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

The Principal VAT Directive (PVD) provides the framework for the EU and domestic law underpinning the right to deduct input tax and the entitlement to exercise that right. It is described by Lewison LJ in Tower Bridge GP Ltd v Revenue and Customs Commissioners [2022] STC 1324. Where emphasis appears it has throughout been added.

“…

The importance of the right to deduct and the neutrality of the tax has been expressed in a number of cases. In particular in Barlis 06 —Investimentos Imobiliários e Turísticos SA v Autoridade Tributária e Aduaneira (Case C-516/14) [2016] BVC 43,a case concerning the sufficiency of detail on invoices and the overall purpose of an invoice. Paragraphs [37] to [39] of the CJEU’s judgment emphasise the importance of these principles:

“37.It should be recalled that, according to settled case-law of the Court, the right of taxable persons to deduct from the VAT which they are liable to pay the VAT due or paid on goods purchased and services received by them as inputs is a fundamental principle of the common system of VAT established by EU legislation (judgment of 13 February 2014, Maks Pen. C-18/13. EU:C:2014:69, paragraph 23 and the case-law cited).

38.The Court has repeatedly held that the right to deduction of VAT provided for in Article 167 et seq. of Directive 2006/112 is an integral part of the VAT scheme and in principle may not be limited. The right is exercisable immediately in respect of all the taxes charged on transactions relating to inputs (see, to that effect, judgment of 13 February 2014, Maks Pen, C-18/13. EU:C:2014:69, paragraph 24 and the case-law cited).

39.The deduction system is intended to relieve the operator entirely of the burden of the VAT due or paid in the course of all his economic activities. The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are in principle themselves subject to VAT, are taxed in a neutral way (judgment of 22 October 2015, PPUH Stehcemp. C-277/14. EU:C:2015:719. paragraph 27 and the case-law cited)”.

The court made reference to the Member States’ powers to penalise non-compliance with formalities consistently in particular with the objectives of preventing evasion and the neutrality of the tax.

InVădan v Agenţia Naţională de Administrare Fiscală—Direcţia Generală de Soluţionare a Contestaţülor (Case C-664/16) [2018] BVC 48,the taxpayer had no invoices at all in support of his claim for input tax on purchases of goods and services used in a construction project.His till receipts were illegible.The Romanian court asked the CJEU whether the taxpayer could exercise the right to deduct tax in reliance on a court-commissioned expert report, in which the expert would assess how much VAT was likely to have been incurred.  The first question the Romanian Court asked was whether the right to deduct could be exercised without invoices – the problem here was that such original material as was available was of such poor quality it could not prove the basic underpinning of the right to deduct.

AG Tanchev said in para [31]:

“ …Articles 167, 168, 178 and 226 of the VAT Directive, taking due account of the principles of VAT neutrality and proportionality, must be interpreted as precluding the exercise of the right of deduction by a taxable person who does not hold any invoices or any other suitable supporting documents attesting to his right to deduct input VAT.”.

At para[80] he said it was logical

“to refuse to deduct input tax where the infringement of formal requirements ‘is so great that it makes it impossible or overly difficult to ascertain whether the substantive conditions for entitlement to a deduction have been met’”.

Not only was there no actual invoice, there was also no other suitable supporting documentation; it was also relevant that there was a “lack of minimal diligence” on the part of the taxpayer in retaining invoices [83], and at [84] that there was:

“nothing in the case file before the Court to suggest that, in the light of a 10-year lapse of time and the lack of any invoices or usable equivalent documents, an expert report could accurately re-record each relevant transaction with respect to which deduction of input tax is claimed.”

 The Court repeated the importance of neutrality to the system of VAT:

“37[The] system is designed to relieve the trader entirely of the burden of the VAT due or paid in the course of all his economic activities. The common system of VAT consequently ensures that all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way (judgment of 9 July 2015, Salomie and Oltean, C-183/14, EU:C:2015:454, paragraph 57 and the case-law cited).

…

“ 42…the strict application of the substantive requirement to produce invoices would conflict with the principles of neutrality and proportionality, inasmuch as it would disproportionately prevent the taxable person from benefiting from fiscal neutrality relating to his transactions.

43 Nevertheless, it is for the taxable person seeking deduction of VAT to establish that he meets the conditions for eligibility (judgment of 15 September 2016, Barlis 06 — Investimentos Imobiliários e Turísticos, C-516/14, EU:C:2016:690, paragraph 46 and the case-law cited).

44 Accordingly, the taxable person is required to provide objective evidence that goods and services were actually provided as inputs by taxable persons for the purposes of his own transactions subject to VAT, in respect of which he has actually paid VAT.”

That evidence

“45 … may include, inter alia, documents held by the suppliers or service providers from whom the taxable person has acquired the goods or services in respect of which he has paid VAT”.

