No ticket, no entry – the Court of Appeal rules on the need for a valid VAT invoice to exercise the right to deduct

In Tower Bridge GP Ltd v The Commissioners for HM Revenue and Customs [2022] EWCA Civ 998, the Court of Appeal has ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct the input VAT on that invoice could not be exercised. The case is important because (i) it reconciles several at first glance inconsistent CJEU authorities that formed the basis of the Appellant’s argument that once the “substantive” conditions for the right to deduct were met, the “formal” invoicing conditions were irrelevant; (ii) it confirms the Court of Appeal’s earlier decision in Zipvit, and (iii) it confirms the process for HMRC exercising their discretion to permit input tax to be repaid where the VAT invoice  is invalid. The decision also involved the Court of Appeal refusing to follow a CJEU decision made post-IP completion day.

The background to the dispute was that the Appellant’s supplier had traded in carbon credits connected with VAT fraud. The supplier was never registered for VAT and never accounted for or paid to HMRC the VAT it charged on the invoices to the Appellant totalling £5.6m. The invoices did not show the supplier’s VAT number, or the name of the customer.

Issue 1 – A valid VAT invoice: The Court of Appeal analysed the retained EU Case Law starting as far back as Jorion née Jeunehomme v Belgian State (Joined Cases C-123/87 and C-330/87) where a valid VAT invoice was said to be the “ticket of admission” to the right to deduct. It identified a theme through the case law that there were substantive and formal conditions that exist in relation the right to deduct. However, the fact that the substantive conditions had been met (i.e. the right to deduct was being exercised by a taxable person, and the goods or services were supplied to the taxable person for the purposes of his own taxable transactions) did not mean that the right to deduct was automatic; something more could be required.

Accordingly, the Court found that the absence of a valid VAT number, and absence of the customer’s name had the effect that the formal requirements had not been met, and the right to deduct could not be exercised. This analysis effectively reiterates the importance of the monitoring function the Revenue exercise in respect of VAT, that would be thwarted if essential requirements were not included on the invoice.

Issue 2 – The exercise of discretion: The Court considered whether the Revenue had wrongly exercised their discretion in refusing to allow Tower Bridge to exercise the right to deduct when the substantive conditions had been met and evidenced. The Court rejected this submission. It found that there were two exercises of discretion embedded within the operation of Regulation 29 of the Value Added Tax Regulations 1995 (i.e. the provision about the exercise of discretion). The first is whether to entertain an application to establish the right to deduct otherwise than by a compliant invoice. The second, if the first discretion is exercised in the taxable person’s favour, is the discretion to specify the documentary evidence that the Revenue require in order to prove that the input tax had been incurred.

It was noted that the Revenue refused to exercise their discretion to allow recovery of the input tax on the basis that: (i) the supplier was not VAT registered, (ii) the transactions were connected with fraud, and (iii) Tower Bridge failed to conduct reasonable due diligence in relation to the transactions. The Court accepted that possession of a valid VAT invoice is the Revenue’s “first line of defence against fraud in the system.”

Howard Watkinson and Joshua Carey represented HMRC. 

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