AC-2023-LON-000068 - [2025] EWHC 2312 (Admin)

The decision notified to the Claimant on 10 May 2023 refusing to accept ECNs 3 and 4 related the history of communications between them and was in terms that highlighted the large number of transactions involved, and the fact that there had been some errors. In particular HMRC made reference to the fact the issue had been ongoing since a new payment system was introduced in about 2015. They stated that ECNs 1 and 2 were dealt with by a different section within HMRC. The Decision Letter referred to published Guidance but only relied upon para 16.8 of Notice 700. It stated that the Claimant had “systematically failed” to obtain an invoice and so HMRC would not consider exercising its discretion. It stated also that the decision-maker would however in any event consider whether it would exercise its discretion, but decided it would not where there was no invoice.

In refusing ECN 3 and 4 the decision stated materially:

“… In both ECNs, Hotelbeds UK is requesting that HMRC apply its discretion under Regulation 29 of The Value Added Tax Regulations 1995 (SI 1995/2518) to allow input tax to be recovered without a valid VAT invoice. This is in relation to circa 43,000 individual transactions (ECN3) and circa 255,000 individual transactions (ECN4).

You have stated that where payment is made by Hotelbeds by bank transfer to suppliers (hotels) that valid VAT invoices are received as the VAT invoice is received prior to the payment being made by Hotelbeds.

Where payment to suppliers is made by Virtual Credit Card (VCC) when the end guest checks in or out of the respective hotel then subsequently either:

(1)No invoice is received by Hotelbeds UK

(2)An invalid VAT invoice is received:

a.

In the name of the Guest

b.

In the name of another Hotelbeds entity (e.g., Hotelbeds Spain)

c.

Made out to Hotelbeds UK but containing supplies received by the end Guest (e.g., food and drink)

d.

Mixture of the above

(3)

A valid VAT invoice is received

This issue has been ongoing since 2015 when Hotelbeds first introduced payment by a similar mechanism to VCC.

There were two Error Correction Notices (ECNs) submitted on 10 June 2019 (ECN1) and 7 April 2020 (ECN2) respectively which were repaid to Hotelbeds group of companies. These ECNs were dealt with by officers outside of Large Business. Both ECNs contained errors and the amounts repaid differed to the original amounts.

In July 2022 and August 2022, HMRC indicated that we would not apply our discretion in relation to ECN3 and would reject it. At this point, Hotelbeds requested that rather than a decision be issued to them that the issue be progressed via Alternative Dispute Resolution (ADR) .

On 28th September 2022 a request for ADR for Hotelbeds UK was submitted. At the ADR meeting on 26 January 2023, HMRC and Hotelbeds were unable to reach an agreement on the matter.

You have raised the issue that ECN3 and ECN4 were made on the same basis as ECN1 and ECN2 which were repaid.

In relation to invalid VAT invoices, HMRC’s published guidance on when and how HMRC will exercise its discretion is available at 16.8 of VAT Notice 700 which I have reproduced here.

…

[The officer then set out 16.8.1 and 16.8.2 of the Guidance section entitled “Invalid Invoice Procedure” from Notice 700.] He continued

“This guidance is clear that where a business has systematically failed to obtain a valid VAT invoice HMRC will not consider exercising its discretion. The first step if a business has received an invalid VAT invoice is to go back to the supplier and request one. If you cannot do this, then you need to evidence why.

Evidence for Input Tax-Legal Position

The default position is that for a taxable person to exercise their right to deduct input tax, they must hold a valid VAT invoice, i.e., one that meets the full legal requirements as set out in regulations 13 and 14 of the Value Added Tax Regulations 1995 (Statutory Instrument 1995/2518). In the absence of a valid VAT invoice, there is no right to deduct input tax.

However, article 182 of the Principal VAT Directive provides that, where a valid VAT invoice is not held, ‘Member States shall determine the conditions and procedures whereby a taxable person may be authorized to make a deduction'. Provision for this is made in UK law under Regulation 29 of the Value Added Tax Regulations 1995. This outlines that the Commissioners of HMRC have the discretion to allow claims that are not supported by the correct evidence, i.e., they can allow the use of alternative evidence to support claims to input tax.

ECN 3 and ECN 4

In the vast majority of transactions, no invoices have been received and when invoices are received by Hotelbeds, some are invalid.

It is not known how many of the invoices now received relating to ECN3 and ECN4 are invalid VAT invoices.

You have stated that when VCC is used to make payment for hotel rooms that Hotelbeds receive very few invoices.

This is clearly a systematic issue with ECN 4 covering invoices not received from 909 separate VAT registrations.

You have referred to HMRC’s VAT Strategy: Input Tax deduction without a valid VAT invoice - Statement of Practice dated March 2007 and in ECN 4 stated that HB UK believes it can continue to provide answers to the questions outlined in Appendix 2 of the Statement of Practice and is therefore entitled to input tax recovery on the basis of alternative evidence covering supplies received between 1 July 2021 and the 30 November 2022.

At paragraph 1 – it states that “This Statement of Practice explains and clarifies HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices.” From the information provided to date, the vast majority of transactions have no invoice at all rather than an invalid one.