A report could supplement but not replace such evidence. The CJEU concluded at [48] that

“a taxable person who is unable to provide evidence of the amount of input tax he has paid, by producing invoices or any other document, cannot benefit from a right to deduct VAT solely on the basis of an assessment resulting from an expert report commissioned by a national court”

In Zipvit Ltd v HMRC (ECJ) [2022] 1 WLR (Advocate General) a more nuanced view was propounded. This was a case where there were invoices at the relevant time, but they were in respect of an exempt supply, indeed, the invoices did not refer to VAT on the relevant supplies because they were understood at the time, wrongly, by the tax authority and parties, to be exempt. There were other complications including of limitation and recovery. There AG Kokott reflected (at para 50) that

“According to the court’s settled case law, the fundamental principle of VAT neutrality requires the deduction or refund of input VAT if the substantive requirements are satisfied, even if thetaxable person has failed to comply with some of the formal requirements. The only exception should be where non-compliance with such formal requirements has effectively prevented the production of conclusive evidence that the substantive requirements were satisfied”

But in that case she emphasised that the law linked exercise of the right of deduction to holding an invoice and characterised the possession of an invoice as a substantive rather than a formal requirement. She characterised an invoice (at para 81 of her Opinion) as a document that

“ … charges for a supply of goods or services [as] … in fact an invoice within the meaning of article 178(a) of the VAT Directive if it enables both the recipient of the supply and the tax authorities to establish which supplier has passed on to which recipient of the supply which amount in VAT for which transaction, and when it has done so. That means it needs to state the supplier, the recipient of the supply, the goods or services supplied, the price and the VAT, which must be stated separately”

and

“if those five essential items of information are provided, the spirit and purpose of the invoice are fulfilled and the right of deduction ultimately arises.

The gravamen of her Opinion, relevant to the particular facts of that case, was that “The recipient of the supply cannot claim relief from a charge to VAT by means of an invoice showing an exempt supply.” Further, in para 85 under “(d)Interim conclusion”

“… a right of deduction in a given amount requires the recipient of the supply to have held at some point an invoice separately stating the VAT passed on in that amount.”

The exercise of the right to deduct beyond circumstances in which the taxpayer is in possession of a document called an invoice has been more recently described by the Supreme Court in RCC v NHS Lothian Health Board [2022] UKSC 28, [2022] 1 WLR 4888 where Lady Rose commented on the AG Opinions in Vadan and in Zipvit:

“The insistence on the production of the VAT invoice in Advocate General Kokott's opinion [in Zipvit] is tempered by the power conferred on member states to accept alternative evidence; a power that has been exercised by the United Kingdom in section 24(6)(a) of the VATA and the proviso at the end of regulation 29(2)…”

The discretion given to HMRC by Regulation 29

“provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a Claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a) … above, such other documentary evidence of the charge to VAT as the Commissioners may direct.”

(and also in bold type in the extract from Tower Bridge) is the subject of the three pieces of written Guidance from HMRC available to the taxpayer, and upon which the Claimant relies in this case.

With regard to policy, as Laws LJ in R (Nadarajah) v Secretary of State for the Home Department [2005] EWCA Civ 1363 at [68] said:

“Where a public authority has issued a promise or adopted a practice which represents how it proposes to act in a given area, the law will require the promise or practice to be honoured unless there is good reason not to do so. What is the principle behind this proposition? It is not far to seek. It is said to be grounded in fairness, and no doubt in general terms that is so. I would prefer to express it rather more broadly as a requirement of good administration, by which public bodies ought to deal straightforwardly and consistently with the public.”

Thus a person has a right to the determination of his application in accordance with policy. This is well-recognised as being a principle related to the doctrine of legitimate expectation but free-standing. In other words (those in fact of Lord Dyson in R (WL (Congo)) v Secretary of State for the Home Department [2012] 1 AC 245) the executive may adopt any policy, provided that the adopted policy is a lawful exercise of the discretion conferred by the statute, and a decision-maker must follow his policy unless there is a good reason to depart from it.

In common with many cases centring on the application of policy, there is a prior question as to what the policy properly construed actually means. Here there are three pieces of policy documentation- the Claimant relies more heavily on the VIT extract, whereas HMRC refers to VAT Notice 700.

The meaning of policy, it is also well-established, is a question of interpretation and interpretation is a matter of law which the court must therefore decide for itself: R (SK (Zimbabwe)) v Secretary of State for the Home Department (Bail for Immigration Detainees intervening) [2011] 1 WLR 1299. The starting point for meaning is of course the natural and ordinary meaning of the words used, viewed in their particular context and in the light of common sense. A document for public guidance should be seen through the eyes of the reasonable reader who should be assumed to start by taking it at face value. 

These principles guide the determination of this application.