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Evidence for the deduction of input tax



Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.

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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 practice'.

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 (No:20083).

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, 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 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

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