Burden of Proof in VAT Input Tax Claims: The Perenco Holdings Judgment

Introduction

The case of Perenco Holdings v. Revenue & Customs ([2015] SFTD 650) adjudicated by the First-tier Tribunal (Tax) on February 4, 2015, delves into the complexities surrounding Value Added Tax (VAT) input tax recovery, particularly in the context of share issue expenses. The appellant, Perenco Holdings, sought to reclaim input tax amounting to £331,455 related to professional services (lawyers and accountants) incurred during share issues between June 1987 and March 1989. The crux of the dispute centered on whether Perenco had already recovered this input tax in prior VAT periods and the associated burden of proof.

This judgment is pivotal as it elucidates the legal and evidential burdens in VAT claims, especially under the framework of what are commonly referred to as "Fleming claims." The parties involved included Perenco Holdings as the appellant and The Commissioners for Her Majesty's Revenue & Customs (HMRC) as the respondent.

Summary of the Judgment

The Tribunal examined whether Perenco had previously recovered the input tax in question and who bore the burden of proof in establishing this. The judgment referenced the Court of Justice of the European Union's (CJEU) decision in Kretztechnik AG v Finanzamt Linz, which had shifted the prevailing understanding of VAT treatment in share issuance.

The Tribunal concluded that Perenco bore the legal burden of proof to demonstrate that it had not already recovered the relevant input tax. Furthermore, Perenco provided sufficient prima facie evidence to shift the evidential burden to HMRC. Given HMRC's failure to produce evidence countering Perenco's claims, the Tribunal allowed the appeal in part, particularly concerning certain share issues, while dismissing it for others. The overall outcome emphasized the critical role of burden of proof in VAT claims and the necessity for HMRC to maintain accurate records to substantiate its positions.

Analysis

Precedents Cited

The judgment extensively referenced several key legal precedents that shaped the Tribunal's decision:

Fleming t/a Bodycraft v HMRC and Conde Nast Publications Ltd v HMRC [2008] STC 324: These cases highlighted issues with the three-year time limit on VAT claims, known as "Fleming claims."
Kretztechnik AG v Finanzamt Linz c-465-03 (26 May 2005): This CJEU decision redefined the VAT treatment of share issues by establishing that issuing shares in exchange for capital investment by a taxable trader does not constitute a supply, making input tax on associated expenses recoverable.
RB Kensington & Chelsea v HMRC [2014] UKFTT 729 (TC): This case addressed the burden of proof in VAT claims, emphasizing that HMRC must prove prior recovery of input tax if the taxpayer presents sufficient prima facie evidence.
WMT Acquisition Co UK Ltd v HMRC [2013] UKFTT 215 (TC): Reinforced that the burden of proof lies with the taxpayer to demonstrate that input tax has not been recovered previously.
KDM International Ltd v Revenue & Customs [2013] UKFTT 315 (TC): Established common ground on the burden of proof in VAT input tax claims related to share issues.

Legal Reasoning

Central to the Tribunal's reasoning was the determination of who bears the burden of proof in VAT input tax claims. The legal framework under sections 25 and 26 of the VAT Act 1994 governs the entitlement and deduction of input tax. Regulation 29 of the VAT Regulations 1995 further specifies procedures for late claims and evidence requirements.

The Tribunal concluded that Perenco had the legal burden to prove that it had not already recovered the input tax. Given Perenco's efforts to retrieve relevant documents and the inevitable loss of records over time, the Tribunal accepted that Perenco provided a prima facie case justifying the shift of the evidential burden to HMRC. Consequently, in the absence of HMRC's evidence to the contrary, certain claims were allowed while others were dismissed based on the specifics of each share issue.

The application of the CJEU's Kretztechnik ruling was pivotal. Prior to Kretztechnik, input tax on share issue expenses was generally non-recoverable unless shares were issued to non-EU shareholders. Kretztechnik altered this understanding, entitling fully taxable traders like Perenco to full input tax recovery, thereby impacting the legitimacy of Perenco's claim.

Impact

This judgment has significant implications for future VAT input tax claims, especially those retroactively applying for recovery based on past legal changes like Kretztechnik. It underscores the importance of maintaining meticulous records for VAT purposes and clarifies the circumstances under which the burden of proof shifts from the taxpayer to HMRC.

For taxpayers, the decision emphasizes the need to proactively manage and retain VAT-related documents to substantiate claims. For HMRC, it serves as a reminder of the necessity to preserve records and the limitations of their supervisory role in certain appellate contexts.

Additionally, the judgment reinforces the principle of effectiveness in EU law, ensuring that taxpayers have viable avenues to reclaim incorrectly paid VAT without encountering insurmountable procedural barriers.

Complex Concepts Simplified

Fleming Claims

Named after the Fleming cases, "Fleming claims" refer to requests for refunds of incorrectly paid or overpaid VAT that may date back several years. These claims often face challenges due to the potential unavailability of original documentation and the length of time that has elapsed since the VAT was initially paid.

Burden of Proof

The "burden of proof" determines which party in a legal dispute must provide evidence to support their claims. In the context of Perenco's case, the Tribunal addressed whether Perenco (the taxpayer) or HMRC (the tax authority) must prove that input tax had already been recovered.

Principle of Effectiveness

Rooted in EU law, the principle of effectiveness ensures that national laws do not impede the fulfillment of EU rights. In VAT matters, this principle mandates that domestic procedures allow taxpayers to effectively exercise their rights to reclaim VAT without undue difficulty.

Regulation 29 of VAT Regulations 1995

Regulation 29 outlines the procedures for making late claims for input tax and for claiming input tax without the original VAT invoice. It stipulates the required evidence and the conditions under which HMRC may accept alternative forms of proof.

Conclusion

The Perenco Holdings v. Revenue & Customs judgment serves as a landmark decision in the realm of VAT input tax recovery, particularly for cases involving historical claims and the intricacies of share issue expenses. By clarifying the allocation of the burden of proof and reinforcing the principle of effectiveness, the Tribunal provided a clearer legal pathway for taxpayers seeking to reclaim VAT under changed legal interpretations.

Key takeaways from the judgment include:

The legal burden of proof in VAT input tax claims typically lies with the taxpayer, especially in Fleming claims where documentation may be scarce.
If the taxpayer presents sufficient prima facie evidence, the evidential burden shifts to HMRC to disprove the claim.
The principle of effectiveness must guide the application of domestic VAT procedures, ensuring that taxpayers can effectively reclaim VAT rights derived from EU law without excessive procedural hurdles.
Maintaining thorough and accessible VAT records is crucial for substantiating claims and avoiding disputes over input tax recovery.

Ultimately, this judgment underscores the dynamic interplay between national tax authorities and EU legal principles, shaping the landscape for VAT recovery claims and emphasizing the necessity for both parties to uphold rigorous standards of evidence and procedural fairness.