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

Zipvit used Royal Mail postal services which were mistakenly treated as VAT-exempt by all parties. Following a Court of Justice ruling that such services were standard-rated, Zipvit claimed input VAT deduction. The Supreme Court referred questions to the Court of Justice regarding entitlement to deduct VAT never actually charged or paid.

Facts

Zipvit Ltd, a mail-order vitamins business, received postal services from Royal Mail between 2006 and 2010. Based on UK legislation and HMRC guidance, all parties believed these individually negotiated services were VAT-exempt. Royal Mail’s invoices showed no VAT charge, and Zipvit paid only the commercial price.

In 2009, the Court of Justice ruled in TNT Post UK Ltd that the postal services exemption only applied to public postal services acting as such, not to individually negotiated contracts. This meant the services should have been standard-rated, with VAT charged on top of the commercial price.

Zipvit subsequently claimed input VAT deduction of £415,746 from HMRC, arguing VAT should be treated as embedded in the prices paid. By this time, Royal Mail could no longer contractually claim the VAT element from Zipvit due to limitation, and HMRC could not assess Royal Mail for the unpaid VAT.

Issues

The ‘Due or Paid’ Issue

Whether, under Article 168(a) of the Principal VAT Directive, VAT can be treated as ‘due or paid’ when the trader only paid the commercial price without any actual VAT element being charged or paid.

The Invoice Issue

Whether a trader can claim input VAT deduction without holding VAT invoices complying with Article 226(9) and (10) of the Directive, which require invoices to show VAT was due and its amount.

Judgment

The Supreme Court (Lord Briggs and Lord Sales, with Lord Hodge, Lady Black and Lord Hamblen agreeing) determined that neither issue was acte clair and made a reference to the Court of Justice of the European Union.

Zipvit argued that VAT should be treated as embedded in payments made, relying on Articles 73, 78 and 90 of the Directive and the Tulică judgment. HMRC contended this would constitute an unmerited windfall for Zipvit and violate the principle of fiscal neutrality, since no VAT had been paid into the public purse.

On the invoice issue, Zipvit argued formal requirements could be satisfied through alternative evidence. HMRC maintained that valid VAT invoices showing VAT charged were essential for the VAT collection regime to function.

Questions Referred

The Court referred four questions concerning: (1) whether the price paid can be treated as including embedded VAT; (2) whether VAT can be treated as ‘due’; (3) whether deduction is possible without compliant invoices; and (4) whether the supplier’s potential defences or the trader’s knowledge are relevant factors.

Implications

This test case has significant financial implications, with estimates of total claims against HMRC between £500 million and £1 billion arising from similar Royal Mail transactions. The case raises fundamental questions about the operation of the VAT system where all parties, including the tax authority, make good faith mistakes about VAT treatment of supplies. It explores the boundaries of the input VAT deduction right and the interaction between substantive and formal requirements under the Directive.

Verdict: The Supreme Court made a reference to the Court of Justice of the European Union, referring four questions regarding the interpretation of the Principal VAT Directive in circumstances where all parties mistakenly treated taxable supplies as exempt from VAT.

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