May 2010, they upheld the decision in a review letter dated 2 July 2010 (written by a Mrs JC Pledger) and the FTT also rejected the claim in its decision.
[2] I have had the advantage of representation by Mr Roger Thomas QC for the appellant Zipvit Limited and by Mr Sam Grodzinski QC and Ms Eleni Mitrophanous for HMRC.
[3] The appeal is from the FTT's decision on a preliminary issue, namely,
Whether a taxable person, who has received supplies of services which were at the material time treated by Royal Mail as exempt under Value Added Tax Act 1994, but which were properly chargeable to VAT under the Sixth VAT Directive or Principle [sic] VAT Directive, is entitled to an input tax credit in respect of those supplies.
[4] The appellant, a company registered for VAT (all its supplies being subject to VAT), carried on the business of supplying vitamins and minerals by mail order. It used the services of Royal Mail to send its mail orders and to distribute advertisements. It used PacketpostTM, MailmediaR and deliveries by Parcelforce. However it is only the supplies by MailmediaR which are in issue before me as those supplies are specimen supplies for the purposes of this hearing.
[5] Both Royal Mail and HMRC believed that the supplies made by Royal Mail to the appellant were exempt from VAT and Royal Mail did not therefore issue VAT invoices (within the meaning of the Regulations – see below) to the appellant. The contract between the appellant and Royal Mail was silent as to VAT and the invoices indicated (with an “E”) that the supplies were exempt.
[6] The CJEU ruled on 23 April 2009 in the case of R (on the application of TNT Post UK Ltd) v R & C Commrs ECASVAT(Case C-357/07) [2009] BVC 389 that the postal exemption was limited. The CJEU decided (at [49]) that,
… the exemption provided for in article 13(A)(1)(a) of the Sixth Directive [replaced by The Council Directive of 28 November 2006 on the common system of value added tax (2006/112/EC) (the Principal VAT Directive or “PVD”)] applies to the supply by the public postal services acting as such-that is, in their capacity as an operator who undertakes to provide all or part of the universal postal service in a member state- of services other than passenger transport and telecommunication services, and the supply of goods incidental thereto. It does not apply to supplies of services or of goods incidental thereto for which the terms have been individually negotiated.
[7]...
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