Zipvit Ltd v Commissioners for Her Majesty’s Revenue and Customs (No 2)

Input VAT is neither “due” nor “paid” under article 168(a) of the Principal VAT Directive where supplier and customer mistakenly treated supplies as exempt, the invoices recorded no VAT, and recovery from the customer and supplier became time-barred. A customer cannot deduct VAT which it was never charged and therefore did not pass on to the final consumer.

A domestic discretion to accept evidence other than a VAT invoice cannot justify an unmerited windfall where the customer has no substantive right to deduct input VAT. Public money should not be used to reimburse a notional tax element which the customer never bore.

Royal Mail supplied individually negotiated postal services to Zipvit. Both parties and HMRC mistakenly regarded those services as exempt from VAT. Royal Mail therefore charged only the commercial price, issued invoices showing no VAT and accounted for no VAT to HMRC.

After European authority established that the services should have been standard-rated, Zipvit claimed £415,746 plus interest as input VAT. It argued that VAT should be treated as embedded in the prices paid. The First-tier Tribunal, Upper Tribunal and Court of Appeal rejected the claim. The Court of Appeal’s decision was reported as [2018] EWCA Civ 1515.

Following a reference made in its first judgment, the Supreme Court had to determine whether VAT was “due or paid” under article 168(a) of the Principal VAT Directive and whether HMRC’s domestic discretion concerning alternative evidence could assist Zipvit.

1. The appeal was dismissed unanimously. Article 168(a) of the Principal VAT Directive did not entitle Zipvit to deduct the alleged input VAT. Lord Briggs and Lord Sales gave the judgment, with which Lord Hodge, Lady Black and Lord Hamblen agreed.

2. A taxable person cannot deduct an amount of VAT which the supplier did not charge and which the taxable person therefore did not pass on to the final consumer. The commercial prices paid by Zipvit could not be recharacterised as comprising a reduced taxable amount and an embedded VAT element. VAT had consequently not been “paid” within article 168(a). Nor was VAT “due” within that provision because Royal Mail had sent no request for its payment. The contractual allocation of liability for VAT did not alter that conclusion where no timely recovery step had been taken and recovery by both the supplier and HMRC was time-barred: paras 27–31.

3. The court declined to decide whether possession of a compliant VAT invoice was an additional condition for deduction. Once Zipvit had no substantive right to deduct under article 168(a), the invoice issue was academic. It concerned an unclear question of EU law on which the Court of Justice had given no definitive ruling: paras 32–33.

4. For the domestic discretion under regulation 29(2) of the Value Added Tax Regulations 1995, the court assumed that HMRC could accept alternative evidence in place of a VAT invoice. Nevertheless, HMRC would have been bound to refuse payment. Zipvit had borne no VAT and possessed no substantive right to recover it, so payment would have created an unmerited windfall. There was no sound basis for using public money in that way: paras 34–36.

1. United Kingdom Supreme Court: By [2022] UKSC 12, unanimously dismissed Zipvit’s appeal after receiving the Court of Justice’s answer to the reference made in the Supreme Court’s earlier judgment.
2. Court of Appeal: By [2018] EWCA Civ 1515, dismissed the appeal on the invoice and regulation 29(2) discretion issues.
3. Upper Tribunal (Tax Chamber): Dismissed the appeal and upheld the First-tier Tribunal on the invoice and discretion issues.
4. First-tier Tribunal (Tax Chamber): Dismissed Zipvit’s appeal against HMRC’s refusal of its input VAT claims.