Factual and Procedural Background
This appeal concerns a decision by the First-tier Tribunal (Tax Chamber) dismissing the challenge by the Appellant, a phone trading company, to HM Revenue and Customs' (HMRC) refusal to allow input VAT deductions on iPhones purchased in the United Kingdom. The Appellant acquired newly issued iPhones through individuals ("runners") who purchased phones in Apple retail stores under purchase restrictions. The Appellant sought to recover VAT charged on these purchases, initially accepted by HMRC. However, following an extended verification prompted by high volume purchases, HMRC disallowed input tax deductions on the basis that the Appellant had not provided valid VAT invoices, only Apple till receipts, which did not meet statutory requirements. HMRC exercised discretion under VAT Regulations not to accept alternative evidence of supply. The Appellant appealed to the First-tier Tribunal, which dismissed the appeal, and the decision was subsequently appealed to the Upper Tribunal.
Legal Issues Presented
- Whether HMRC's refusal to accept alternative evidence of supply in the absence of valid VAT invoices was a reasonable exercise of discretion under the VAT Regulations;
- The appropriate approach for the First-tier Tribunal when hearing appeals concerning input tax deductions where no valid VAT invoice is held;
- The applicability of section 47(2A) of the Value Added Tax Act 1994 regarding supplies made through agents acting in their own name;
- Whether the First-tier Tribunal erred in conducting a two-stage analysis involving first determining if a taxable supply had occurred and then assessing the reasonableness of HMRC's discretion;
- The extent to which EU law and case law inform the national discretion to refuse input tax deductions absent compliant VAT invoices.
Arguments of the Parties
Appellant's Arguments
- The Appellant contended that it had produced sufficient evidence, including invoices and evidence of payment, to demonstrate taxable supplies had been received.
- Argued that the First-tier Tribunal should have upheld the appeal once it found on the facts that a taxable supply had occurred, regardless of the absence of valid VAT invoices.
- Asserted that once all substantive requirements for input tax deduction were met, refusal to allow deduction absent fraud was unjustified under EU law.
- Challenged the application of section 47(2A) on the basis that the runners were employees, not agents, and thus that provision should not bar the input tax deduction claim.
Respondents' Arguments (HMRC)
- Contended that the runners were recipients of the taxable supplies, not the Appellant, and that no taxable supply from Apple to the Appellant had been established.
- Maintained that HMRC's discretion under regulation 29(2) of the VAT Regulations to refuse to accept alternative evidence in the absence of valid VAT invoices was properly exercised and reasonable.
- Argued that the two-stage approach adopted by the First-tier Tribunal was appropriate and consistent with established case law.
- Rejected the Appellant's attempt to rely on findings made by the First-tier Tribunal on the existence of supply as superseding HMRC’s decision or expanding the tribunal's jurisdiction.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Kohanzad v Customs and Excise Commissioners [1994] STC 967 |
Tribunal's supervisory jurisdiction over HMRC discretion to accept input tax claims without VAT invoices. |
Confirmed that the tribunal reviews whether HMRC's discretion was exercised reasonably, not substituting its own decision. |
| Best Buys Supplies Ltd v HMRC [2011] UKUT 497 (TCC) |
Reiteration of supervisory jurisdiction test from Kohanzad. |
Supported the approach that the tribunal assesses reasonableness of HMRC discretion in input tax claims. |
| Case C-285/11 Bonik EOOD v Bulgarian Tax Authority ECLI:EU:C:2012:774 |
Right to deduct input VAT not to be denied based on upstream supply issues if substantive conditions met. |
Distinguished facts; did not support obligation on Member States to provide forum for full merits assessment absent tax authority decision. |
| Case C-518/14 Senatex GmbH v Finanzamt Hannover-Nord ECLI:EU:C:2016:691 |
Prohibition of disproportionate penalties for formal invoice defects; formal conditions separate from substantive right to deduct. |
Held that refusal to accept alternative evidence post-decision is not required; did not assist Appellant as no invoice correction accepted. |
| Case C-271/12 Petroma Transport SA and others v Belgium ECLI:EU:C:2013:297 |
Tax authority may refuse deduction if invoices incomplete at time of decision; no obligation to revisit decision on new evidence later. |
Confirmed that HMRC discretion to refuse alternative evidence is lawful and tribunal reviews reasonableness of that decision. |
| Case C-123 & 330/87 Jeunehomme v Belgium [1988] ECR 4517 |
