Introduction

Zipvit Ltd v. Revenue And Customs ([2018] EWCA Civ 1515) is a pivotal case adjudicated by the England and Wales Court of Appeal (Civil Division) that delves into the intricate principles governing Value Added Tax (VAT) in circumstances where supplies previously deemed exempt are later identified as taxable at the standard rate. The appellant, Zipvit Limited, a mail-order supplier of vitamins and minerals, challenged the refusal of Her Majesty's Revenue and Customs (HMRC) to allow the recovery of input VAT on services provided by Royal Mail, which were initially treated as VAT-exempt but later determined to be standard-rated following a Court of Justice of the European Union (CJEU) decision.

Summary of the Judgment

The Court of Appeal upheld the decision of the Upper Tribunal, dismissing Zipvit's appeal. The core issue revolved around whether Zipvit was entitled to recover input VAT on Mailmedia services from Royal Mail, initially considered VAT-exempt but subsequently classified as standard-rated. The primary contention was whether the VAT element of the consideration paid by Zipvit could be reclaimed, especially in the absence of a VAT invoice from Royal Mail confirming the payment of VAT. The court concluded that without a compliant VAT invoice detailing the VAT charged and its payment by Royal Mail, Zipvit could not validly claim the input tax credit, rendering its appeal unsuccessful.

Analysis

Precedents Cited

The judgment references several key precedents that significantly influenced the court’s decision:

• TNT Post UK Limited v. Revenue and Customs Commissioners (Case C-357/07): This CJEU decision determined that postal services provided by the universal postal provider are not exempt if they are "individually negotiated". It emphasized the principle of fiscal neutrality, limiting exemptions to services provided in the capacity of a universal service provider.
• Elida Gibbs Limited v. Customs and Excise Commissioners (Case C-317/94): This case elucidated the fundamental VAT principle that only the final consumer bears the tax burden, maintaining fiscal neutrality across the supply chain.
• Barlis 06 Investimentos Imobiliários e Turísticos SA v. Autoridade Tributária e Aduaneira (Case C-516/14): This CJEU decision highlighted the importance of VAT invoices in allowing tax authorities to monitor VAT payments and the right of deduction, reinforcing that incomplete invoices cannot substantively support VAT recovery claims.
• Mason v. Boscawen (2008): A UK case underscoring that the consideration for a supply is inclusive of VAT, unless explicitly agreed otherwise in the contract.
• Simpson & Marwick v. Revenue and Customs Commissioners (2013): This case dealt with bad debt relief and interpreted VAT-inclusive consideration, reinforcing that without a provision to separate VAT, only the proportional VAT can be reclaimed.

Legal Reasoning

The court's legal reasoning centered on two main issues:

1. The Right to Deduct Input VAT ("due or paid" issue):

   Under Articles 167 and 168 of the Principal Directive and corresponding UK legislation, a taxable person is entitled to deduct input VAT from output VAT. However, this right is contingent upon the VAT being "due or paid". The court considered whether the VAT was indeed due or paid by Zipvit, irrespective of Royal Mail's payment status to HMRC. The Upper Tribunal initially erred by focusing on Royal Mail’s liability rather than Zipvit’s, a mistake rectified by the Court of Appeal.

   The court emphasized that under the Indian Directive Articles 73 and 78(a), the consideration for a supply is inclusive of VAT unless the contract explicitly allows for VAT to be charged separately. Given the General Terms between Zipvit and Royal Mail stated that charges were "exclusive of VAT", Zipvit argued that the payments made should retrospectively include VAT, thereby qualifying for input tax deductions.

2. The Requirement of a VAT Invoice:

   Article 178(a) of the Principal Directive mandates that to exercise the deduction right, a VAT-compliant invoice is necessary. The Court referenced Barlis and Petroma Transport cases to underscore that a VAT invoice must contain specific details, including the VAT rate and amount paid. Zipvit’s invoices from Royal Mail indicated exempt status without detailing VAT components, undermining their ability to claim input tax credits.

   The court rejected Zipvit’s argument that alternative evidence or retrospective reconstruction of VAT-inclusive consideration sufficed, emphasizing that without a compliant invoice, the right to deduct VAT cannot be legitimized. The landlord in Mason v. Boscawen was held to include VAT as part of the rent, but in Zipvit’s case, the lack of VAT invoicing rendered their claims invalid.

Impact

This judgment sets a crucial precedent in VAT law, particularly regarding the recovery of input VAT in scenarios where initial supplies were misclassified as exempt. Key impacts include:

• Emphasis on Invoice Compliance: Reinforces the mandatory nature of comprehensive VAT invoicing as a precondition for input tax recovery, underlining that alternative evidence is insufficient.
• Retrospective VAT Treatment: Clarifies that without explicit contractual terms permitting separate VAT charges, consideration must be treated as VAT-inclusive, affecting how businesses structure their contracts and handle VAT assessments.
• Fiscal Neutrality Enforcement: Upholds the principle of fiscal neutrality by ensuring that VAT is ultimately borne by the end consumer, preventing businesses from unfairly recovering VAT without proper documentation.
• Legal Certainty for Taxpayers: Provides clarity on the conditions required for VAT recovery, aiding businesses in maintaining compliance and understanding the implications of contract terms on VAT obligations.

Complex Concepts Simplified

• Fiscal Neutrality: The principle that VAT should not add extra cost to businesses in the supply chain, ensuring that only the final consumer bears the tax burden.
• Input Tax Credit: The VAT that a business can reclaim on purchases made for business purposes.
• Chargeable Event: The point in time when a supply of goods or services becomes subject to VAT.
• Value Added Tax (VAT): A consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
• VAT Invoice: A detailed invoice containing specific information required by VAT regulations, essential for claiming input tax credits.

Conclusion

The Zipvit Ltd v. Revenue And Customs case underscores the critical importance of adhering to VAT invoicing requirements for the recovery of input tax. By upholding the necessity of a compliant VAT invoice, the Court of Appeal reinforced fiscal neutrality and ensured that VAT recovery mechanisms cannot be exploited without proper documentation. Businesses must ensure that their contractual agreements with suppliers clearly delineate VAT obligations and that VAT invoices contain all mandated details to facilitate legitimate input tax claims. This judgment serves as a vital guide for taxpayers and legal practitioners in navigating the complexities of VAT law, emphasizing that procedural compliance is as paramount as substantive correctness in fiscal matters.