European law does not allow the refusal of an input tax claim where the tax authority has all the information needed to validate a claim, even when there are defects in the actual invoicing.
As a general rule, when input VAT is incurred by a taxable person it is available for credit (VATA 1994 s 24). There are however a number of conditions which have to be met before input tax is available for credit (reg 29 of the VAT regulations, SI 1995/2518). These include evidence of the purchase, which will ordinarily be in the form of an invoice.
HMRC often assess taxpayers and seek to disallow input tax claims on the basis of invalid invoices. In the recent case of Oval Estates (Bath) Ltd v HMRC [2017] UKFTT 403 (TC), HMRC sought to do precisely that. HMRC disallowed the taxpayer’s input tax claim on the basis that: (1) it was not directly attributable to an identifiable supply; (2) the description on the supply was inaccurate; (3) the invoice was not a valid VAT invoice; and (4) there was no evidence the invoice had been paid. It also raised allegations of deliberate and concealed behaviour on the part of the taxpayer.
The tribunal considered the decision of the CJEU in Barlis 06 (Case C-516/14), a case which concerned the description of supplies shown on a VAT invoice. The CJEU in that case drew a distinction between the formal conditions for deduction of input tax and the substantive requirements for the right of deduction of input tax. In Barlis, the formal conditions had not been complied with and the judgment of the CJEU confirmed the invoices were deficient. However, the CJEU went on to explain that tax authorities cannot refuse the right to deduct VAT on that ground alone if they have all the information available to validate a claim.
It was clear to the tribunal in Oval Estates that the invoice had failed to meet the formal conditions laid down by article 226(6) and (7) of the VAT Directive 2006/112/EC, or the VAT regulations. However, on a review of the evidence, the tribunal concluded that HMRC had information specific enough to demonstrate that the substantive conditions for recovery had been satisfied and that a supply of taxable services had been received. The taxpayer had established its right to deduct the VAT. The tribunal also concluded that there was evidence that the taxpayer had paid the amount shown on the invoice.
With regard to the allegations of deliberate conduct and fraud, the tribunal considered that these allegations could only succeed if the evidence established, on the balance of probability, that there was such conduct. In this case, the evidence indicated that there was confusion among the accounting staff of the taxpayer but not dishonesty. Accordingly, the tribunal held that the delay was innocent and not the result of any dishonest arrangement or intent.
The tribunal’s decision is good news for taxpayers. It means that a taxpayer may deduct VAT even if there is a formal mistake in an invoice, provided that sufficient evidence is available to demonstrate that the substantive conditions for recovery have been satisfied. Businesses facing challenges from HMRC should review all the available evidence and if appropriate, robustly challenge any assessment issued by HMRC.
Home >Articles > Deficiencies in invoices may not prevent VAT recovery
Deficiencies in invoices may not prevent VAT recovery
European law does not allow the refusal of an input tax claim where the tax authority has all the information needed to validate a claim, even when there are defects in the actual invoicing.
As a general rule, when input VAT is incurred by a taxable person it is available for credit (VATA 1994 s 24). There are however a number of conditions which have to be met before input tax is available for credit (reg 29 of the VAT regulations, SI 1995/2518). These include evidence of the purchase, which will ordinarily be in the form of an invoice.
HMRC often assess taxpayers and seek to disallow input tax claims on the basis of invalid invoices. In the recent case of Oval Estates (Bath) Ltd v HMRC [2017] UKFTT 403 (TC), HMRC sought to do precisely that. HMRC disallowed the taxpayer’s input tax claim on the basis that: (1) it was not directly attributable to an identifiable supply; (2) the description on the supply was inaccurate; (3) the invoice was not a valid VAT invoice; and (4) there was no evidence the invoice had been paid. It also raised allegations of deliberate and concealed behaviour on the part of the taxpayer.
The tribunal considered the decision of the CJEU in Barlis 06 (Case C-516/14), a case which concerned the description of supplies shown on a VAT invoice. The CJEU in that case drew a distinction between the formal conditions for deduction of input tax and the substantive requirements for the right of deduction of input tax. In Barlis, the formal conditions had not been complied with and the judgment of the CJEU confirmed the invoices were deficient. However, the CJEU went on to explain that tax authorities cannot refuse the right to deduct VAT on that ground alone if they have all the information available to validate a claim.
It was clear to the tribunal in Oval Estates that the invoice had failed to meet the formal conditions laid down by article 226(6) and (7) of the VAT Directive 2006/112/EC, or the VAT regulations. However, on a review of the evidence, the tribunal concluded that HMRC had information specific enough to demonstrate that the substantive conditions for recovery had been satisfied and that a supply of taxable services had been received. The taxpayer had established its right to deduct the VAT. The tribunal also concluded that there was evidence that the taxpayer had paid the amount shown on the invoice.
With regard to the allegations of deliberate conduct and fraud, the tribunal considered that these allegations could only succeed if the evidence established, on the balance of probability, that there was such conduct. In this case, the evidence indicated that there was confusion among the accounting staff of the taxpayer but not dishonesty. Accordingly, the tribunal held that the delay was innocent and not the result of any dishonest arrangement or intent.
The tribunal’s decision is good news for taxpayers. It means that a taxpayer may deduct VAT even if there is a formal mistake in an invoice, provided that sufficient evidence is available to demonstrate that the substantive conditions for recovery have been satisfied. Businesses facing challenges from HMRC should review all the available evidence and if appropriate, robustly challenge any assessment issued by HMRC.
