Zipvit Ltd v Commissioners for Her Majesty’s Revenue and Customs [2022] UKSC 12

Zipvit sought to deduct input VAT on Royal Mail postal services which both parties mistakenly believed were exempt. The Supreme Court, following a CJEU reference, held VAT could not be regarded as ‘due or paid’ where no VAT had been charged or passed on.

Facts

Zipvit Ltd, a mail order supplier of vitamins and minerals, engaged Royal Mail’s individually negotiated ‘Mailmedia®’ business postal services between January 2006 and March 2010. The contract incorporated Royal Mail’s terms, which provided that prices were exclusive of VAT and that Zipvit would pay any VAT due at the appropriate rate. At the time, Parliament, HMRC, Royal Mail and Zipvit all understood, in good faith, that such services were exempt from VAT under article 132(1)(a) of the Principal VAT Directive (2006/112/EC). Accordingly, Royal Mail’s invoices were marked ‘E’ for exempt, showed no VAT, and Zipvit paid only the commercial price.

Following the Court of Justice’s judgment in R (TNT Post UK Ltd) v Revenue and Customs Comrs (Case C-357/07), it became clear that the exemption did not apply to individually negotiated supplies, which should have been standard rated. Royal Mail had not accounted to HMRC for VAT on these supplies, and HMRC did not seek to assess Royal Mail, considering (amongst other matters) that Royal Mail had an enforceable legitimate expectation based on HMRC’s earlier guidance. Royal Mail did not pursue Zipvit for the balance of the contract price representing the VAT element, and the limitation period for any such claim largely expired.

Zipvit made voluntary disclosure claims to recover input VAT (totalling £415,746 plus interest) on the basis that the sums it had paid must be treated as VAT-inclusive. The case is a test case, with total exposure estimated at £500 million to £1 billion.

Issues

Three principal issues arose:

(1) The ‘due or paid’ issue

Whether, under article 168(a) of the Directive, VAT could be regarded as ‘due or paid’ by Zipvit in respect of the supplies, so as to be deductible as input tax, even though the invoices had treated the supplies as exempt and no VAT had in fact been charged or separately paid.

(2) The invoice issue

Whether, even if VAT were substantively due or paid, Zipvit’s inability to produce VAT invoices showing that VAT had been charged (as required by article 226(9) and (10)) precluded recovery.

(3) The discretion issue

Whether HMRC’s discretion under regulation 29(2) of the Value Added Tax Regulations 1995 to accept alternative evidence of payment of VAT should have been exercised in Zipvit’s favour.

Arguments

Zipvit

Zipvit contended that the amounts paid to Royal Mail should be treated as VAT-inclusive: if Royal Mail had charged £120 (the commercial price), then £100 should be treated as the taxable amount and £20 as embedded VAT. That embedded VAT was ‘paid’ within article 168(a), or alternatively ‘due’. Zipvit argued that it could prove by alternative means the amount of VAT due or paid, and so the absence of VAT invoices should not defeat its claim.

HMRC

HMRC argued that no VAT was ‘due or paid’ in respect of the supplies within the meaning of article 168(a), because no VAT had been charged and nothing had been passed on. Further, the invoices did not comply with article 226(9) and (10), so Zipvit could not satisfy the formal conditions for deduction. On the discretion issue, HMRC submitted that any payment would be an unmerited windfall.

Judgment

This was the Supreme Court’s second judgment following a reference to the Court of Justice of the European Union (the last such reference made by the Supreme Court). The CJEU gave a definitive ruling on 13 January 2022 (Case C-156/20).

The ‘due or paid’ issue

The CJEU held (at para 31)

given that VAT is a tax which must be charged, at each stage, only on the added value and must ultimately be borne by the final consumer …, a taxable person such as Zipvit cannot claim to deduct an amount of VAT for which it has not been charged and which it has therefore not passed on to the final consumer

. Consequently, VAT could not be regarded as included in the price paid (para 33), nor as ‘paid’ within article 168(a) (para 35), nor as ‘due’ (paras 36-40), since no request for payment of VAT had been sent to Zipvit. The CJEU concluded (para 41) that article 168(a) must be interpreted as meaning that VAT cannot be regarded as ‘due or paid’ where, on the basis of a common mistake induced by national authorities’ incorrect interpretation of EU law, the supplies were treated as exempt, the invoices did not refer to VAT, and any recovery action by supplier or tax authority was time-barred.

The Supreme Court accordingly dismissed Zipvit’s claim on this ground.

The invoice issue

Because the claim failed substantively on the ‘due or paid’ issue, the CJEU did not answer the invoice question (paras 42-43). The Supreme Court declined to rule on it, holding it academic and concerning unresolved EU law. The court expressly left open whether the CJEU’s reasoning might affect the analysis of this issue in later cases.

The discretion issue

Although this was a domestic law question under regulation 29(2), the court assumed a valid discretion existed. Given Zipvit had no substantive right to deduction under the Directive and had not in fact borne any VAT, any payment would have been an unmerited windfall. HMRC would inevitably have been bound to refuse it; there was no sound basis to expend public money on such a payment.

Implications

The judgment, applying the CJEU’s ruling, establishes that where a supplier and trader mistakenly treat a supply as exempt on the basis of guidance from the tax authority, and the trader is neither charged VAT nor passes it on to the final consumer, the trader cannot later claim deduction of a notional embedded VAT element as input tax under article 168(a), particularly where recovery of unpaid VAT by the supplier or tax authority is time-barred.

The principle reflects the fundamental architecture of VAT as a tax on added value, ultimately borne by the final consumer: a trader cannot deduct VAT it did not bear and did not pass on. The decision has substantial fiscal significance, as it disposes of claims estimated at between £500 million and £1 billion against HMRC arising from the aftermath of the TNT Post judgment.

The decision is necessarily confined to its particular factual matrix: a common good-faith mistake, invoices treating the supply as exempt, no VAT passed on, and time-barred recovery by supplier and tax authority. The court expressly left the invoice issue unresolved for another occasion. Notably, this judgment is also of historical procedural significance as the outcome of the last reference made by the Supreme Court to the Court of Justice of the European Union before the end of the relevant transition arrangements.

Verdict: Appeal dismissed. Zipvit is not entitled to deduct input VAT under article 168(a) of the Principal VAT Directive, because in the circumstances no VAT was ‘due or paid’ within the meaning of that provision; HMRC would also properly have refused any discretionary payment under regulation 29(2).

Source: Zipvit Ltd v Revenue and Customs (Respondent) (No 2) [2022] UKSC 12