Evidence for the deduction of input tax
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HMRC issue new guidance on the evidence required for the deduction of
input tax following the Pexum decision
HMRC issued Revenue & Customs Brief 36/07 on 11 April 2007 entitled 'VAT
input tax deduction without a valid VAT invoice : Revised statement of
The statement of practice is an update of an earlier July 2003 version and is
very much aimed towards the anti-MTIC fraud effort as it specifically addresses
supplies of computers, telephones and other related equipment, as well as
alcohol and oils. Although the new version is phrased in helpful tones which
indicate 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 deductions on the grounds that the documentation is invalid (to run
alongside 'should have known' 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 Tribunal decision in Pexum Ltd v Comm of HMRC
In the Pexum case HMRC disallowed over £1.5 million of input tax on twelve
invoices for the purchase of goods described on the invoices as CPUs on the
grounds that the invoices were invalid because the goods were not as described.
As such an essential ingredient of the exercise of 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), as the goods were incorrectly described.
Although the decision states that HMRC did not allege that Pexum or its
suppliers were knowingly a party to any fraudulent activity it is strongly
implied that there may never have been any goods involved in the transaction,
and certainly not those described on the invoices. The 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 basic arguments on behalf of Pexum was 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, Mr Demack found against Pexum,
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 VAT 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:
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 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.
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 Pexum decision this
will strengthen HMRC’s fight against MTIC fraud, but hopefully not at the
expense of legitimate traders.
About the Author
Steve Allen is the
Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered
Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are
respected tax advisers, but have worked for both Customs & Excise and one of the
top four accountancy firms for many years. This mean that their team know both
sides of the equation and are truly experts in this field.
The company has a cross-section of clients from multi-national companies
through to medium-sized and numerous smaller regional firms of accountants and
solicitors. They produce a regular publication 'VAT Voice', which can be
downloaded directly from their website
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Article Published/Sorted/Amended on Scopulus 2007-04-23 21:14:04 in Tax Articles