When you were notified on the 23rd of March 2020 that ECN1 was to be repaid, the following comments were made by HMRC:

“HMRC have some serious concerns about the process going forward. The ability to use alternative evidence should be a concession to be used in certain circumstances. It should not be available to be used as an ongoing way to claim your input tax. The company should have the correct processes in place to ensure that the invoices are obtained and held.

If you do feel that the company is unable to get this information then please write to our Written Enquiries Team to request any special input tax concessions”

The decision then gives some history of the previously allowed claims. It states with relation to ECN2 (it is not contested that this was stated for the first time to the taxpayer in this letter):

“At this time, the UK was under Covid-19 restrictions and within HMRC there was a pause on compliance work within certain sectors. The Tourism industry was included in this compliance pause and repayments to customers were being prioritised. This explains why the ECN was repaid without any checks at that time.”

The decision then records that HB applied for clearance to use alternative evidence going forward but “this was denied in December 2020 with HMRC choosing not to grant permission”.

The decision then cites caselaw, in particular Tower Bridge GP Ltd v Revenue and Customs Commissioners [supra] in support of the proposition that the primary purpose of HMRC's discretion under reg 29 of the VAT Regulations was to allow defective invoices to be corrected by the subsequent supply of information that ought to have been in the invoices in the first place. This citation appears to be in support of the (unspoken) proposition that recovery other than with an invoice is not a purpose or not a primary purpose of the secondary legislation. Indeed, the decision continues:

“For ECN 3 and ECN4, the primary purpose of regulation 29 does not apply for the vast majority of the transactions as no invoice is held at all rather than a defective one.

My Decision

The guidance in VAT notice 700 is clear that where a business has systematically failed to obtain a valid VAT invoice HMRC will not consider exercising its discretion. However, I have considered whether to exercise discretion and do not think it is appropriate for the majority of the transactions within ECN 3 and ECN 4 i.e., those where no invoice is held.

While the payment mechanism of VCC ensures that suppliers (hotels) are paid promptly, there is still an obligation on the supplier to provide a VAT invoice. The fact that payment by VCC appears to discourage suppliers from doing so does not absolve them of this obligation. There is no apparent reason why Hotelbeds cannot obtain VAT invoices from their suppliers.

This reasoning is confirmed in the First Tier Tribunal (‘the Tribunal’) decision in the case of Everycar Contracts Ltd and Sabrina Hammon t/a SJM Group (UKFTT 405 (TC)). In that decision the Tribunal accepted our argument that:

‘… it is fundamental to HMRC’s proper supervision of VAT that taxable persons are required to issue, and to hold, when claiming input tax deductions, regular VAT invoices … there is no apparent reason why the appellants in this appeal should not be able to obtain regular VAT invoices from dealer-suppliers. There is an obligation on them under regulation 13 of the VAT Regulations 1995 to provide a regular VAT invoice to whichever of the appellants was the purchaser of a car in any particular case.’

The Claimant says that the refusals to allow the deductions in question are unlawful because HMRC failed without good reason to apply their own public Guidance on the subject, alternatively and in any event the Claimant had a legitimate expectation to which the court will give effect that in their circumstances they would be entitled to deduct input tax based upon statements made in HMRC materials namely Appendix 2 of the Guidance contained in the second Policy Guidance, the SOP and/or in the course of dealing in which two earlier ECNs were accepted by HMRC on the basis of what the Claimant says are effectively identical facts.

They say also that HMRC made an irrational decision on the facts given that the Claimant held sufficient proof of the relevant supplies; the decision was inconsistent with the Guidance and the grounds upon which the Claimants were refused are incoherent.

Further, the decision evinces a breach of the EU principle of effectiveness upon which the Claimants may rely for periods before 31 December 2020 by virtue of the transitional provisions in the European Union (Withdrawal) Act 2018 para 39(5) of Schedule 8, read with para 3 of Schedule 1. There is no issue but that, if the EU principles apply, these are the correct dates and legislative framework.

The Claimant observes, correctly, that these paragraphs of VIT31200, consistently with Regulation 29(2) itself, do not prescribe the nature of alternative evidence a taxpayer must provide before HMRC will consider whether it is satisfactory to support deduction. They argue that HMRC’s decision-maker in this case wrongly refused even to consider exercising hisdiscretion to permit repayment unless the alternative evidence the Claimant relied upon was comprised of ‘invalid’ invoices.

They refer to his evidence to the Court explaining the decision he made. He said the following in his statement:

In other words says the Claimant, the decision-maker read the Guidance and the caselaw as telling him that where there was no invoice, HMRC was not required even to consider the alternative evidence proffered.

The decision-maker also stated that there was no apparent reason why the Claimant could not get VAT invoices since they had explained to HMRC their contracts did require the suppliers to render one to them, and there was an example of a new supplier who did do so.

This the Claimant says was a clear failure to follow the guidance contained in VIT31200, and involved a failure to consider whether the alternative evidence the Claimant had provided was adequate to enable a deduction of input tax to be properly made.  If he did consider it, it was not considered properly, in order to see whether it evidenced the charge to tax but rather, contrary to the Guidance in VIT31200, he had only looked to see if the Claimant had pursued the individual suppliers for invoice evidence themselves. In fact they had, and it was not the Claimant’s fault that their suppliers had failed to respond adequately.