Member States may require additional invoice information but not to the extent that deduction becomes impossible or excessively difficult. |
Supported limits on formal requirements consistent with VAT Directive objectives. |
| Case C-85/95 John Reisdorf v Finanzamt Koln-West [1996] ECR I-6257 |
Member States may require original invoice or admit other evidence if original lost. |
Confirmed discretion to accept alternative evidence in absence of original invoice. |
| Case C-90/02 Finanzamt Gummersbach v Bockemühl [2004] ECR I-3303 |
Limits on formal requirements in reverse charge procedures. |
Supported proportionality in formal requirements for input tax deduction. |
| Case C-590/13 Idexx Laboratoires Italia Srl v Agenzia delle Entrate ECLI:EU:C:2014:2429 |
Tax authority cannot impose additional conditions rendering right to deduct ineffective once substantive requirements met. |
Distinguished from present case where substantive requirements not established before tax authority decision. |
| Case C-18/13 Maks Pen EOOD v Direktor na Direktsia ECLI:EU:2014:69 [2014] All ER (D) 226 |
Deduction cannot be refused if conditions met unless fraud or abuse shown; national courts may investigate new fraud facts on appeal. |
Did not assist Appellant as no fraud was alleged here and substantive supply not established. |
| Case C-392/09 Uszodaépítő kft v APEH Központi Hivatal Hatósági Főosztály [2010] ECR I-8791 |
Tax authority must not impose additional conditions making deduction ineffective when information to establish VAT liability exists. |
Held that HMRC did not impose impermissible additional conditions in this case. |
| Case C-438/09 Dankowski v Dyrektor Izby Skarbowej w Łodzi [2010] ECR I-14009 |
Same principle as above regarding additional conditions on deduction rights. |
Supported HMRC's approach as reasonable. |
| Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 |
Support for supervisory jurisdiction of tribunal over HMRC discretion. |
Cited in Kohanzad and applied in assessing reasonableness of HMRC decisions. |
Court's Reasoning and Analysis
The Upper Tribunal carefully analysed the statutory and regulatory framework governing input tax deductions, including relevant EU VAT Directives and domestic VAT legislation. It reiterated that a valid VAT invoice is a formal prerequisite for input tax deduction but that HMRC retains discretion under regulation 29(2) of the VAT Regulations 1995 to accept alternative evidence in the absence of such invoices.
The Tribunal rejected the two-stage approach adopted by the First-tier Tribunal and parties, whereby the tribunal first determines if a taxable supply occurred and then assesses HMRC's reasonableness in refusing alternative evidence. Instead, the Upper Tribunal held that the only decision properly before the tribunal on appeal is HMRC's exercise of discretion to refuse acceptance of alternative evidence due to insufficient documentary proof, not a decision on whether a taxable supply occurred.
The Tribunal emphasized that the First-tier Tribunal's role is supervisory, assessing whether HMRC's discretion was exercised reasonably based on the evidence before HMRC at the time of its decisions. It is not the tribunal's role to substitute its own decision or to make findings on the existence of supply where HMRC made no such decision.
The Upper Tribunal examined relevant EU case law, including Bonik, Senatex, and Petroma, and concluded these cases do not require Member States to provide a forum for a full merits assessment of supply existence absent a tax authority decision. Nor do they require HMRC to revisit decisions refusing deductions when new evidence is presented post-decision.
The Tribunal found that HMRC was entitled to be cautious in this case given the absence of proper VAT invoices and the gaps and uncertainties in the Appellant's evidence. The Appellant's business model, which deliberately avoided receipt of VAT invoices, was a relevant factor. The case officer's refusal to accept alternative evidence was therefore reasonable.
Accordingly, the Upper Tribunal upheld the First-tier Tribunal's conclusion that HMRC's decision was not unreasonable and dismissed the appeal.
Holding and Implications
The Upper Tribunal DISMISSED the appeal.
The direct effect of this decision is that HMRC’s refusal to accept alternative evidence of supply in the absence of valid VAT invoices was a reasonable exercise of discretion and the Appellant is not entitled to input tax deductions on the iPhones purchased. The decision clarifies the limited scope of the tribunal’s jurisdiction in such appeals, emphasizing that the tribunal reviews the reasonableness of HMRC’s discretion rather than making fresh factual findings on supply. No new precedent was set beyond reinforcing established principles regarding supervisory review of HMRC discretion and the formal requirements for VAT input deductions.