VAT Case Update II -July
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Tribunal allows partial bad debt relief claim even though payments were
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
This is an interesting case in that it examines the meaning of ‘relevant
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
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
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)
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 2008-07-29 13:23:51 in Tax Articles