The essence of the complaint is that the decision maker here confined himself to the notion that alternative evidence must comprise “invalid invoices” whereas that is not the position under the Guidance nor is it a lawful consideration of the discretion residing in HMRC. Thus they failed to follow VIT31200 and unlawfully fettered the discretion under both VIT31200 and regulation 29(2) by refusing to consider exercising their discretion unless the alternative evidence the Claimant relied upon was of a particular type.   The Claimant relies particularly on the passage that refers to the

“Factors for HMRC staff to consider when exercising discretion where the supply is not of goods specifiedin the Invalid Invoice Statement of Practice”

…

“The factors will vary depending upon the individual circumstances of the taxpayer. Example questions are contained at Appendix 2 of the Statement of Practice and are listed below. These are only examples, they are not absolute and not all questions will be appropriate to all taxpayers. HMRC staff should prepare bespoke questions that suit the individual circumstances of the taxpayer’s business”.

The Claimant says that although headed “Invalid Invoice Statement of Practice: Appendix 2’, the VIT31200’s wording on its face covers a non-invoice situation with “Questions todetermine whether there is a right to deduct in the absence of a valid VAT invoice”. It asks a series of questions each of which the Claimant could answer appropriately.

The Claimant points to wording in the SOP headed “Input Tax deduction without a valid VAT invoice” which by its title suggests no invoice is necessary, and also states, “This Statement of Practice explains and clarifies HMRC's policy in respect of claims for input tax supported by invalid VAT invoices.” But the required documentation section refers to the “documentary evidence” being anything “other than an invoice”. The ‘Decision Flowchart’, (Appendix 1) speaks to the situation where a taxable supply has taken place, but a valid VAT invoice cannot be obtained.

The Claimant points to exchanges within HMRC in the evidence querying whether this wording was to be changed (it was not), and to the fact that HMRC never suggested the SOP did not apply to the Claimant’s case. In so far as it had been applied properly, it would they argue have allowed relief.

On behalf of the Claimant, Mr Singh KC highlighted what he said were material errors in the decision-making. The taxpayer had been criticised as failing to obtain invoices, yet HMRC, responsible for the care and management of VAT, did nothing to enforce the suppliers’ legal obligations to issue invoices. Where an invoice has not been issued within a 30 day time limit HMRC should contact the supplier and warn them that continuing irregularity may result in a civil penalty. That never happened, and he pointed to the evidence showing that one of the officers of HMRC had commented it was quite wrong. He contrasted the enormous amount of resource and time expended by the taxpayer in seeking to get invoices from the hotel - 900 separate VAT registered suppliers were chased in respect of 300,000 individual supplies. Even now years later invoices are being given to them, it was submitted, illustrating how unreasonable HMRC’s position was.

The alternative evidence is satisfactory, he argued. As to “systematically”, he submitted this was being used in the sense of “repeatedly”. There was a contrast between a taxpayer who had made reasonable efforts to comply with the legislation and the taxpayer who had on the other hand systematically failed. A systematic failure did not encompass therefore, the actions of the taxpayer who has reasonably tried to comply with legislation. Somebody who makes no effort to retain or obtain invoices might be described thus. For example, a taxpayer who doesn’t have a system or doesn’t keep any of the invoices might come within it. Alternatively, where a claimant deliberately enters a dubious arrangement such as in the case of Boyce meaning he is not going to receive an invoice by design - that would be a systematic failure.

The Upper Tribunal case of HMRC vJames Edwin Boyce[2017] UKUT 0177 (TCC) upon which HMRC relied in their Decision Letter, was a case where Mr Boyce’s business operated the purchase, supply and export of prestige motorcars- Porsches, Mercedes and Range Rovers. Most were exported by Mr Boyce’s customer, Great Harvest Ltd, to Singapore. The manufacturers of the vehicles and the owners of the dealership franchises would not have approved of Great Harvest purchasing them in the UK for the purposes of export like this. The Tribunal described the solution by Great Harvest as:

“ … to disguise its involvement by Mr Boyce purchasing the vehicles and then selling them on to Great Harvest. In turn, Mr Boyce’s involvement was disguised by individuals purchasing the vehicles from the dealership franchises for him (“theNamed Purchasers”). The managers of the dealerships where the vehicles were purchased (“theDealerships”) were not only well aware of what was happening, but in fact actively sought Mr Boyce out to sell the vehicles to…some of the Named Purchasers were themselves employees or contacts of the Dealerships”.

The Dealerships’ invoices referred to the Named Purchasers, rather than Mr Boyce, as the purchasers of the vehicles. The FTT found they would be extremely unlikely to supply Mr Boyce with a replacement VAT invoice or to credit the Named Purchasers and reissue an invoice to Mr Boyce. Mr Boyce was then assessed to tax by HMRC in the sum of almost £125,000. Some£100,663 represented disallowed repayment of input tax in the absence of satisfactory purchase invoices. HMRC considered Regulation 29 and their discretion, but refused to exercise it in his favour.

