Factual and Procedural Background
The Appellant, Company A, appeals against a decision by the Respondents, the Tax Authority, dated 3 July 2013, which denied Company A the right to deduct input tax amounting to £33,349.58 claimed in its VAT return for the quarter ending 31 March 2013. Company A also appeals a penalty of £28,346 imposed on the basis of alleged deliberate and concealed behaviour related to this input tax claim.
The disputed input tax related to a single invoice (number 265) amounting to £200,097.48 (including VAT at 20%), dated 30 September 2012, issued by an associated company, Company B, to Company A. Company B was the contractor engaged by Company A to construct a commercial building (Unit 3) as part of a larger development. Company A acted as developer, and another associated company, Company C, owned the freehold and was regarded as the client.
Company A made payments on behalf of Company B to suppliers and subcontractors due to Company B's cash flow difficulties, resulting in an intercompany loan balance. Invoice 265 was raised to reflect this arrangement. The invoice was posted in Company B's accounting system on 13 November 2012 but was dated 30 September 2012. Company B went into liquidation on 29 November 2012 after a proposed Company Voluntary Arrangement (CVA) was rejected.
The Tax Authority investigated and disallowed the input tax deduction on the grounds that the invoice was not a valid VAT invoice, the supply was not clearly identifiable, payment had not been made, and the transaction was connected to fraud by Company B. A penalty was also imposed for deliberate and concealed behaviour. The appeal was heard before the Tribunal with evidence from officers of the Tax Authority and Company A's managing director, alongside extensive documentary evidence including accounting records and valuation schedules.
Legal Issues Presented
- Whether the VAT noted on invoice 265 was attributable to an identifiable supply from Company B to Company A.
- Whether the description on invoice 265 was sufficient to constitute a valid VAT invoice under the formal requirements.
- Whether the right to deduct the VAT as input tax should be denied on the basis that the invoice was invalid.
- Whether the amount shown on invoice 265 had been paid by Company A.
- Whether input tax deduction should be denied under the Kittel principle due to connection with fraud by Company B.
- Whether the penalty imposed on Company A for deliberate and concealed behaviour should be upheld.
Arguments of the Parties
Respondents' Arguments
- The VAT amount claimed was not directly attributable to an identifiable supply made by Company B to Company A.
- The description on invoice 265 ("Works carried out on Unit 3") was too vague to constitute a valid VAT invoice.
- The decision to disallow the input tax deduction was reasonable and should be upheld.
- Company A had not demonstrated that payment had been made for the amount on invoice 265, invoking section 26A VAT Act 1994.
- Company A, through its managing director and finance manager, knew or should have known that the transaction was connected with fraud by Company B, which failed to account for the output VAT.
- The penalty for deliberate and concealed behaviour was justified due to dishonest conduct in claiming input tax.
Appellant's Arguments
- There was a demonstrable supply made by Company B to Company A as described in invoice 265.
- Industry practice supports the invoice description, referencing schedules of works completed which were provided and accepted.
- The decision to disallow the input tax deduction was unreasonable given the substantive conditions for deduction were met.
- Accounting records showed that payment had effectively been made through intercompany loan offsetting entries.
- The managing director did not know or should not have known of any fraud; the invoice was raised before liquidation and in the expectation that the CVA would succeed.
- There was no deliberate or concealed behaviour by Company A warranting the penalty.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 |
Standard for reasonableness in administrative decisions (Wednesbury unreasonableness). |
The Tribunal found HMRC’s decision to disallow input tax was not unreasonable on the basis of the information before them, but ultimately rejected the disallowance for other reasons. |
| Axel Kittel v Finanzamt Traunstein (Case C-439/04) |
Principle denying input tax deduction where the claimant knew or should have known the transaction was connected with fraud. |
HMRC relied on this principle to deny input tax deduction, but the Tribunal found no evidence on the balance of probabilities that Company A was complicit in fraud, so the principle did not apply. |
| Deadoc Construction Limited [2015] UKFTT 433 (TC) |
Industry practice regarding invoice descriptions in construction contracts. |
Appellant cited this decision to support the sufficiency of the invoice description in the present case. |
| Revenue and Customs Commissioners v Infinity Distribution Ltd (in administration) [2016] EWCA Civ 1014 |
Interpretation of VAT invoice requirements and input tax deduction. |
Appellant relied on this case to support the validity of the invoice and input tax claim. |
| Barlis 06 Investimentos Imobiliarios e Turisticos SA v Autoridade Tributaria e Aduaneira (Case C-516/14) |
Distinction between formal VAT invoice requirements and substantive right to deduct input tax. |
The Tribunal applied the distinction, concluding that although the invoice did not meet formal requirements, the substantive conditions for input tax deduction were met. |
| Senatex GmbH v Finanzamt Hannover-Nord (Case C-518/14) |
Clarification of VAT invoice and input tax deduction conditions. |
Supported the Tribunal’s reasoning on formal and substantive requirements. |
| Victoria Walk Limited [2016] UKFTT 687 (TC) |
Assessment of dishonest conduct and fraud in VAT claims. |
Tribunal referenced this decision in discussing the threshold for finding fraud or dishonest conduct on the balance of probabilities. |
Court's Reasoning and Analysis
The Tribunal began by distinguishing between the formal requirements for a valid VAT invoice under Article 226 of the Principal VAT Directive and the substantive conditions for the right to deduct input tax under Article 168. It found that invoice 265 did not satisfy the formal requirements because the description of the supply was too vague and did not specify the date of supply. However, the Tribunal held that the Tax Authority had sufficient information from accompanying valuation schedules to ascertain the substantive facts necessary to allow the input tax deduction.
The Tribunal accepted that Company B supplied construction services to Company A for the development of Unit 3, and that these services were used for taxable transactions by Company A. It rejected the argument that the supply was made to another associated company rather than Company A, noting that invoice 265 was addressed to Company A, evidencing the contractual relationship.
Regarding payment, the Tribunal found that payments made by Company A on behalf of Company B to suppliers and subcontractors were reflected in offsetting entries in Company B’s accounting records, constituting effective payment of the invoice amount. The Tribunal accepted explanations for minor inconsistencies and payments dated after the offsetting entries as anticipated liabilities.
On the allegation of fraud and deliberate concealment, the Tribunal found that the delay in raising and posting invoice 265 was due to administrative oversight and the insolvency process, not dishonest intent. The failure to provide the invoice to the liquidator was attributed to administrative error rather than fraud. The Tribunal found no evidence on the balance of probabilities that Company A or its managing director engaged in fraudulent conduct or knowingly used the invoice to claim input tax connected with fraud.
Consequently, the Tribunal concluded that the Kittel principle did not apply, and the penalty for deliberate and concealed behaviour was not justified.
Holding and Implications
The Tribunal ALLOWED the appeal, holding that Company A was entitled to deduct the input tax of £33,349.58 claimed in respect of invoice 265. The penalty imposed on Company A for deliberate and concealed behaviour was also quashed.
The decision directly affects the parties by reversing the denial of input tax deduction and removing the penalty. The Tribunal emphasized that no fraudulent conduct was established and that the administrative errors did not justify penalty or denial of deduction. No new legal precedent was set beyond the application of existing principles to the facts.