In Zipvit Ltd v HMRC (Case C-156/20) (13 January 2022), the CJEU decided that, in the following circumstances, a customer is not entitled to recover an element of the consideration paid for supplies as input tax:
the supplier and the customer mistakenly assume, based on an incorrect implementation of EU law by the national tax authorities, that the supplies are exempt from VAT and, as a result, the invoices do not refer to VAT;
the contract between the supplier and the customer specifies that if VAT is due, the customer should bear the cost of it;
the customer takes no steps to treat an element of the consideration paid as VAT and recover it from the tax authorities as input tax until any action by the supplier and the tax authorities in relation to the matter is time barred.
The background is that Zipvit Ltd, and other customers of Royal Mail, sought to recover, as input tax, an element of the price they had each individually negotiated and paid to Royal Mail for postal services. At the time the transactions took place all parties, including HMRC, considered that the supplies were exempt. VATA 1994 Sch 9 Group 3 was subsequently revised in 2011, following the CJEU decision in R (oao TNT Post UK Ltd) v HMRC (Case C357/07), so that it no longer provides exemption for postal services for which the price has been individually negotiated.
The key issue for the CJEU was whether, in the above circumstances, VAT can be regarded as due and paid on the supplies and therefore deductible as input tax. The CJEU decision means that Zipvit Ltd, and the other customers of Royal Mail affected by the decision, will not be able to obtain the input tax deduction they were seeking. The decision may, however, be regarded as good news for taxpayers generally and may provide some comfort to suppliers. Had the CJEU decided that there was an entitlement for customers to recover from the tax authorities amounts that the tax authorities had not received and were time barred from recovering from suppliers, the cost would ultimately be borne by taxpayers.
Why it matters: The court held that where a customer paid a supplier for what both parties (based on an incorrect interpretation of EU law by the national authorities) mistakenly believe is a VAT-exempt supply, but it turned out to be standard rated and any action by the supplier and HMRC to recover the unpaid VAT was time-barred, the customer cannot claim a deduction of input tax from HMRC for the VAT element of the original payment because the VAT was neither due nor paid.
Although the decision relates to circumstances where an EU country, in this case a former EU country, fails to correctly implement EU law, it could potentially have wider implications. For example, the decision may be helpful to suppliers where there is a dispute regarding the extent to which customers or HMRC can seek to apply, retrospectively, a different VAT treatment than the treatment that was applied based on the published HMRC guidance available at the time the transactions took place.
In relation to the wider implications, although CJEU decisions made after 31 December 2020 are not binding on UK courts and tribunals, a UK court or tribunal may have regard to a CJEU decision made after 31 December 2020 to the extent that it is relevant to the matter in dispute. This point is covered by s 6(2) of the European Union (Withdrawal) Act 2018.
In Zipvit Ltd v HMRC (Case C-156/20) (13 January 2022), the CJEU decided that, in the following circumstances, a customer is not entitled to recover an element of the consideration paid for supplies as input tax:
the supplier and the customer mistakenly assume, based on an incorrect implementation of EU law by the national tax authorities, that the supplies are exempt from VAT and, as a result, the invoices do not refer to VAT;
the contract between the supplier and the customer specifies that if VAT is due, the customer should bear the cost of it;
the customer takes no steps to treat an element of the consideration paid as VAT and recover it from the tax authorities as input tax until any action by the supplier and the tax authorities in relation to the matter is time barred.
The background is that Zipvit Ltd, and other customers of Royal Mail, sought to recover, as input tax, an element of the price they had each individually negotiated and paid to Royal Mail for postal services. At the time the transactions took place all parties, including HMRC, considered that the supplies were exempt. VATA 1994 Sch 9 Group 3 was subsequently revised in 2011, following the CJEU decision in R (oao TNT Post UK Ltd) v HMRC (Case C357/07), so that it no longer provides exemption for postal services for which the price has been individually negotiated.
The key issue for the CJEU was whether, in the above circumstances, VAT can be regarded as due and paid on the supplies and therefore deductible as input tax. The CJEU decision means that Zipvit Ltd, and the other customers of Royal Mail affected by the decision, will not be able to obtain the input tax deduction they were seeking. The decision may, however, be regarded as good news for taxpayers generally and may provide some comfort to suppliers. Had the CJEU decided that there was an entitlement for customers to recover from the tax authorities amounts that the tax authorities had not received and were time barred from recovering from suppliers, the cost would ultimately be borne by taxpayers.
Why it matters: The court held that where a customer paid a supplier for what both parties (based on an incorrect interpretation of EU law by the national authorities) mistakenly believe is a VAT-exempt supply, but it turned out to be standard rated and any action by the supplier and HMRC to recover the unpaid VAT was time-barred, the customer cannot claim a deduction of input tax from HMRC for the VAT element of the original payment because the VAT was neither due nor paid.
Although the decision relates to circumstances where an EU country, in this case a former EU country, fails to correctly implement EU law, it could potentially have wider implications. For example, the decision may be helpful to suppliers where there is a dispute regarding the extent to which customers or HMRC can seek to apply, retrospectively, a different VAT treatment than the treatment that was applied based on the published HMRC guidance available at the time the transactions took place.
In relation to the wider implications, although CJEU decisions made after 31 December 2020 are not binding on UK courts and tribunals, a UK court or tribunal may have regard to a CJEU decision made after 31 December 2020 to the extent that it is relevant to the matter in dispute. This point is covered by s 6(2) of the European Union (Withdrawal) Act 2018.
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