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Steve Allen, Director of VAT Solutions (UK) Ltd, reports a further selection of recent VAT decisions.

Steve Allen

Tribunal allows partial bad debt relief claim even though payments were non-specific

The claimant had rendered its VAT returns showing the output tax due on all its supplies, including the unpaid invoices that were the subject of the claim. However as it had gone into liquidation it had not settled the liability shown as payable to HMRC on those returns. HMRC therefore refused the bad debt relief (BDR) claim, on the grounds that the VAT due on the supplies that were the subject of the claim had not been paid in full and so the conditions for a claim were not met.

At the hearing, the Tribunal held that the input tax credit shown on the returns in question amounted to part payment of the output tax due for the periods. As a result, a partial BDR claim could be made. The calculation of the claim was done as follows. The output tax due on the non bad debts was calculated. This was all deemed to have been paid by virtue of the input tax credit. The excess input tax credit was then regarded as part payment of the VAT due on the bad debt invoices, and this was the amount of the claim. The fact that not all of the VAT on the unpaid invoices could be shown to have been paid to HMRC did not prevent the BDR claim being made for the part that had been paid, by input tax credit, as EU law was less prescriptive than HMRC’s interpretation. HMRC’s interpretation made exercising the right to a BDR claim excessively difficult or impossible. The appeal was thus allowed.

Times Right Marketing Ltd (in Liquidation)(VTD 20,611)

Tribunal holds that charges for epilepsy services did not constitute a business activity

This is an interesting case in that it examines the meaning of ‘relevant charitable purpose’.

HMRC argued that the provision of epilepsy support and care services by the Appellant to the Scottish Health Boards was a business supply, meaning that it could not obtain zero-rating for a new epilepsy centre building (the question of whether the building was ‘relevant residential’ was not explored by the Tribunal).

HMRC's argument was solely based on the fact that the Appellant had a customer base, provided support services and charged the Health Board for them, and that this was an economic activity. The Tribunal was, however, swayed by the fact that the Appellant was the sole supplier of the services in Scotland (there was no general marketplace or distortion of competition), and the charges to the Health Board simply covered part of the costs of the service.  As such, there was no profit motive, so the Tribunal used the principles set out in Yarburgh to allow the Appellant’s appeal.

Quarriers (VTD 20,660)

Tribunal allows input tax claim for innocent buyer of fraudulent mobile phones

This was an appeal against HMRC's refusal to repay input tax on an inward supply of mobile phones from a UK company to the Appellant.

The Appellant supplied the purchased mobile phones to a Dutch company (a zero-rated supply). This was an indirect dispatch, and the Appellant did not inspect the goods. Instead they were collected from the UK company by a freight forwarder and shipped. HMRC initially denied the claim because the disputed supply formed part of a chain of supplies involving fraud, though the Appellant was an innocent party.  The phones sent to Holland were not the phones the Appellant had bought and paid for, but were old and broken stock.

Following the ECJ Optigen decision, the input tax claim was still denied but for an additional reason, which was that when the goods were inspected in Holland, the consignment consisted of old mobile phones which did not correspond with the description of the new mobile phones in the Appellant’s invoice to the Dutch company.  Consequently, HMRC argued that it could not claim the input tax because it had not made an onward taxable supply of the phones.

The dispute involved two issues; one factual and one legal. The factual issue was whether the consignment of old phones had been sent in error, and that the correct consignment of new phones was actually subsequently delivered to Holland. HMRC contended that the Appellant's claim for input tax principally depended on whether the onward supply to the Dutch company actually took place, relying on the wording of s26 of VATA 1994, which essentially restricts an input tax claim to so much of the input tax that was attributable to ‘taxable supplies made or to be made by it in the course or the furtherance of its business’.

The second issue was the Appellant's legal entitlement to recover the input tax arising from the inward supply of new mobile phones from the UK company, irrespective of whether or not the outward supply to the Dutch company actually took place. The Appellant and HMRC had opposing views on the legal requirements for recovering input tax. The Appellant said its right to input tax derived from the fact that the purchase was for its taxable business. HMRC argued that as the Appellant was not an intending trader, it could only claim the VAT if it made a taxable supply of the phones it had bought.

The Tribunal found that the Appellant intended to make an onward supply but was prevented from doing so because of fraud committed by others.  Therefore it found that the Appellant satisfied s26 of VATA 1994.

HMRC argued the Teleos principle, which dealt with the requirements of Article 28a of the Sixth Directive for exempting intra-EC supplies from VAT, but could not apply it as they had not taken any formal steps to challenge the zero-rated status of the Appellant's supply to the Dutch company. The Tribunal recognised that HMRC could have challenged the zero-rating as the phones appeared never to have left the UK, meaning conditions for zero-rating set out in Teleos were not met.

HMRC conceded that the Appellant was an honest and an unwitting party to fraud. The Appellant also had in place a standard procedure for conducting due diligence on prospective customers and suppliers. HMRC proposed that the Appellant was required to take every reasonable measure to ensure that its onward supply of the mobile phones was actually made based on the wording of para 65 in Teleos. However, the Tribunal did not agree with this interpretation, stating that the object of reasonable steps in para 65 of Teleos was the avoidance of participation in tax evasion, and not to ensure that the onward supply was actually made.

Ultimately, the Tribunal applied the principles in Optigen, satisfied that the input tax on the inward supply was attributable to a taxable supply. In Optigen the ECJ decided that “the right to deduct input VAT…could not be affected by the fact that in the chain of supply of which those transactions formed part, another prior or subsequent transaction was vitiated by VAT fraud, without that taxable person knowing or having any means of knowing”. The appeal was thus allowed.

Ross Pharmacy Ltd (VTD 20,634)