The Upper Tribunal (Tax and Chancery Chamber) (Arnold J) held in favour of HMRC that the Tribunal below had been wrong tohave considered that the fact that it was virtually impossible or excessively difficult for Mr Boyce to obtain valid VAT invoices meant that there had been a breach of the principle of effectiveness. This difficulty was not as a result of HMRC’s decision not to accept alternative evidence, but due to the nature of the transactions which Mr Boyce chose to enter into. i.e. a system which was designed not to produce an invoice to him.

Further, there was a real and obvious risk of fraud in that the VAT invoices made out to the Named Purchasers could be used in order to make duplicate claims for the recovery of the VAT shown on them. That risk distinguished this case from one where no VAT invoice had been issued at all. In addition, the alternative evidence required was not just that of a supply taking place, but what ought to have been contained in a valid invoice, if one had been available; as an exception to the general rule about input tax recovery, it was up to Mr Boyce to prove those details were present.

The present case was not on a par with Boyce the Claimant submitted- here there was no system designed not to produce the invoice, and certainly no attempt at any subterfuge. In respect of the present case Mr Singh KC emphasised the amount of money involved - for example with ECN 4 about £6 million (as at the date of the hearing) which was significantly in excess of the claimant’s annual operating profit. He stated the spreadsheets set out the details of every single supply, the name of the supplier, the date of the supply, the VAT amount and so on. Namely, all the key information that would be on an invoice had one been submitted. HMRC made an error in their approach to the spreadsheet materials.

His submission on the Guidance was that there was nothing inconsistent about all of the bits of guidance when looked at together. VIT 31200 catered for exactly the present situation. The reasoning of the Decision Letter was confused but it appeared to be that HMRC decided that the Claimant had systematically failed to obtain invoices. They would not consider exercising their discretion to permit the deduction, unless the alternative evidence relied upon was invalid invoices.

The Claimant’s core argument is that the decision-maker only looked at the alternative evidence to identify hotels and check whether the taxpayer had chased the invoices, so he never actually considered the alternative evidence to see if it supported the charge to tax. This was a misapplication of the policy: he just did not look at the alternative evidence. That is a very powerful reason he submitted for allowing the claim and permitting the deduction. The policy states “HMRC staff will not simply refuse a claim without giving reasonable consideration to such evidence”. And he pointed to the duty to ensure no more tax than was properly due was paid.

He emphasised that from 1 March 2023 there was no issue because the Claimant started operating the TOMS system.

As to the protection of the revenue unusually in this case the reverse position from that typical in the caselaw obtained: HMRC had monies that were properly input tax that had not been repaid when it was clear that output tax had been paid. There was no loss to the public purse.

In the present case there was no perceptible risk that an input tax deduction might be obtained by others and no suggestion that such a risk ever materialised - only a theoretical risk was put forward. That could not materialise here because the end consumer does not obtain their room from the hotel. The Claimant supplies the room to a tour operator, and the individual gets the room from that tour operator - so the payment goes from the individual to the tour operator. The hotel could not charge the individual for the room. The punter would say “I’ve already paid my tour operator why is the hotel charging me?”

As to the Statement of Practice the Claimant’s submission was that this guidance applied to the whole situation and did not differentiate between whether you have an invoice which is invalid or whether you have no invoice. It shouldn’t matter what the document is, the point is whether the conditions for the right to deduct are met. The Claimant referred to emails within HMRC where they indicated that the wording does not represent policy advice and it needs to be changed. They note that wording was not in the event changed.

The first paragraph states “this statement of practice explains and clarifies HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices.…” The taxpayer says that HMRC recognised it had to apply to all kinds of alternative evidence, that the wording needed to be changed and other parts of the guidance make clear it’s not just limited to invalid invoices. For example in paragraph 6 (see above) the phrase “without a valid VAT invoice there is no right to deduct input tax. However, in the absence of such an invoice you may still be able to make claims for input tax, but these claims are subject to HMRC’s discretion. This of course assumes that a taxable supply has taken place.…” assists them.

The Claimant relies on paragraph 17 under the heading “How will HMRC apply their discretion” - the answer to which is that “claimants will need to be able to answer most of the questions at Appendix 2 satisfactorily. In most cases this will be little more than providing alternative evidence to show that the supply of goods or services has been made (this has always been HMRC’s policy).” Particular attention was drawnto paragraph 19 which states as long as the claimant can provide “satisfactory answers to the questions at appendix 2 and to any additional questions may be asked input tax deduction will be permitted”. The Appendix questions were it was said, were satisfactorily answered.

The Claimant understood HMRC’s position to be that it systematically failed to obtain VAT invoices and therefore HMRC does not have to permit the deduction. Emphasis is placed on paragraph 19 and that the questions answered at Appendix 2 meant input tax deduction would be permitted. The language is slightly different for the latter says they will allow deduction, the other document says normally they will.

As to Notice 700 and paragraph 16.8 that is headed “Invalid invoice procedure; 16.8.1 immediately underneath has the heading “What to do if you hold an invalid VAT invoice”.

HMRC say in contrast that the operative policy is found in VAT Notice 700, a document of general application, and it alone is relevant to the decision-maker’s task in this case.

