Hotelbeds UK Limited v Commissioners for HMRC

Where a taxable person lacks a valid VAT invoice, the right to deduct input tax is not automatically extinguished. HMRC must lawfully exercise the discretion under regulation 29 of the VAT Regulations 1995, considering reliable alternative evidence of the taxable supply.

The exercise must balance protection of revenue and prevention of fraud against VAT neutrality, the fundamental right to deduct, proportionality and efficient tax administration. Guidance focused on invalid invoices cannot justify refusing even to consider other evidence where no invoice exists. A repeated absence of invoices is not necessarily a systematic failure: that expression connotes an organised or planned method of operation which threatens the tax system. The application was allowed because HMRC misapplied its guidance, failed to give proper weight to neutrality and reached an irrational conclusion on the facts.

Hotelbeds, a wholesale supplier of hotel accommodation, sought recovery of input tax for supplies from UK VAT-registered hotels. It had submitted two earlier error correction notices which HMRC paid, followed by two further notices claiming approximately £416,977 and £9.77 million.

Many hotel suppliers had not issued invoices, although Hotelbeds relied on detailed alternative evidence and had pursued suppliers for invoices. HMRC refused the later claims, principally relying on section 16.8 of VAT Notice 700 and concluding that Hotelbeds had systematically failed to obtain valid invoices.

The judicial review concerned whether HMRC had unlawfully failed to follow its published guidance, unlawfully fettered the regulation 29 discretion, acted irrationally, or breached the EU principle of effectiveness. The court also considered, but did not need to decide, legitimate expectation.

1. Application allowed. HMRC’s refusal of the third and fourth error correction notices was unlawful. HMRC should have allowed payment of those claims, which was the only lawful decision on the facts.
2. The three policy documents were drafted principally for cases involving invalid invoices, not cases where no invoice was held. They were ambiguous and inconsistent, and none justified refusing to consider alternative evidence merely because it was not an invalid invoice.
3. Under regulation 29 of the VAT Regulations 1995, the decision-maker had to assess the alternative evidence against the relevant principles: protection of revenue, minimisation of fraud, the central importance of the right to deduct, VAT neutrality, proportionality, and the need to discourage organised arrangements undermining the evidentiary structure of VAT.
4. The word systematic in Notice 700 could not mean merely repeated. In context it connoted an organised, planned and deliberate method of operation which threatened revenue or created a parallel non-compliant system of input-tax recovery. The circumstances were materially different from HMRC v James Edwin Boyce, where the business model was designed not to produce invoices.
5. HMRC wrongly treated the absence of invoices as decisive, failed properly to consider the detailed alternative evidence, and gave inadequate weight to neutrality and the absence of any serious fraud risk. The earlier payment of substantially similar claims reinforced Hotelbeds’ entitlement to have the evidence considered under the policy.
6. By the date of the decision Hotelbeds had adopted the Tour Operators’ Margin Scheme for future supplies. The perceived risk of a continuing parallel invoice-free system had therefore disappeared. The refusal was consequently irrational, unfair and outside the range of reasonable decisions open to HMRC.
7. It was unnecessary to determine the separate legitimate-expectation ground.