Royal Mail and Zipvit had priced postal services on the mistaken assumption that they were VAT-exempt. Could Zipvit nevertheless deduct VAT as input tax when it had received no invoice charging it? In this 2020 judgment the Supreme Court explained why it needed the Court of Justice to interpret the VAT Directive before it could decide the appeal.
The supplies and the shared mistake
Zipvit supplies vitamins and minerals by mail order. Between 1 January 2006 and 31 March 2010 it used Royal Mail’s individually negotiated multimedia business postal service. The contracts provided that the stated charges were exclusive of VAT and that Zipvit should pay any VAT due. National legislation and HMRC guidance treated all Royal Mail postal services as exempt. Invoices were marked exempt, showed no VAT, and Zipvit paid only the commercial price. Royal Mail did not account for VAT, and HMRC did not expect it to do so. The supplier, the trader and HMRC all acted in good faith.
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In TNT Post, the Court of Justice had held that the exemption for public postal services did not apply to individually negotiated supplies of this kind. The mistake therefore left a mismatch. The supplies were taxable, but neither the price paid nor the invoices treated any amount as tax.
The claims and the decisions below
Zipvit claimed £415,746 plus interest by voluntary disclosure, calculated on the basis that the sums actually paid included a VAT element. HMRC rejected the claims. They said Zipvit had been contractually obliged to pay VAT in addition to the commercial price, but had not been charged it and had not paid it. Royal Mail did not sue for the balance, and HMRC did not assess Royal Mail. HMRC considered that national law had treated the supplies as exempt, that Royal Mail had not received the VAT, and that HMRC had created a legitimate expectation that VAT need not be collected and accounted for.
The First-tier Tribunal accepted that the services were standard-rated, which is now common ground, but dismissed the appeal. It held that there was no VAT due or paid for the purposes of article 168(a) of the Principal VAT Directive, and that Zipvit held no valid invoices showing a VAT charge. It also found that HMRC would properly have refused, under their discretion to accept alternative evidence, to allow a deduction that would give Zipvit an unmerited windfall at public expense. The Upper Tribunal dismissed the further appeal. It is now common ground that due or paid means due or paid by the trader to the supplier. The Upper Tribunal upheld the decisions on the invoices and the discretion.
The Court of Appeal likewise dismissed the appeal. It considered the due or paid issue not to be acte clair. On the invoices, it held that deduction required invoices complying with article 226(9) and (10), or evidence that Royal Mail had paid the tax to HMRC, which Zipvit could not produce. It agreed that the claim would give Zipvit an uncovenanted bonus out of public funds and treated the invoice issue as acte clair.
The issues referred
Before the Supreme Court, Zipvit argued that each sum paid should be treated as a lower taxable amount plus embedded VAT, so that VAT had been paid, or alternatively that VAT was due. It said HMRC’s inability to recover tax from Royal Mail could not defeat the right to deduct, and that alternative evidence could satisfy the formal invoice requirements. HMRC argued that the contract should not be rewritten, that VAT had neither been paid nor become enforceable as due, and that a deduction would breach neutrality because the tax had never reached the public purse. They also said a valid claim required an invoice showing the VAT due and its amount.
Lord Briggs and Lord Sales, with whom Lord Hodge, Lady Black and Lord Hamblen agreed, held after full argument that neither issue was acte clair. The Court therefore referred questions asking, in these circumstances, whether the price paid is to be treated as including VAT that was paid, whether VAT was instead due, whether a deduction is available without a compliant invoice, and whether a possible defence by the supplier to an assessment, or the trader’s knowledge and failure to offer to pay the VAT, is relevant.
Verdict: The Supreme Court referred four questions to the Court of Justice about VAT due or paid, invoices and the parties’ knowledge and legal positions. It made no award of input tax in this judgment. The later final decision is reported separately at [2022] UKSC 12.
