Court of Justice
In Zipvit Ltd (C-156/20), a group litigation case, the taxpayer supplied vitamins and minerals by mail order. The UK’s national postal service supplied the taxpayer with a number of postal services under contracts which had been individually negotiated. The contract between the taxpayer and the national postal service stated that the price was exclusive of VAT and that any VAT would be paid in addition. At the relevant time, both parties to the contract and the tax authority believed the supply of all postage services to be VAT-exempt. However, later, in TNT Post UK (C-357/07) the CJEU held that only those services of a public postal service, ie the universal services provided in the public interest, are exempt from VAT. By contrast, those services which are provided on individually negotiated terms and are not subject to the requirements of the universal service are not VAT-exempt.
Following the judgment in TNT Post UK (C-357/07), the UK tax authority did not require relevant suppliers to account for VAT on past supplies since the recipients of the supplies would mostly have been entitled to recover the VAT. It was therefore considered disproportionately costly and administratively burdensome. In addition, the tax authority considered that it had created a legitimate expectation on the part of the national postal service that it was not required to collect VAT so that the postal service would have had a defence to an assessment.
The taxpayer however sought to recover input VAT in respect of the postal services it received which should have been treated as taxable supplies. The taxpayer’s case is a test case and, as the Advocate General pointed out, if the taxpayer were to win, then many other recipients of supplies of postal services wrongly treated as VAT-exempt would enjoy a windfall profit.
Rather than focussing on the lack of invoice as the Advocate General did (see our previous alert), the Court looked at whether VAT could be said to have been included in the price and therefore whether it could be said to have been ‘due’ or ‘paid’ as required by the rules enabling a trader to deduct input VAT. In a short judgment, the Court noted that the contract between the parties expressly provided that the price was exclusive of VAT, that the national postal service could, according to the contract have required Zipvit to pay it the VAT but that it did not (the tax authorities having waived recovery from the supplier), and concluded that, in those circumstances, VAT could not be regarded as being included in the price paid by Zipvit.
As to whether the input VAT could be said to be ‘due’, the Court said that this required there to be an enforceable claim against Zipvit to pay the VAT. Since the postal service had not demanded the VAT, it could not be regarded as ‘due’. Consequently, and in light of the expiry of the limitation periods for both the tax authority and the postal service to demand the VAT from the supplier and recipient respectively, the taxpayer was not entitled to recover any input VAT.
DLA Piper comment:
In this judgment the CJEU, contrary to the Advocate General’s opinion, focused on whether VAT could be said to have been included in the agreed price. The CJEU’s judgment, therefore, determines the conditions under which a company may claim parts of the commercial price paid as input VAT. The CJEU focuses on the contract between recipient and supplier to ascertain whether any VAT was “due” or “paid”.
Taxpayers similarly seeking to reclaim input VAT without a VAT invoice need to revisit their contractual agreements to prove whether those contain an explicit exclusion of VAT in the agreed prices. If this is not the case, the taxpayer has the possibility to argue that VAT has been included in the price to be able to recover input VAT but without a VAT invoice there are likely to be complications.
In Kemwater ProChemie (C-154/20) the taxpayer had claimed an input VAT deduction for advertising services it had procured for a golf tournament. After a tax inspection, the tax authorities denied the VAT deduction, noting that the reported supplier of the advertising, ‘VS’, denied any knowledge of the transaction.
The Court was asked, whether the right to deduct VAT must be refused, without the tax authorities having to prove that the taxable person has committed VAT fraud or that they knew, or should have known that the relevant transaction was involved in fraud where, as the true supplier of the goods or services concerned had not been identified, the taxable person did not have evidence that that supplier was a taxable person.
The Court said that while the fundamental principle of VAT neutrality requires deductions of input VAT to be allowed if the material conditions are satisfied, it falls on the taxable person to provide objective evidence that goods or services were actually supplied as inputs by taxable persons for the purpose of his or her own transactions subject to VAT. Where the tax authorities have the information necessary to establish that the material conditions have been satisfied, they cannot impose additional conditions which render the right to deduct input VAT ineffective for practical purposes. The tax authority cannot restrict itself to examining the invoice itself but must take account of the additional information provided by the taxable person and cannot require the taxpayer to prove in every case that the supplier is a taxable person:
However, where the true supplier has not been identified, the taxable person must be refused the right to deduct VAT if, “taking into account the factual circumstances” and the evidence provided by that taxable person, the information needed to verify that the supplier was a taxable person is lacking. In those circumstances, the right to deduct should be refused without the tax authorities having to prove that the taxable person committed VAT fraud or that he or she knew, or ought to have known, that the transaction was connected with such fraud.
DLA Piper comment:
With this decision the Court once again upholds its case law concerning the fundamental principle of the common system of VAT: the right of deduction. The Court stresses that the fundamental principle of VAT neutrality means that input VAT deduction will take place once material conditions are met even though formal conditions have not been fulfilled. Therefore, this decision shows how important it is to obtain and retain sufficient evidence to support any input VAT reclaim; commercial evidence regarding supplies made and received should be kept in case invoices and other documentation are questioned by the tax authority. Proof of the status of the taxable person can be achieved by providing objective evidence that goods or services were actually supplied as inputs by taxable persons for the purposes of his or her own transactions subject to VAT, in respect of which he or she has actually paid VAT.
Referring to the distinction, discussed in other Court of Justice cases, between formal and substantive conditions of the right to deduct input VAT, the Court has confirmed that producing evidence that a supply has been received from a taxable person is a substantive condition.
