UK Supreme Court refers VAT postal services dispute to EU

The case concerned postal services supplied by the UK's Royal Mail to online vitamin seller Zipvit under a contract individually negotiated with the company.

Tax disputes expert Jake Landman of Pinsent Masons, the law firm behind Out-Law, said: "The matter is being referred to the EU, notwithstanding Brexit, as the UK/EU Withdrawal Agreement provides that the CJEU continues to have jurisdiction to give preliminary rulings on requests from the UK made before the end of the transition period".

"Under the UK/EU withdrawal agreement this CJEU reference will run its course even though the process will likely complete after the end of the transitional period," he said.

The case concerns a period of just over three years from January 2006, when it was understood that all postal supplies made by public postal services such as Royal Mail were exempt from VAT, even if Royal Mail was supplying business postal services under contracts individually negotiated with the customer. VAT was therefore not charged on the supplies to Zipzit and the invoices showed the supplies as being exempt from VAT.

However, in 2009 in a case involving delivery service TNT, the CJEU decided that the postal services VAT exemption applied only to supplies made by the public postal services acting as such, and did not apply to supplies of services for which the terms had been individually negotiated. This meant that the supplies made by Royal Mail to Zipvit should in fact have been treated as standard rated for VAT purposes. Royal Mail should have paid VAT to HM Revenue & Customs (HMRC) and should have charged VAT to Zipvit.

Even though Zipvit had not actually paid VAT and had simply paid the commercial price for the services, it claimed that it was entitled to recover input VAT on the basis that the price actually paid for Royal Mail's services must be treated as having included a VAT element. At the time Zipvit made its claim, Royal Mail could have claimed the VAT element from Zipvit under its contract with the company, but did not do so before the limitation period expired. HMRC could also have issued assessments to Royal Mail to recover the VAT, but chose not to do so, on the basis that Royal Mail would have a defence that it had a legitimate expectation that it was not required to charge VAT on the services. This time limit has now also expired.

The case is a test case. For Zipvit the tax at stake is around £400,000 plus interest, but it is estimated that between £500 million and £1 billion of tax is stake in respect of other cases.

The Supreme Court decided to refer to the CJEU the question of whether in Zipvit's circumstances there was any VAT which was 'due or paid'. It also referred to the CJEU the question of whether a trader can claim input tax recovery where the tax authority, the supplier and the trader all misinterpret VAT law to treat a supply as exempt instead of taxable if the trader cannot produce a VAT invoice showing that VAT has been paid.

VAT is only deductible as input tax if it is 'due or paid' in respect of supplies to the trader of goods or services by another taxable person.

Zipvit said that the commercial price it paid Royal Mail for the supplies of postal services must be treated as having contained an element of VAT, even though the invoice said that the services were exempt from VAT. Alternatively, Zipvit argued that even if the embedded element of VAT was not 'paid, it should be regarded as being 'due'

HMRC argued that nothing in the EU VAT Directive requires or justifies retrospective re-writing of the commercial arrangements between Royal Mail and Zipvit. Royal Mail did not issue further invoices to demand payment of VAT, cannot be compelled to issue such further invoices, and has not accounted to HMRC for any VAT in respect of the services. HMRC could not take action to compel Royal Mail to account for any VAT in respect of the supply of services. HMRC argued that if Zipvit were to succeed it would gain an unmerited financial windfall at the expense of the taxpayer.

On the invoice issue, HMRC argued that a valid claim for the deduction of input tax cannot be made in the absence of a compliant VAT invoice. Zipvit argued that it is sufficient if alternative satisfactory evidence of the VAT which was paid or is due can be produced. Zipvit contends that it has produced alternative satisfactory evidence of the VAT paid, in the form of payment of the embedded VAT.