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

The SOP Policy Guidance document is headed “VAT Strategy: Input Tax deduction without a valid VAT invoice Statement of Practice”. It provides by its introductory paragraphs:

“1.

This Statement of Practice explains and clarifies HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices. It also explains why amendments were made to section 24(6)(a) and paragraph 4(1) of Schedule 11 to the Value Added Tax Act 1994 (VATA), and regulation 29(2) of the Value Added Tax Regulations 1995 to introduce new measures. These changes were effective from 16 April 2003 and apply to supplies made on or after this date. The statement of practice was first issued in July 2003 and has now been revised to provide clearer guidance and the updated legal position. This guidance does not apply to situations where HMRC may deny recovery of input tax for other reasons such as “abuse” of the right to deduct.

Why were changes needed?

2.

These changes were made to address the increasing threat to VAT receipts by the use of invalid VAT invoices and are part of the Government's strategy to address fraud, avoidance and non-compliance in the VAT system. They are a proportionate and necessary response to a systematic and widespread attack on the VAT system, where the use of invalid VAT invoices is becoming an increasing pressure on revenue receipts, particularly in those business sectors involved in the supply of the goods listed at Appendix 3. In addition to the revenue loss, this has led to distortion of competition.

3.

For the vast majority of business there will be no change, and for businesses trading within the targeted sectors the measure will only impact if you have an invalid invoice. If you are a VAT registered business, and you have been issued with an invoice that is invalid, you should be able to return to your supplier and ask them for a valid VAT invoice that complies with the legislation. If for some reason you cannot, this Statement of Practice sets out whether or not you may be entitled to input tax recovery. In most cases, provided businesses continue to undertake normal commercial checks to ensure their supplier and the supplies they receive are 'bona fide' prior todoing any trade, it is likely they will be able to satisfy HMRC that the input tax is deductible.”.

The document then sets out the basics of the right to deduct and continues:

“6.

If you are a taxable person, in order to exercise your basic right to deduct input tax, you must hold a valid VAT invoice. 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. Where HMRC question the fact that an underlying supply has taken place, these provisions do not apply.”

[Emphasis in original]

An explanation of why the changes referred to in paras 2 and 3 were made appears at para 7, namely the expansion of the category of evidence acceptable to support deduction without a valid VAT invoice to include non-documentary evidence. Paras 8 to 10 explain what a valid invoice contains (name of supplier, VAT number etc etc), and what an invalid invoice is. The Guidance then goes on to a heading “Invalid Invoice and HMRC’s Discretion” and paragraphs that are unnumbered on the policy guidance document but are likely intended as numbers 13 and 14 state:

“A proper exercise of HMRC’s discretion can only be undertaken when there is sufficient evidence to satisfy the Commissioners that a supply has taken place.

Where a supply has taken place, but the invoice to support this is invalid, the Commissioners may exercise their discretion and allow a claim for input tax credit.”

A further unnumbered part next deals with certain “supplies/transactions listed at Appendix 3”. Appendix 3 is headed “Supplies of goods subject to widespread fraud and abuse”. It refers to telephones and computers and other goods and is of no relevance here. The document labelled Appendix 1 is a decision flow chart which indicates a series of questions. After the box “DO YOU HOLD A VALID VAT INVOICE”, the answer “YES” leads to a box saying “YOU HAVE A RIGHT TO DEDUCT INPUT TAX”. The answer “NO”, on the basis it is not a case of goods subject to widespread fraud, leads to another question box “CAN YOU SATISFACTORILY ANSWER MOST OF THE QUESTIONS AT APPENDIX 2” which, where a positive answer is given, leads to “WHILE YOU HAVE NO BASIC RIGHT TO DEDUCT, THE COMMISSIONERS WILL PERMIT INPUT TAX DEDUCTION”. The capitals are in the original.

The questions at Appendix 2 appear as follows:

“Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice

1 . Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?

The document continues:

“How will HMRC apply their discretion?

17.

For supplies of goods not listed at Appendix 3, 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 thatthe supply of goods or services has been made (this has always been HMRC’s policy).

18.

For supplies of goods listed at Appendix 3, claimants will be expected to be able to answer questions relating to the supply in question including all or nearly all of the questions at Appendix 2. In addition, they are likely to be asked further questions by HMRC in order to test whether they took reasonable care in respect of transactions to ensure that their supplier and the supply were 'bona fide'.

19.

As long as the claimant can provide satisfactory answers to the questions at Appendix 2 and to any additional questions that may be asked, input tax deduction will be permitted.

20.

Decisions on when to disallow VAT claims will only be made after an independent central review of the case has been carried out.”

The passages in bold are those upon which the Claimant particularly relies. Further (presently irrelevant) details follow on the availability of a challenge to a decision made under this SOP.

It is to be noted that by its title this policy guidance document at first appears to apply to any claim made where a valid invoice is not held- whether because what is held is an invalid invoice, or because what is held is not an invoice at all, however, by the first paragraph it states it is only the “policy in respect of claims for input tax supported by invalid VAT invoices”. The phrase “in the absence of a valid invoice” is of course broad enough to cover both circumstances.

Similarly, in para 6, the document states that in order to exercise the right to deduct you must hold a valid VAT invoice. Immediately thereafter it states that without a valid invoice there is no right to deduct. Neither of these statements is strictly accurate, of course. In fact, as the caselaw above suggests, and importantly, as is not disputed in this case, in order to exercise automatically a right to deduct, a valid invoice must be held. The burden of authority shows that the right to deduct exists when the substantive conditions for deduction have arisen, it may be given effect to either automatically, when a valid invoice is held, or as a matter of discretion in other circumstances. The position is made clear later on in para 16 by reference to the case of invalid invoices.

The reasoning for the legislative amendment to which reference is made is explained as the

“threat to VAT receipts by the use of invalid VAT invoices … [which] are part of the Government's strategy to address fraud, avoidance and non-compliance in the VAT system.”