Tax deductions

Zipvit – no input tax deductions as VAT is not “due or paid”

In Zipvit Ltd v HMRC (No 2) [2022] UKSC 12, the Supreme Court (SC) dismissed the taxpayer’s appeal against HMRC decisions refusing Zipvit’s claims to deduct input tax.

Zipvit supplied vitamins and minerals to customers and used the services of Royal Mail, which provided commercial postal services under individually negotiated contracts. Zipvit, Royal Mail and HMRC incorrectly considered Royal Mail postage to be exempt from VAT. Zipvit has therefore not been charged or paid VAT on any postal services provided by Royal Mail, and has not accounted to HMRC for any amount representing VAT in respect of such services.

However, a few years later, the judgment of the Court of Justice of the European Union (CJEU) in R (TNT Post UK Ltd) v HMRC (Case C-357/07), was released. The CJEU held that the exemption for postal services only applied to services provided by public postal services acting as such, and did not apply to services whose conditions had been individually negotiated.

Zipvit has filed claims against HMRC for the deduction of input tax for services. HMRC rejected these claims on the grounds that while Zipvit was contractually obligated to pay VAT, it had in fact not discharged VAT and had failed to pay VAT. Zipvit appealed unsuccessfully to the Court of First Instance (FTT), Higher Court and Court of Appeal. Following a hearing at the SC, a referral was made to the CJEU to decide the question of “due or paid” and the question of the “invoice”.

In dismissing Zipvit’s appeal, the CS applied the CJEU judgment, which held that VAT should not be considered included in the price paid by Zipvit and that VAT could not be considered to have been ” due or paid”, for the purposes of the main VAT Directive (2006/112/EC). The SC also concluded that if HMRC had considered exercising its discretion under Regulation 29(2) of the VAT Regulations 1995, it would have been obliged to conclude that no payment should be made to Zipvit.

The CJEU did not find it necessary to decide the “invoice” issue which concerned whether the condition that Zipvit held a VAT invoice to prove and substantiate its claim to have paid input VAT was filled. The SC also declined to determine this point.

Why is this important: The SC’s decision ends not only Zipvit’s claims, but also around £500m – £1bn of other taxpayers’ claims against HMRC. Had Zipvit been successful, it would have been a boon to the plaintiffs.

The decision leaves unanswered important questions relating to the “invoice” issue that could arise again in other litigation.

The decision can be viewed here.