Anonymised Summary of Legal Opinion

Factual and Procedural Background

This appeal concerns whether the First-tier Tribunal's ("FTT") jurisdiction in relation to a decision by the tax authority to refuse an input tax deduction is supervisory only or fully appellate. The Appellant (Company B) submitted a VAT return claiming input tax. An officer of the Appellee asked Company B to produce supporting invoices, including invoices relating to amounts shown as paid to an account described as "Verity" (Company D). Company B's director provided bank statements, a VAT report, a supplier/customer list and a limited set of invoices but did not produce the Verity underlying invoices. The Appellee's officer requested those invoices repeatedly. The Appellee adjusted the return, disallowed the claimed repayment and issued assessments under the domestic VAT statute. Company B sought internal review; the review upheld the officer's decision that the evidence presented was insufficient and that, under the applicable regulation, the Appellee was entitled to refuse the deduction. Company B appealed to the FTT. The FTT held that its jurisdiction was supervisory and that invoices not produced to the Appellee prior to the decision could not be relied on in the tribunal. The Upper Tribunal dismissed Company B's appeal. This appeal followed to the court whose opinion is summarised here.

Legal Issues Presented

1. When the tax authority requires a taxable person to produce VAT invoices and the taxable person does not produce them, and the tax authority (in the absence of sufficient alternative evidence) refuses the deduction under regulation 29(2) of the VAT Regulations 1995, is the resulting statutory appeal to the FTT supervisory only or does it amount to a full appellate jurisdiction permitting the taxable person to rely on invoices not previously produced to the tax authority?
2. Whether the formal issue of assessments under section 73 changes the nature of the FTT's jurisdiction (i.e. whether an appeal against an assessment engages full appellate jurisdiction rather than supervisory review) when the substantive decision being challenged is the Appellee's exercise of discretion under Reg 29(2).

Arguments of the Parties

Appellant's Arguments (as advanced by Attorney Brown and Attorney Morse)

• Attorney Brown: If the taxable person in fact holds compliant invoices, the right to deduct is available even if those invoices were not produced to the tax authority on request; Reg 29(2)'s reference to "other evidence" implies HMRC's exercise of discretion necessarily asserts the absence of a compliant invoice, and the taxpayer must be able to rebut that assertion before the FTT by producing the invoices.
• Attorney Morse: The issuance of assessments under section 73 means the appeal is an appeal against the "amount" assessed and therefore should engage the FTT's full appellate jurisdiction (he advanced four propositions, including that assessments must be to the best judgment and for the correct amount, and that the FTT's primary function is to find the correct amount of tax due).

Appellee's Arguments (as advanced by Attorney Watkinson)

