CJEU: postal supplier cannot deduct for VAT mistakenly unpaid

The UK Supreme Court referred the dispute to the Court of Justice of the EU (CJEU) in April 2020, before the end of the Brexit transition period, as provided for under the terms of the Withdrawal Agreement. While the sums at stake in the immediate case are relatively minor, between £500 million and £1 billion of tax could be at stake in similar cases, according to the Supreme Court.

VAT is only deductible as input tax if it is “due or paid” in respect of supplies to the trader of goods or services by another taxable person.

“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 … 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,” the CJEU said in its judgment.

“Consequently, in circumstances such as those in the main proceedings, VAT cannot be regarded as being included in the price paid by the recipient of the services,” it said.

Zipvit, an online vitamin company, had purchased business postal services from Royal Mail under an individually negotiated contract over a three year period beginning in January 2006. At the time, both parties believed that such services were exempt from VAT as postal supplies made by a public postal service, and therefore no VAT was charged and the invoices showed the supplies as being exempt from VAT.

However, in 2009, the CJEU ruled that the postal services VAT exemption only applies to supplies made by public postal services acting in a public capacity, and not to supplies made under an individually negotiated commercial contract. This meant that the services purchased by Zipvit should have been standard rated for VAT purposes, with Royal Mail paying VAT to HM Revenue & Customs (HMRC) and charging that VAT to Zipvit.

Zipvit argued that the commercial price it paid for the services should be treated as having included a VAT element, giving it the right to recover that amount in input VAT. Alternatively, it argued that if the embedded element of VAT was not “paid”, it should be regarded as being “due” within the meaning of the EU VAT Directive.

At the time Zipvit made its initial claim, in 2010, Royal Mail would have been entitled to claim the VAT element from Zipvit under its contract with the company, before the limitation period expired. At the same time, HMRC could have issued assessments to Royal Mail to recover the VAT. However, it chose not to do so on the basis that Royal Mail would have a defence that it had a legitimate expectation that it was not required to charge VAT on the services. HMRC’s time limit for issuing its assessment has also now expired.

The CJEU acknowledged in its judgment that, at the point that Zipvit made its claim, it was “legally not impossible” for Royal Mail to recover VAT from Zipvit, and for HMRC in turn to recover VAT from Royal Mail. However, as neither had done so in time, “it must be held that the price invoiced to Zipvit for the supply of postal services is a price exclusive of VAT”.

“The mere fact that a supply exempt from VAT is ultimately regarded, once completed, as being subject to VAT cannot suffice for a finding that tax is deductible if no request for payment of that tax has been sent to the recipient of that supply, even though it is not impossible for the supplier to address such a request to that recipient,” the court said.

VAT expert Jake Landman of Pinsent Masons said: “Because the CJEU decided that VAT could not be regarded as being due or paid in the circumstances of the case it was not necessary to answer the final question referred – namely, whether the VAT Directive must be interpreted as meaning that a recipient may rely on the right to deduct where it does not hold invoices containing requisite details. The CJEU simply noted that this question was no longer relevant due to the conclusions already reached”.