An important case at the Court of Appeal has clarified a VAT position which could have cost the Revenue up to £1 billion.
Zipvit Limited v The Commissioners for Her Majesty’s Revenue & Customs (HMRC) sought to overturn the decisions of earlier tribunals which found that Zipvit was unable to claim notional input tax credit on the price paid to their supplier, Royal Mail.
Zipvit had paid for postal services supplied via the Royal Mail which, under article 13A(1)(a) of the Sixth Directive (now the Principal VAT Directive) had been treated as exempt from VAT. This is commonly known as ‘the postal exemption’.
However, the Court of Justice of the European Union (CJEU) subsequently clarified that the postal exemption was limited to supplies by the universal postal service operator operating as such and, therefore, could not apply to services for which the terms had been ‘individually negotiated’.
As such, the ‘MailMedia’ services supplied to Zipvit were treated as exempt but were in fact, standard rated. While HMRC was out of time to collect output tax from Royal Mail, Zipvit believed it could make a claim for input tax, as did many other users of Royal Mail services.
The claims by these businesses relied on the fact that the amount paid to RM included VAT at the appropriate rate embedded within the charge. This view was supported by UK VAT legislation stipulating that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.
Despite this argument, the Revenue said that the absence of a VAT invoice showing that VAT was charged to Zipvit or any details suggesting the rate of tax charged meant that Zipvit’s claim to recover input tax had no merit.
This argument was taken to the First Tier Tribunal (FTT) and the Upper Tribunal (UT) which ruled in favour of HMRC’s interpretation of the VAT rules.
As a result, Zipvit decided to launch its appeal at the Court of Appeal, which upheld the decisions in the previous courts finding that Zipvit had failed to demonstrate that the relevant VAT had been “due or paid” on the supplies received from Royal Mail.
In fact, further evidence produced during the case demonstrated that the amounts paid were exclusive of VAT, regardless of the subsequent CJEU ruling, which meant that VAT was not embedded in the consideration paid.
In his ruling, Lord Justice Henderson said the appeal raised some important points on the principles of VAT.
This decision focuses on the importance of an invoice detailing the rate of VAT charged on a supply to entitle the recipient to recover input tax.
It is believed that up to £1 billion of claims could have been submitted if Zipvit had succeeded in its claim so HMRC will be pleased that this point has been clarified.
This case demonstrates how complex a simple tax can be and that businesses should seek advice when attempting to reclaim VAT in anything other than everyday circumstances. If you would like help with any aspect of VAT recovery, speak to our team at UK VAT Advice.