Y4 Express Limited v The Commissioners for HMRC

Entitlement to input tax credit requires proof that the relevant supplies were made to the taxpayer by another taxable person. A payment alone does not establish consideration for VAT purposes. There must be a legal relationship, which need not be contractually enforceable, providing a framework for reciprocal performance and a direct link between the service and payment. Economic activity requires supplies for consideration and an objectively determined purpose of obtaining income on a continuing basis. The enquiry is wide-ranging and objective; there is no separate sufficiently-direct-link test.

Y4 Express Limited appealed against the First-tier Tribunal’s decision of 10 July 2020. The FTT held that Y4 was not entitled to input tax credit concerning Royal Mail accounts used by Y4 but held in the names of Mr Man and Colemead Limited. Y4 challenged the legal conclusions that neither intermediary made taxable supplies to it and argued alternatively that Royal Mail had supplied services directly to Y4 on the basis of economic reality.

1. Appeal dismissed. The FTT applied the correct legal tests and was entitled to conclude that neither Mr Man nor Colemead made taxable supplies to Y4.
2. Under Article 168 of the Principal VAT Directive, Y4 had to establish that the alleged suppliers were taxable persons and had made supplies to Y4 on which VAT was due or paid. Under the parties’ agreed approach, this required consideration of whether they supplied services for consideration and carried on an economic activity.
3. Applying Tolsma [1994] STC 509 and Town and County Factors Ltd [2002] STC 1263, payments constituted consideration only if they were the value given in return for services under an agreement or framework establishing the necessary link between supply and payment. The FTT had rejected Y4’s case that there was an arrangement to pay commission or income.
4. The economic-activity enquiry was objective and wide-ranging. Under Wakefield College v HMRC [2018] STC 1170, supplies for consideration were necessary but not sufficient. The activity also required an objectively determined purpose of obtaining income on a continuing basis. Subjectively motivated conduct was irrelevant, although objectively relevant circumstances could include friendship.
5. The FTT had considered and rejected Y4’s alternative Airtours Holiday Transport Ltd [2016] STC 1509 argument. Economic reality pointed to supplies by Royal Mail to Mr Man and Colemead, since Royal Mail invoiced them, they paid the invoices, and Royal Mail would not have dealt with Y4.
6. The appeal was dismissed on both grounds.

• First-tier Tribunal: Decision released 10 July 2020. Y4’s input-tax claims were rejected. Permission to appeal was granted on 3 December 2020.
• Upper Tribunal (Tax and Chancery Chamber): Appeal dismissed.