Their essential submission is that the conclusion that the Claimant had “systematically failed to obtain valid VAT invoices” was fatal to their claims, and it was not beyond the range of reasonable decisions open to the decision-maker. The Court should approach the challenge as requiring the taxpayer to demonstrate the decision was in this sense perverse, and further to demonstrate to the Court that the only proper decision that was available to HMRC was to allow the claims under ECNs 3 and 4. There was no good reason the Claimant could not obtain the invoices , and they had “systematically failed” to do so.

In questioning, Mr Singh had agreed that the word “systematically” appeared to be used by HMRC, at least on occasion, as meaning “repeatedly”. He submitted that the guidance relied on by HMRC, even if it were the solely relevant document, which was disputed, contrasted the taxpayer who had made reasonable efforts with the taxpayer who had systematically failed, and that demonstrably, the Claimant fell into the former category. He suggested a taxpayer who received invoices but failed to pass them on would fall into the latter category. A taxpayer who had tried to comply with the legislation could not be said to have “systematically failed”. It was not the Claimant’s failure that meant the suppliers did not send on invoices, and HMRC who had supervisory and coercive power through the imposition of penalties on those who were non-compliant, had not acted.

Mr Singh had also suggested that “systematically” implied there was some failure in the Claimant’s systems- which here there was not. Further, it might mean where a claimant deliberately enters into dubious arrangements where there will deliberately be no invoice. That was not this case. It was not possible to say here what HMRC were isolating as the systematic failure – perhaps it was the payment method by VCC, he ventured. That was the industry standard though it could be Visa, Amex or Mastercard, it operated rather as a payment by mobile does. It was not of the same character as the Boyce case.

Mr Watkinson on behalf of HMRC argued that in those (many) cases where the Claimant held no invoices, there was no apparent reason why it could not obtain them, it had been a commercial decision to do as they had done, and to change the payment system which reduced the chance of them receiving an invoice. This was their choice, and HMRC were justified in not exercising their discretion to permit the Claimant to rely on alternative evidence at all in such circumstances.

The primary submission was that this situation had arisen because the Claimant had chosen to change its payment method for commercial reasons to the VCC which meant they did not automatically receive a valid VAT invoice, which consequence they were aware of. Secondly, where they held invalid invoices, as opposed to no invoices, HMRC would consider exercising their discretion, but he submitted that they required further information, had asked for it, and the Claimant had not satisfactorily provided it.

In answer to my questions of him during submissions as to the meaning of “systematically”, he said it meant a variety of things. He said first it was an ordinary word and did not require a gloss, and Notice 700 was general Guidance and applied to every business so it was “apt to cover a broad spectrum of failures”. He nonetheless agreed with me that it was a precise concept, but said it was apt to cover “a broad range of factual scenarios” meaning different trader situations. It covered “failures that are not one-off”, accepting the antonym might be “individual” or “on -off” or ”infrequent”. He said it also connoted the concept of scale as well as frequency, here there were thousands of instances of no invoice, so that was “systematic”. He also said it imported a reference to some kind of system; it was therefore broad enough to cover the sort of scenario that was in fact a business model of not obtaining invoices – like Boyce, as well as the case, as here, where your experience suggests to you, that you may not get invoices.

He submitted the decision letter should not be “pored over”, nor examined with a fine-toothed comb, accepting it could have been better phrased. It was not, as submitted by HB, a decision that HMRC would not consider the evidence in those cases where there was no invoice held. It was reasonable he submitted for HMRC to say, even in light of the attempts by HB to obtain invoices from suppliers, that they had not made reasonable attempts to comply with the legislation- as required by VATN 700. This was because the business method was known not to produce many or any invoices and so was within the policy reasons for rejection.

Mr Watkinson agreed that a taxpayer was entitled to assume that others would abide by their legal obligations – i.e. that the suppliers would supply an invoice as the law required. However, the Claimant had created an environment that disincentivised the sending of an invoice, and there was “a balance to be struck”. The taxpayer was required to strive to fulfil its obligations to obtain invoices; thus he submitted that a failure to try hard enough would constitute a systemic failure. Such was the case in the present circumstances.

He submitted that the decision-maker had been entitled to say that there was no good reason why the taxpayer had not obtained invoices. The system they adopted discouraged invoices. The policy was to be interpreted as meaning this, and reliance was placed on the Everycar Contracts Ltdcase in the Tribunal as an example of HMRC reasonably holding the view that the taxpayer could have obtained invoices.

In that case, another car dealer matter,the trade was in the purchase and export of “top end” cars, typically Mercedes-Benz and BMW models. It was “not well regarded by the car manufacturers” and the problem arose from the fact that the UK franchised dealers concerned preferred not to issue paperwork – particularly VAT invoices – naming Everycar. They issued paperwork naming unconnected individuals with those individuals’ addresses, although they knew that their sales were in reality being made to Everycar. The company made claims for repayment of input tax. The officer noted that

“ …the company had deliberately for business reasons chosen toadopt a practice whereby the invoices were made out to third parties. The suppliers were by my understanding still in existence and the company could have obtained invoices from them had they chosen to.”

and

“ …if the third party invoices were to be accepted as alternative evidence, there was a risk to the Exchequer of duplicate claims being made to the input tax.”

