Zipvit Ltd v Revenue and Customs (Respondent) (No 2)

Factual and Procedural Background

Company B sells vitamins and minerals by mail order. Between 1 January 2006 and 31 March 2010 it purchased individually-negotiated business postal services (“the services”) from Company A. The contract stated that the commercial price was exclusive of VAT and that the customer must pay “any VAT due.”

National legislation and guidance issued by Authority A erroneously treated all of Company A’s postal services as VAT-exempt. Acting on that common mistake, Company A invoiced the services as exempt (“E”), showed no VAT, and Company B paid only the commercial price. Company A did not account for VAT and Authority A raised no assessment.

On 23 April 2009 the Court of Justice of the European Union (“CJEU”) held that the exemption applies only to services supplied under universal-service conditions, not to individually-negotiated contracts. As a result, the services should have been standard-rated.

Company B then made two “voluntary disclosure” claims (totalling £415,746 plus interest) to deduct input VAT it said was embedded in the prices already paid. Authority A rejected the claims. The First-tier Tribunal, Upper Tribunal and Court of Appeal all dismissed Company B’s appeals, chiefly because (i) no VAT was “due or paid,” (ii) Company B held no VAT invoices, and (iii) paying a notional sum would be an unwarranted windfall.

The Supreme Court referred two questions to the CJEU. After the CJEU delivered its judgment (Case C-156/20), the Supreme Court decided the appeal without further oral hearing.

Legal Issues Presented

1. The “due or paid” issue: whether VAT can be regarded as “due or paid” under Article 168(a) of the VAT Directive when neither the supplier nor the customer ever charged, paid or was later pursued for the tax.
2. The invoice issue: whether possession of VAT invoices compliant with Article 226(9)–(10) of the Directive is a necessary pre-condition to deduction where the taxpayer relies on alternative evidence.
3. The discretion issue: whether Authority A should have exercised its domestic discretion (regulation 29(2) of the 1995 VAT Regulations) to accept other evidence and repay the claimed amount.

Arguments of the Parties

Company B’s Arguments

• The price it paid must be treated as a tax-inclusive amount; the embedded element is “VAT … paid” or at least “due” for Article 168(a) purposes.
• Even if VAT was not shown on the invoices, deduction should be allowed because all facts are established and alternative evidence suffices.
• If necessary, Authority A should exercise its regulation 29(2) discretion to accept that evidence; refusing would be disproportionate.

Authority A’s Arguments

• No VAT was ever charged, paid or subsequently recoverable; therefore nothing is “due or paid” within Article 168(a).
• Valid VAT invoices, or proof that the supplier accounted for tax, are an essential pre-condition; Company B has neither.
• Even if a discretion exists under regulation 29(2), paying Company B would create an unjustified windfall funded by public money.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Due or Paid. The Supreme Court adopted the CJEU’s binding answers. VAT can be deducted only when the trader has been charged the tax and passed it on through the supply chain. Company B neither paid nor was asked to pay VAT, and no request can now lawfully be made because limitation periods for both civil recovery against Company B and tax assessments against Company A have expired. Hence no VAT was “paid.” Likewise, because no tax demand was issued, nothing was “due.”

2. Invoice Issue. The CJEU found it unnecessary to decide whether valid invoices are an additional requirement. Given the negative answer on the substantive entitlement, the Supreme Court considered the invoice issue academic and declined to rule on it.

3. Discretion Issue. Assuming, without deciding, that Authority A retained a domestic discretion under regulation 29(2), the Court agreed with the lower tribunals that the discretion could only reasonably be exercised by refusing repayment. Any payment would confer an unmerited windfall; Company B had already paid less than the true commercial price and had no EU-law right to reimbursement.

Holding and Implications

APPEAL DISMISSED.

The Court confirmed that a trader cannot deduct input VAT that was never charged, paid, or recoverable, even where a common mistake led the parties and the tax authority to treat the supply as exempt. The decision forecloses similar claims—estimated between £500 million and £1 billion—arising from the same error. No new legal doctrine was created, but the ruling reinforces the principle that the right of deduction is strictly conditional on actual payment (or enforceable liability) and proper invoicing.