• The relevant decision under challenge was the Appellee's exercise of discretion under Reg 29(2) to disallow the deduction on the basis of the materials presented when the decision was taken; when the Appellee refuses to allow deduction by exercising that discretion the tribunal's role is supervisory only.
• Where a taxable person refuses or fails to produce invoices when requested, the invoice cannot perform its function as proof; the tribunal should confine review to materials before the Appellee when it made its decision and to public law grounds (error of law, irrationality, unreasonableness, taking irrelevant considerations into account).
• Issuance of assessments to give effect to the discretionary decision does not alter the character of the substantive decision or transform the tribunal's jurisdiction into a full appellate one where the substantive decision being challenged is a discretionary refusal under Reg 29(2).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Case A (Joined Cases C-123/87 and C-330/87)	Compliant invoice described as the "ticket of admission" to the right to deduct; Member States may adopt rules on invoice content necessary for verification and fiscal control.	Used to emphasise the centrality of the invoice in the VAT system and that Member States may require invoices meeting content requirements for verification.
Case B (Case C-146/05) [2008] STC 757	Member State formal requirements may be required for prevention of tax evasion but must not go further than necessary; fiscal neutrality requires substantive requirements be met even if some formal requirements not complied with unless non-compliance prevents conclusive evidence.	Applied to show that formal requirements may be waived if substantive proof exists, but not if non-compliance prevents production of conclusive evidence.
Case C (Case C-516/14)	Invoice must enable checking whether issuer has paid the tax; invoice's role is to provide information necessary for tax authorities to ensure payment by the issuer.	Reinforced the proposition that invoices must be accessible to tax authorities to serve their function as proof.
Case D (Case C-518/14) [2017] STC 205	Invoice is a form of proof permitting collection and deduction of VAT; VAT identification aids verification and prevention of evasion.	Supported the conclusion that invoices are central and must be produced to tax authorities to be effective proof.
Case E (Case C-152/02) [2005] STC 525	Right to deduct arises only when goods/services supplied and taxable person has a valid invoice; practical administrative consequences support this approach.	Used to justify that the right to deduct depends on timely possession/production of an invoice and that retrospective exercise may cause administrative difficulties.
Case F (Case C-85/95) [1997] STC 180	Member States may require production of the original invoice on inspections; refusal to produce upon request may justify denying deduction unless other cogent evidence is admitted.	Authorised domestic practice of denying deduction where invoice is withheld and confirmed Member States' power to require original invoices for supervision.
Case G (Case C-271/12) [2013] STC 1466	Where corrected invoices are submitted before the authority's decision the right cannot in principle be refused; but information submitted after the authority's decision does not compel revisiting that decision.	Held that evidence supplied after the authority's refusal does not oblige tax authorities to revisit their decision — supports supervisory approach.
Case H (Case C-159/17)	Denial of deduction as penalty for formal non-compliance may go further than necessary; refusal depends on whether lack of information prevents production of conclusive evidence of substantive requirements.	Used to explain that refusal should be justified by absence of information necessary to establish substantive entitlement, not merely formal non-compliance.
Tower Bridge GP Ltd v Appellee [2022] EWCA Civ 998, [2022] STC 1324	Two discretions in Reg 29(2): (1) whether to entertain alternative evidence; (2) if so, what alternative documentary evidence is required.	Quoted to illustrate the two-stage nature of the discretion under Reg 29(2).
Kohanzad v Company A [1994] STC 967	Where the tax authority exercises discretion to refuse credit, the tribunal's role is supervisory and focused on materials before the authority when decision was made; later material is generally not for consideration in reviewing the discretionary exercise.	Applied as leading authority for the supervisory nature of tribunal review where Reg 29 discretion is exercised.
GB Housley Ltd v Appellee [2014] UKUT (TCC), [2014] STC 2733	Confirmed application of supervisory review where discretion under Reg 29 is at issue; addressed procedural consequences where discretion was not considered.	Discussed in support of principle that tribunal reviews exercise of discretion on materials before the authority.
HMRC v Boyce [2017] UKUT 177 (TCC), [2017] BVC 513	Applied supervisory review principles in cases of discretionary refusals of input tax.	One of the post-Kohanzad authorities applying the supervisory approach.
Scandico Ltd v Appellee [2017] UKUT 467 (TCC), [2018] STC 153	Where the authority decides it is not satisfied on the evidence before it, the tribunal's review is supervisory and later evidence before the tribunal does not entitle the appellant to sidestep the authority's discretion.	Relied on to confirm that tribunal should address the authority's decision as made and apply Kohanzad test.
GB Housley v Appellee [2017] STC 508 (CA)	If tribunal allows appeal because the authority failed to consider Reg 29 discretion, the assessment falls to be discharged rather than remitting for fresh consideration; subsequent factual materials cannot be used to justify the original decision.	Applied to explain limits on remittal and to prevent authorities relying on later materials to support earlier decisions.
BUPA Purchasing Ltd v Company A (No 2) [2007] EWCA Civ 542, [2008] STC 101	Section 73 assessments must assess a net amount of VAT due; if taxpayer contends repayment is due they must appeal under other grounds such as amount of input tax allowed.	Used to show formal gateways to appeal but not to change the nature of tribunal jurisdiction depending on which gateway is used.
Rahman v Company A [1988] STC 826; Rahman (2) [2003] STC 150	Best judgment assessments involve two stages: (1) whether assessment was made to the best judgment; (2) if so, whether the amount should be reduced by reference to further evidence available to the tribunal.	Discussed to show instances where tribunals may consider material not available to the authority when substituting their own judgment on amount.
Pegasus Birds Ltd v Company A [2004] EWCA Civ 1015, [2004] STC 1509	Guidance that tribunal's primary task is to find the correct amount of tax on material properly available to it; tribunals should not divert to attack the Commissioners' exercise of judgment except where properly pleaded.	Examined in detail; court emphasised that Pegasus does not displace supervisory approach where the substantive decision is an exercise of discretion under Reg 29(2).
Mithras (Wine Bars) Ltd v Appellee [2010] UKUT 115, [2010] STC 1370	In considering an appeal against amount of an assessment, tribunal may have full appellate jurisdiction to decide the correct amount if the assessment was properly made to the Commissioners' best judgment.	Used to contrast situations where the tribunal exercises full appellate jurisdiction on quantum once the best-judgment stage is satisfied.
Karoulla v Appellee [2018] UKUT 255, [2018] BVC 518	When tribunal is satisfied assessment was made to best judgment it may exercise full appellate jurisdiction on the amount and admit material not available to the Commissioners.	Illustrated that full appellate jurisdiction on quantum can follow where Reg 29 discretion is not the substantive decision under challenge.
Rich Couture Ltd [2024] UKFTT 1077; 3KH Ltd [2025] UKFTT 748; Noonan [2025] UKFTT 67	FTT decisions in best-judgment assessment cases (none involved exercise of discretion under Reg 29).	Cited as examples of best-judgment appeals where different procedural rules may apply; distinguished from Reg 29 discretionary refusals.
John Dee Ltd v Company A [1995] STC 941	The nature of the tribunal's function depends in large measure on the nature of the decision appealed against.	Quoted for principle that tribunal powers depend on the nature and substance of the decision under challenge rather than the procedural gateway.