Her reasoning for refusal was

“If the third party invoices were to be accepted as alternative evidence, there was a risk to the Exchequer of duplicate claims being made to the input tax, both by [Everycar] and by the person to whom the invoice had been addressed. I considered that this risk of enabling fraud to be committed was a valid reason not to apply [HMRC’s] discretion to accept alternative evidence”.

In that case it was held there was no good reason why a credit note could not be issued to the third party and a new invoice issued to the relevant taxpayer, so the officer’s decision was upheld.

Mr Watkinson showed the Court the contract between the taxpayer and the supplier. In fact it set out the contractual requirement upon the supplier to furnish HB with an invoice, although it did not, because of the nature of the system, make payment conditional on an invoice. His case was the contract ought to have contained an exhortation to abide by the obligation to send HB an invoice and that HMRC were entitled to say that there had been a “systematic failure” – in essence, here there were a lot of invoice failures, a lot of money was at stake, and it was the inability of the taxpayer to force an invoice to be sent to them that had caused this. The decision was consistent with the policy in VAT Notice 700 and made under it.

I have come to the clear conclusion that none of the three pieces of written policy in this case was drafted with a “no invoice” situation in mind.

Each of them, including that relied upon by HMRC here, namely 16.8 in VAT Notice 700, is headed or makes reference to “invalid invoices”. There is no reference directly to “the position where no invoice is held” and thus no written policy Guidance that pertains directly to present circumstances. The drafters of these policy documents do not appear to have contemplated particularly the position that the right to input tax might be exercised when a taxpayer held materials other than an invoice. The titles to the documents or the relevant sections make that clear. Those parts which can be construed as applicable to the case of a claim without any invoice are in truth also capable of being applied where an invalid invoice is held as well. The headings and other context suggest that the framework in mind was that of the invalid invoice, not the absence of invoice.

Furthermore, such guidance as there is, even if indirectly perhaps of assistance, is inconsistent, ambiguous and, in my judgement, difficult for a decision-maker to navigate. An element of sympathy must extend to the officer who was tasked with the decision-making in the present case. It may not be accidental that whilst one division in HMRC allowed ECNs 1 and 2, another declined to allow ECNs 3 and 4 which had been made on essentially similar terms. That observation is, however, speculative: the point is, that the available written policies were not of precise utility to those tasked with deciding the ECNs.

HMRC in submission suggested that VAT Notice 700 was the predominating document which applied. In my view, whilst part of the main body of HMRC general Guidance, this document is otherwise no more obviously applicable in the present circumstances than the other two HMRC documents. Mr Watkinson read only the second paragraph, but the whole of the section 16.8 is headed “invalid invoices” and deals with a position where an invalid invoice is held. In order to suggest it intends to incorporate guidance for the current situation, the title to section 16.8 has to be ignored.

The policy documents give no warrant for HMRC declining to consider materials seeking to show that the right to deduct is evidenced by documents other than one called an invoice. While it is the case that to exerciseautomatically the right to deduct, a valid invoice must be held, it is not the case that without an invoice there is no right at all. However, insofar as the officer expressed this is as the law, given his later explanation of the decision, I regard it as possibly a “slip of the pen”. The observation of the Supreme Court in NHS Lothian makes clear that such is the (agreed) position.

In lighting upon the written policy contained in Notice 700 HMRC has misconstrued and/or misapplied its own policy. The decision as currently explained does not suggest a coherent understanding or consistent application of policy. Indeed, as stated, there was in my view no precise written policy that dealt with the approach to take where no invoice was held. The explanation given on behalf of HMRC now, for example, that the likelihood of the suppliers failing to send an invoice was a foundation for holding that HB had failed to make reasonable attempts to comply with the legislation is inconsistent with ECNs 1 and 2 having been granted under policy. The document relied upon fails to explain what is meant by reasonable attempts to comply, particularly since the phrase has here been held to apply to a trader whose contract actually required his supplier to produce invoices to him in terms, and where HMRC took no contemporaneous steps to enforce the suppliers’ obligations under the law to furnish invoices.

The balance of the competing principles – fraud, the right to repayment etc. is differently emphasised in the different policy documents and no coherent connect between the one and the other was suggested to the Court.

The main policy objects of HMRC might, however, with some analysis, be capable of being discerned in these policy materials notwithstanding. Again, it must be said the officer making the decision on these materials was in my judgement placed in a significant difficulty in trying to rationalise three arguably inconsistent – and as I judge it-in truth, inapplicable, pieces of policy Guidance.

Given the absence of directly applicable, specifically drafted, policy, the decision-maker in this situation is required to go back to the scope of the discretion which the taxpayer seeks to invoke, and to judge the request made against the principles of the tax in light of HMRC’s duty to protect the revenue. The starting point is the demands of the law which would guide the exercise of HMRC’s discretion under Regulation 29.

Those requirements appear from the framework materials set out above and were, I accept, in part, reflected in the HMRC decision-making process in this case and may be found in some places in parts of some of the Guidance documents, although not in my view sufficiently clearly expressed. They are, in simple terms, in respect of this case at least, and in no order of priority:

Taking each piece of policy material in turn, it seems to me that there are elements of these relevant policy objectives in each of them.

