In Zipvit Ltd v HMRC [2020] UKSC 15, the Supreme Court was asked to consider whether Zipvit (which ran a mail order business) was entitled to recover VAT as input tax on supplies received by Royal Mail under a commercial contract containing exclusive of VAT wording (a fact that was only discovered and considered in this litigation at the Court of Appeal). Both parties (HMRC included) acted on what turned out to be the mistaken belief that the supplies by Royal Mail were VAT exempt. A subsequent CJEU decision, TNT Post (Case C-257/07), held that such a supply of individually negotiated mail services are standard rated, triggering Zipvit’s claim for recovery of VAT as input tax.
The decisions so far handed down from the First-tier Tribunal to the Court of Appeal all fell in favour of HMRC, with the reasoning focused on avoiding a windfall benefit in the hands of Zipvit (it being impossible for HMRC to seek recovery of the VAT from Royal Mail) and the absence of any VAT invoices supporting Zipvit’s right to recovery. As a test case, the outcome of this matter has an estimated £500m to £1bn at stake for HMRC.
There are two key issues underpinning Zipvit’s appeal that the Supreme Court unanimously was unable to declare as acte clair.
Issue one concerns the interpretation of the words ‘due or paid’ in article 168(a) (recovery of VAT as input tax) of the Principal VAT Directive (PVD). Could ‘due or paid’ be construed as a matter of law to apply to a scenario where VAT was technically due but was not demanded by Royal Mail by the issue of VAT invoices, despite the contract requiring Zipvit to pay the commercial price for the mail services plus such amount of VAT (if any) as was chargeable?
If the starting point in answering issue one is to consider the contractual arrangements between a supplier and customer, VAT inclusive wording will presumably satisfy the requirements for recovery as the parties are agreeing to a built-in component of VAT to any consideration.
Uncertainty appears with any VAT exclusive wording, as it suggests that any VAT payable is in addition to any consideration for the supply in question and therefore VAT has not been ‘paid’ and is not ‘due’ under article 168, even though as a matter of law VAT is chargeable on the supply, unless it was invoiced to and/or paid by the customer. The prevalence of exclusive of VAT wording in standard agreements could presumably restrict VAT recovery in circumstances where parties expect VAT not to apply. A reference to the CJEU on this issue is welcomed.
Issue two (invoicing) concerns the interaction between article 168 and article 229 (VAT invoicing requirements) in the PVD. If a claim for input tax is supported under article 168, can article 229 to dispose of a claim on the basis that a valid VAT invoice or satisfactory alternative evidence does not exist?
A key factor feeding into both issues was HMRC’s decision not to assess Royal Mail for the unaccounted-for VAT once it became clear that the supplies in question were standard rated. This was based on the fact that HMRC considered that VATA 1994 treated the supply as VAT exempt and that it had created an enforceable legitimate expectation on the part of Royal Mail that it could not successfully assess for any of the VAT that was in fact chargeable. It will therefore be interesting to see whether the CJEU will decide that the recipient of a supply can subsequently recover VAT from HMRC that both parties to the contract thought had not been included in the price that was paid for that supply and where no output tax was due.
The timing of the Supreme Court’s reference is also interesting, as it may result in a decision being handed down after the Brexit implementation period. Although, as far as the UK is concerned, this could be the final authoritative steer from the CJEU on VAT recovery if it is decided before the end of the year; the Supreme Court would not be so bound if the Luxembourg Court decides the matter after the end of the implementation period (31 December 2020). It will also be interesting to see if ministers exercise their powers under the Withdrawal Agreement such that any EU case law that may result in HMRC having to pay ‘windfall’ amounts of VAT is not to be paid, if the CJEU decides this way. If this were to happen, it would surely lead to further litigation as to the scope of the ministerial powers granted under the Withdrawal Act.
In Zipvit Ltd v HMRC [2020] UKSC 15, the Supreme Court was asked to consider whether Zipvit (which ran a mail order business) was entitled to recover VAT as input tax on supplies received by Royal Mail under a commercial contract containing exclusive of VAT wording (a fact that was only discovered and considered in this litigation at the Court of Appeal). Both parties (HMRC included) acted on what turned out to be the mistaken belief that the supplies by Royal Mail were VAT exempt. A subsequent CJEU decision, TNT Post (Case C-257/07), held that such a supply of individually negotiated mail services are standard rated, triggering Zipvit’s claim for recovery of VAT as input tax.
The decisions so far handed down from the First-tier Tribunal to the Court of Appeal all fell in favour of HMRC, with the reasoning focused on avoiding a windfall benefit in the hands of Zipvit (it being impossible for HMRC to seek recovery of the VAT from Royal Mail) and the absence of any VAT invoices supporting Zipvit’s right to recovery. As a test case, the outcome of this matter has an estimated £500m to £1bn at stake for HMRC.
There are two key issues underpinning Zipvit’s appeal that the Supreme Court unanimously was unable to declare as acte clair.
Issue one concerns the interpretation of the words ‘due or paid’ in article 168(a) (recovery of VAT as input tax) of the Principal VAT Directive (PVD). Could ‘due or paid’ be construed as a matter of law to apply to a scenario where VAT was technically due but was not demanded by Royal Mail by the issue of VAT invoices, despite the contract requiring Zipvit to pay the commercial price for the mail services plus such amount of VAT (if any) as was chargeable?
If the starting point in answering issue one is to consider the contractual arrangements between a supplier and customer, VAT inclusive wording will presumably satisfy the requirements for recovery as the parties are agreeing to a built-in component of VAT to any consideration.
Uncertainty appears with any VAT exclusive wording, as it suggests that any VAT payable is in addition to any consideration for the supply in question and therefore VAT has not been ‘paid’ and is not ‘due’ under article 168, even though as a matter of law VAT is chargeable on the supply, unless it was invoiced to and/or paid by the customer. The prevalence of exclusive of VAT wording in standard agreements could presumably restrict VAT recovery in circumstances where parties expect VAT not to apply. A reference to the CJEU on this issue is welcomed.
Issue two (invoicing) concerns the interaction between article 168 and article 229 (VAT invoicing requirements) in the PVD. If a claim for input tax is supported under article 168, can article 229 to dispose of a claim on the basis that a valid VAT invoice or satisfactory alternative evidence does not exist?
A key factor feeding into both issues was HMRC’s decision not to assess Royal Mail for the unaccounted-for VAT once it became clear that the supplies in question were standard rated. This was based on the fact that HMRC considered that VATA 1994 treated the supply as VAT exempt and that it had created an enforceable legitimate expectation on the part of Royal Mail that it could not successfully assess for any of the VAT that was in fact chargeable. It will therefore be interesting to see whether the CJEU will decide that the recipient of a supply can subsequently recover VAT from HMRC that both parties to the contract thought had not been included in the price that was paid for that supply and where no output tax was due.
The timing of the Supreme Court’s reference is also interesting, as it may result in a decision being handed down after the Brexit implementation period. Although, as far as the UK is concerned, this could be the final authoritative steer from the CJEU on VAT recovery if it is decided before the end of the year; the Supreme Court would not be so bound if the Luxembourg Court decides the matter after the end of the implementation period (31 December 2020). It will also be interesting to see if ministers exercise their powers under the Withdrawal Agreement such that any EU case law that may result in HMRC having to pay ‘windfall’ amounts of VAT is not to be paid, if the CJEU decides this way. If this were to happen, it would surely lead to further litigation as to the scope of the ministerial powers granted under the Withdrawal Act.
