Tower Bridge GP Limited v The Commissioners for HMRC

A taxable person cannot exercise the right to deduct input VAT merely by proving that the substantive conditions for deduction are satisfied. For an ordinary domestic supply, the person must hold an invoice complying with the mandatory requirements of the Principal VAT Directive, or provide supplementary material which supplies the required information.

Under regulation 29 of the VAT Regulations 1995, HMRC has two discretions: whether to entertain a claim unsupported by a compliant invoice and, if so, what alternative documentary evidence to require. HMRC may consider fraud, inadequate due diligence, loss of tax revenue and whether the defect can be corrected. Its decision is subject only to supervisory review by the tax tribunal.

Tower Bridge GP Limited, as representative member of a VAT group, claimed input tax paid on purchases of carbon credits. The supplier was a taxable person but was unregistered, fraudulently failed to account for the VAT and could not be traced. Its invoices omitted both its VAT registration number and the customer's name. The transactions under appeal preceded the date from which the purchaser should have known of their connection with VAT fraud.

The First-tier Tribunal dismissed the appeal: [2019] UKFTT 176 (TCC). The Upper Tribunal upheld that decision: [2021] UKUT 0030 (TCC), [2021] STC 522.

The Court of Appeal considered whether the VAT group could exercise its right to deduct as of right despite having no valid VAT invoice, and whether HMRC had unlawfully refused to allow alternative documentary evidence under regulation 29 of the VAT Regulations 1995.

1. The appeal was dismissed unanimously. The right to deduct and the right to exercise that deduction are distinct. Articles 167 and 168(a) of the Principal VAT Directive establish the right, while article 178(a) makes its exercise subject to holding an invoice drawn up in accordance with article 226. Calling that requirement formal does not make compliance optional.

2. Earlier EU authority fell into several relevant categories. Additional national formalities could not defeat the right where the Directive's requirements were satisfied. A defective invoice could support deduction where supplementary information corrected it. Different rules applied to reverse-charge and intra-Community transactions, for which the Directive did not itself require an article 226 invoice. Some invoice particulars were more important than others. In particular, the supplier's VAT identification number and the customer's identity served essential verification and anti-fraud functions.

3. The invoices could not be corrected. The supplier had no VAT registration number, and the invoices did not identify the customer. The purchaser therefore could not exercise the right to deduct as of right. The post-transition decision in Kemwater was not binding under the European Union (Withdrawal) Act 2018. It conflicted with the earlier jurisprudence, transferred reverse-charge reasoning to a materially different context and did not address the authorities requiring correction or provision of the missing information. The court declined to follow it.

4. Regulation 29 of the VAT Regulations 1995 contains two discretions. HMRC first decides whether to entertain proof of the deduction otherwise than through a compliant invoice. If it does, HMRC then specifies the alternative documentary evidence required. The primary purpose is to allow missing invoice information to be supplied subsequently. The First-tier Tribunal's role in reviewing those discretions is supervisory.

5. HMRC was entitled to consider the supplier's non-registration, the transactions' connection with fraud, the purchaser's failure to perform basic checks, the inability to correct the invoices and the resulting loss to the public purse. The Kittel principle did not govern this question because it concerns fraud even where a compliant invoice exists. Any remittal would inevitably produce the same result, even if the original decision-making process contained errors.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously: [2022] EWCA Civ 998.
2. Upper Tribunal (Tax and Chancery Chamber): The tribunal upheld the rejection of the input tax claim: [2021] UKUT 0030 (TCC), [2021] STC 522.
3. First-tier Tribunal (Tax Chamber): Judge Jones rejected the claim to deduct the input tax: [2019] UKFTT 176 (TCC).