The strong driver against recovery without a valid invoice is fraud. But here, there was no real risk of fraud. Further, materials of a type existed sufficient to satisfy HMRC that two earlier claims based on similar records could lawfully be paid. The payments were made without caveat as to the nature of these materials provided, or as to the measurable risk of fraud, or perception of the material accuracy of the majority of entries, nor doubts about the bona fides of the parties. In other words the taxpayer was entitled to believe that the policy had been and did apply to it. That it recognised that they took steps to secure invoices, and the volume of evidence had satisfied the checklist of essentials HMRC stated would support recovery. There was a sole indication after payment, that the position going forward posed problems.

In the absence of coherent and helpful guidance it is perhaps unsurprising that the decision-maker went astray. However, HMRC, in seeking to do the best they could, applied some parts of the documents but in my judgement the decision they reached was not in the circumstances of this case sustainable. That is so whether it is expressed as being a misapplication of policy or a misunderstanding of their own policies, or in terms of the factors taken into account.

HMRC submitted that the Guidance meant that if you had done everything it was reasonable to expect of you to get the invoices and the supply had been shown to have taken place then HMRC would consider exercising its discretion in your favour. But if you had “systematically failed” to obtain a valid VAT invoice they could refuse, and in that context “systematically” meant “repeatedly". HMRC’s essential case was the Claimant could get the invoices, they could try harder, and they did not. Therefore HMRC submitted, it was rational to conclude there was “systematic” failure.

In my judgement “systematic” has to mean a threat to the recovery of VAT emerging from a planned system. A systematic failure, without more, cannot be just the repeated failure - that is not what the word means. The usual meaning of systematic involves the concept of planning: this must on a common sense meaning invoke the notion of the choice of an organised plan. The word connotes intention, order and planning – in my judgement it connotes an element of deliberate choice. It may be that was what was intended to be conveyed here - namely this was intended to be read as HMRC’s rejection of the construction of a parallel system that always and necessarily avoided the obtaining of valid invoices – whether as valid documents or invoices at all. However that is not what it says. The threat to the revenue going forward is of paramount importance in this concept - again, Boyce is the example. That was not this case, however. Further, the words used both in the policy documents and in the Decision Letter are in my judgement inadequate properly to convey this notion.

Although not spelt out in policy and not explained, this was a reflection in my judgement of the fear of a parallel system of trading and input tax deduction that was incompatible with the statements of principle to the effect that the invoice is paramount. Inevitably in such a scenario the burden on the Revenue would be heavy. However, as I say this is not spelt out in the decision nor reflected in the policy.

I find the use of the word “systematically” in VAT Notice 700 unhelpful and unexplained. It has a number of possible meanings, even according to Counsel’s submissions. No policy document giving guidance on matters of this importance can afford to have a variety of unexplained meanings that are not immediately clear to the reader. The imprecision of the Guidance - unexplained and indeed, not obvious, is unacceptable and cannot, as it must, guide a trader in the organisation of its business affairs. Furthermore, none of it is actually designed to deal with the position the trader found itself in.

The reference to Tower Bridge is apt to mislead. That case was not about a primary as opposed to a secondary purpose for regulation 29. In any event, albeit the primary purpose may be to deal with circumstances where a document is held, because that may be the norm, it is of no assistance to the construction of the discretion to think of primary and secondary purpose and thereby to disregard, or at best devalue, as on one reading of it the Decision Letter did, a claim by a taxpayer without invoices.

The purpose of the discretion is to recognise, necessarily, that the neutrality of the tax is important. Failure to recover input tax is non-neutral. In the same way as over -recovery of input tax harms the revenue and depletes the public purse, the retention of moneys properly recoverable is equally wrong and unfair. The tension between protection of the revenue and recognition of the neutrality of the tax and therefore the right to deduct is central. In my judgement the decision failed to take the principles of neutrality and the right to deduct properly into account and thereby also erred in law.

In my judgement here, however, and irrespective of the inapplicable policy documents and their misapplication, and the failure properly to consider the principles including of neutrality, a further factor is fatal to HMRC’s decision. By the time of the decision, HMRC knew that the taxpayer had changed its modus operandi. There was no system going forward – there was no proposed parallel, non-invoice based, recovery scheme. The taxpayer had been refused a continuing work around, they had considered the options and told HMRC latterly they were doing so. They had opted for TOMS.

In my judgement there was no serious suggestion of fraud, indeed there never had been, and no serious concerns as to inaccuracy or failure to pay output tax- the acceptance of ECNs 1 and 2 show that. There was latterly an attempt to insert uncertainty in so far as saying there had been mistakes, or that they “could if they wanted to” i.e. “could try harder” with regard to invoices but the real concern here, as submitted, was with the risk of the position going forward. That risk had ceased at the date of the decision.