Court's Reasoning and Analysis

The court began by characterising the decision under challenge. It concluded that the substantive decision was the Appellee's exercise of discretion under regulation 29(2) to refuse to allow the deduction because of insufficient evidence presented at the time the decision was made; the assessments issued under section 73 were the formal fiscal consequences of that discretionary decision. The court reviewed relevant EU-derived and domestic law establishing that (i) the invoice is central to the right to deduct and must be available to tax authorities to serve its evidential function, (ii) Member States may require production of original invoices and may admit alternative evidence, and (iii) evidence presented after the tax authority's decision does not oblige the authority to revisit its decision (citing cases such as the Terra line of authority and Petroma).

Applying established domestic authorities (in particular Kohanzad and its progeny), the court held that where the Appellee has exercised its discretion under Reg 29(2) to refuse a deduction on the basis of the material before it, the FTT's role is supervisory. The FTT should review whether the Appellee's exercise of discretion was defensible on public law grounds (error of law, unreasonableness, irrationality, irrelevant/ignored considerations), confined to the materials available to the Appellee at the time of decision. The court rejected the Appellant's primary argument that holding a compliant invoice entitled the Appellant to rely on it before the FTT even if it had not been produced to the Appellee: the statutory power to require production and the case law permit refusal where documents are not produced when requested, and evidence must be presented before the authority's decision to compel reconsideration.

The court also rejected the argument that the formal issuance of assessments converted the tribunal's jurisdiction into a full appellate jurisdiction. It analysed authorities on best-judgment assessments and concluded that the nature of the tribunal's jurisdiction depends on the substance of the decision under challenge, not the procedural route of appeal; where the substantive decision is an exercise of discretion under Reg 29(2) the review remains supervisory even if assessments were issued to give effect to that decision. The court noted that treating similar cases differently depending solely on whether an assessment was issued would be incoherent and unfair.

Finally, the court examined the Appellant's pleaded grounds of appeal and found they did not assert that compliant invoices were held but withheld; they relied on materials already provided to the Appellee. That limited the scope of any challenge and reinforced that the Appellant could not adduce fresh invoices before the FTT to overturn the discretionary refusal.

Holding and Implications

HOLDING: The appeal is dismissed. The court held that the FTT's jurisdiction in relation to the Appellee's decision under Reg 29(2) to disallow input tax on the basis of the materials before it is supervisory, not fully appellate, and that invoices not produced to the Appellee before its decision could not be relied on to overturn that discretionary refusal.

Implications: The direct effect is that Company B's appeal fails and the Appellee's decision and related assessments stand. The decision confirms that where a tax authority exercises its Reg 29(2) discretion to refuse input tax on the basis of insufficient evidence presented at the time, the tribunal's review is confined to supervisory public law grounds and to the materials before the authority when it made its decision. The court indicated no new broader precedent beyond the application and clarification of existing authorities.

Disposition

The appeal is dismissed.

Panel

Opinion delivered by Judge [Last Name]. Judges Jackson and Miles agreed.