Zipvit claimed input VAT deductions for Royal Mail postal services mistakenly treated as VAT-exempt. The Supreme Court, following the Court of Justice's ruling, held no VAT was 'due or paid' under the Directive, so Zipvit had no right to deduct input VAT. Appeal dismissed.
Background
Zipvit Ltd, a mail-order vitamins and minerals business, used Royal Mail’s individually negotiated ‘Mailmedia®’ postal services between January 2006 and March 2010. Under the contractual terms, Zipvit was to pay the commercial price plus any VAT chargeable. However, both parties, HMRC, and the implementing national legislation mistakenly treated the services as exempt from VAT pursuant to article 132(1)(a) of the Principal VAT Directive (2006/112/EC). Consequently, Royal Mail’s invoices marked the supplies as exempt, showed no VAT charge, and Zipvit paid only the commercial price. Royal Mail did not account to HMRC for any VAT on these supplies.
The error was exposed by the Court of Justice’s 2009 judgment in R (TNT Post UK Ltd) v Revenue and Customs Comrs (Case C-357/07), which held the postal services exemption applied only to services supplied by public postal services acting as such, and not to individually negotiated contracts. Following this, Zipvit made voluntary disclosure claims totalling £415,746 plus interest for input VAT deductions. HMRC rejected these claims. By the time of the proceedings, limitation periods had expired for Royal Mail to recover the VAT element from Zipvit and for HMRC to assess Royal Mail for unpaid VAT.
The Issue(s)
The ‘due or paid’ issue
Whether, under article 168(a) of the Directive, VAT could be regarded as ‘due or paid’ by Zipvit such that it could claim a deduction of input VAT, despite no VAT having been separately charged, invoiced, or paid. Zipvit argued that the sums it paid to Royal Mail should be treated as containing an embedded VAT element — ie that the commercial price should be decomposed into a lesser taxable amount plus a deemed VAT component.
The invoice issue
Whether, even if Zipvit had a substantive right under article 168(a), it was additionally required to hold VAT invoices evidencing the VAT charge, in compliance with articles 226(9) and (10) of the Directive — invoices it never possessed.
The discretion issue
Whether HMRC’s discretion under regulation 29(2) of the Value Added Tax Regulations 1995 to accept alternative evidence in place of a VAT invoice should have been exercised in Zipvit’s favour.
The Court’s Reasoning
The ‘due or paid’ issue
The Supreme Court applied the Court of Justice’s ruling in Case C-156/20 (delivered 13 January 2022), which was the last reference made by the Supreme Court to the CJEU before Brexit took full effect. The CJEU’s reasoning was clear and determinative.
given that VAT is a tax which must be charged, at each stage, only on the added value and must ultimately be borne by the final consumer …, a taxable person such as Zipvit cannot claim to deduct an amount of VAT for which it has not been charged and which it has therefore not passed on to the final consumer
The CJEU ruled that:
VAT cannot be regarded as being included in the price paid by the recipient of the services [ie Zipvit]
and that VAT could not be regarded as having been ‘paid’ by Zipvit within article 168(a). Nor could it be regarded as ‘due’, since no request for payment of that tax was sent to Zipvit. The CJEU summarised at paragraph 41 that article 168(a):
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.
The Supreme Court accepted this ruling as clear and dispositive, requiring no further hearing.
The invoice issue
Having resolved the case on the ‘due or paid’ issue, the Supreme Court declined to rule on the invoice issue. Lords Briggs and Sales stated:
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 discretion issue
On the domestic law question of HMRC’s discretion under regulation 29(2), the Supreme Court agreed with the lower tribunals and the Court of Appeal. Even assuming a valid discretion existed under domestic law, the court held:
In the circumstances of the case, as set out above, Zipvit had no right under the Directive to recover from HMRC any element of input VAT. Moreover, in commercial terms, as the Tribunals and the Court of Appeal correctly pointed out, any payment to Zipvit would have been an unmerited windfall.
There was, the court concluded, no sound basis on which public monies should be used to make any such payment.
Practical Significance
This decision authoritatively establishes, in line with the CJEU’s ruling, that where a supply is mistakenly treated as VAT-exempt and no VAT is separately charged, invoiced, or paid, the recipient trader cannot retrospectively claim an embedded VAT deduction under article 168(a) of the Directive. The principle that VAT must be charged at each stage and ultimately borne by the final consumer precludes treating a payment of only the commercial price as containing a deemed VAT element. The judgment has significant financial implications: the court noted estimates of between approximately £500 million and £1 billion as the total value of similar claims against HMRC, all of which fail on the reasoning applied. The case also demonstrates the limits of the domestic discretion under regulation 29(2), confirming that HMRC are not obliged — and indeed should not — exercise that discretion to confer unmerited windfalls where no substantive EU law right to recover input VAT exists.
Verdict: Zipvit’s appeal was dismissed. The Supreme Court held that Zipvit had no right under article 168(a) of the Principal VAT Directive to deduct input VAT in respect of the Royal Mail services, as VAT could not be regarded as ‘due or paid’ in the circumstances. HMRC’s refusal of the claims was upheld.
Source: Zipvit Ltd v Commissioners for Her Majesty’s Revenue and Customs [2022] UKSC 12