The Claimant is correct to emphasise that fundamentally there was no meaningful complaint concerning the risk of fraud. There was no complaint about the identity of the supplier, the date of the transaction, the VAT registration of the supplier nor of the intention of the taxpayer to abide by its obligations – that is to say its obligation to hold an invoice. However, and whether that is correct or not, the situation here was fundamentally different. Crucially, as stated, there was no threat to the future system of input tax deduction. Many weeks before the Decision Letter was promulgated, HB indicated that they had changed their systems for the future. The threat to future revenue methods was gone. In those circumstances the decision of 9 May 2023 was irrational.

The context was that the Claimant had been repaid without serious query 2 ECNs based on sets of information very similar to that offered for ECNs 3 and 4. They had been told thereafter, that as to the future there was likely a serious issue, and systems were strengthened, seeking to produce the required invoices. As directed by HMRC, they applied to obtain a ruling from HMRC that they might use an alternative method of input tax recovery evidence going forward, but had failed. And after 28 February 2023 they changed to the Tour Operators’ Margin Scheme paying tax only on the margin, and obviating the need for recovery against invoices.

In my judgement the obstacles concerning documentation and proof placed in the way of recovery of ECNs 3 and 4 were not reasonable. They produced a refusal that was unfair and unreasonable, and unsustainable in public law terms. They are inconsistent with the payment of the earlier ECNs. In light of the payment of ECNs 1 and 2 without serious quibble as to the quality of the evidence or the bona fides of the suppliers and the supply, the Claimant could reasonably expect that evidence of that nature was sufficient to found recovery. One of the grounds relied upon by HMRC when rejecting the two later ECNs was that it was said that from the information provided by Hotelbeds, HMRC cannot be sure that they have collected all the output tax that Hotelbeds are claiming in their ECNs.The officer states (correctly) that the ordinary way for HMRC to check whether VAT claimed as input tax has been accounted for by the supplier is to check the VAT invoice, or check the list of VAT invoices included in a VAT report that is the basis for the VAT return. For transactions where there were no invoices at all HMRC could not do this. He cites (just) one example where there was a discrepancy in the amount said to be due when the supplier reconciled their records. In the context of the information submitted, the carefully collated spreadsheets, the detail, the precision and accuracy of the enormous majority of the many entries, HMRC’s cavil at a tiny fraction that were shown (by the taxpayer themselves) later to be inaccurate and were corrected, is as it was put “grasping at straws” - looking for reasons for refusal, when none was, standing back, and acting reasonably and proportionately, really available. It was never seriously suggested that output tax had routinely not been received by HMRC, nor was it suggested there was fraud of any kind, nor that parties (many internationally known names) did not exist or had not traded as recorded by the taxpayer.

The Claimant argued, given the status of the taxpayer, the suppliers, their bona fides and the plethora of detail of the transactions without invoices, it was wrong for the Revenue not to give effect to the right to deduct and to the principle of neutrality as the policies seemed to provide. The real concern which was the core oral submission of HMRC, was what they called “systematic” that the business failed more often than not to receive invoices. HMRC had put down a marker concerning the future – I deduce (though that deduction is irrelevant to my reasoning), that as indicated, this was really the concern.

It must be right that the Revenue should guard against a parallel system of operation –the Boyce example where the modus operandi could not produce a compliant invoice exemplifies it. In my judgement, this might apply also where what happens is a threat to the proper management of the Revenue going forward. The crunch point would be if the taxpayer, upon whom the obligation to “obtain” an invoice is placed, could not obtain an invoice, he would have to do business in a different manner. The system of VAT requires that respect is given to the centrality of the invoice. However, here this concern did not arise: as stated, before final refusal of ECNs 3 and 4 was made, the Claimant made clear from 1 March 2023 there was no pattern of operation going forward. In these circumstances, aside from HMRC’s misunderstanding and therefore misapplication of policy, the decision to withhold repayment of ECNs 3 and 4 was also unreasonable in the sense that it was outside the band of reasonable decisions open to HMRC for the reasons given.

Nothing said here is intended to cast any doubt on the numerous statements in caselaw as to the importance of the invoice which make clear the centrality still of that main document of trade – the invoice –to the operation of the system. It serves to minimise the risk of fraud and to maximise neutral application of the tax in a manner that is proportionate to the national authorities with the care and management of the tax. In the current situation, however, none of the relevant risks were seriously in play with this taxpayer. Perhaps most importantly, the risk of establishing a parallel non-compliant system had vanished on 1 March 2023 before the final decision was promulgated in May.

Within the evidence is a private exchange within which HMRC worry that the Claimant would not stay with TOMS; and then what would be done to stop that? This was not expressed as part of the public reasoning of the decision, nor as a submission. Rightly so. But the remaining concern about this taxpayer, namely that its commercial operation was unlikely ever to render invoices on a regular basis going forward had in fact disappeared once the TOMS system was adopted, before the decision was promulgated.

This application for judicial review must be allowed. It is a corollary of the reasoning that HMRC should have allowed payment of ECN3 and ECN4. This was the only lawful decision available on the facts of this case. For the relevant dates it may also be expressed as a breach of EU principle of effectiveness.

It is not necessary given my decision in this case to deal with the parallel submission based upon legitimate expectation. It seems to me that the better analysis is that referring to the application of policy, and also to the unreasonableness, in the public law sense, of the final decision in the circumstances of these facts properly understood.