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In April 2007, HMRC issued Revenue & Customs Brief 36/07 entitled 'VAT input tax deduction without a valid VAT invoice: Revised statement of practice'.  Andrew Needham looks at the reasons for the revised policy and its likely effect on businesses.

The statement of practice is an update of an earlier July 2003 version, and is very much aimed towards the anti-MTIC fraud effort because of its specific address to supplies of computers, telephones and other related equipment, and also alcohol and oils. Although the new version is phrased in helpful tones, indicating a willingness on the part of HMRC to exercise their discretion to allow deduction if appropriate checks on the supplier have been made, it is more likely to be a reiteration of HMRC’s position that, where involvement in a chain of supplies to facilitate MTIC fraud is suspected, they will look to challenge input tax deduction on the grounds that the documentation is invalid (to run alongside the 'should have known' test for disallowance based on the Kittel case).

The timing of the issue of this Brief suggests that the reason for its issue may have been a recent VAT Tribunal decision in Pexum Limited (VTD 20,083).  In the Pexum case, HMRC disallowed over £1.5 million of input tax on twelve invoices for the purchase of goods described on them as ‘CPUs’.  This was on the grounds that the invoices were ‘invalid’ because the goods were not as described. As such, HMRC considered that an essential ingredient of the ability to ‘exercise the right to deduct’, namely the holding of a valid tax invoice or other document, was not satisfied under SI 2518/1995 VAT Regulation 14(1)(g). Although the decision states that HMRC did not allege that Pexum or its suppliers were knowingly a party to any fraudulent activity, it was strongly implied that there may never have been any goods involved in the transaction, and certainly not those described on the invoices. 

Tribunal Decision 

The Tribunal’s written decision runs to 47 pages and covers various aspects, including the question of whether the Appellant satisfied the HMRC statement of practice on deduction without a valid tax invoice. The three basic arguments made on behalf of Pexum were that the July 2003 statement of practice published by HMRC had been satisfied, that the operation of the VAT system relies on the tax authorities being satisfied that balancing output tax and input tax are being accounted for, and that HMRC's introduction of the concept of a 'right to exercise a right to deduct' (in this case infringed by the description of the goods on the invoices) is an unjustifiable restriction on the right to deduct.  

The Tribunal Chairman found against Pexum, concluding:

In our judgment, the invoices held by Pexum in support of its claim for input tax deduction, were not valid VAT invoices for the purposes of VATA or the VAT Regulations since they did not give a “description sufficient to identify the goods ... supplied”, as required by Regulation 14(l)(g). Likewise those invoices did not contain details of “the ... nature of the goods supplied” as required by Article 22(3)(b) of the Sixth Directive.

If any goods were supplied to Pexum at all:

a.    the goods that were in fact supplied were not capable of being described as “CPUs”, having regard to their physical characteristics and their lack of functionality; and/or
b.    the goods that were in fact supplied were not in any event genuine Intel P4 2.8GHz 800 CPUs or capable of being described as such.

We therefore hold that Pexum had no right to deduct the input tax claimed because its purchase invoices described the goods purportedly bought by it as “Intel P4 2.8GHz 800” CPUs, manufactured by Intel.

Guidance 

In conjunction with the revised statement of practice, HMRC have amended Regulation 29(2) so that they can now accept any alternative evidence for the deduction of input tax, not just documentary evidence. Along with the long-awaited introduction of the reverse charge on business to business transactions, the ‘means of knowledge’ test, and the recent Pexum decision, this revised policy should strengthen HMRC’s position in its ongoing fight against MTIC fraud (but hopefully not at the expense of legitimate traders!).