TC09666 - [2025] UKFTT 01253 (TC)

An important preliminary issue arose just before and at the hearing, namely as to the nature and scope of HMRC's assessment and so the issues in this appeal.

Mr Levine raised this issue initially just before the hearing as an objection to HMRC adding an additional authority to the bundle (Block-Aid limited v HMRC [2024] UKFTT 00339) some 8 days before the hearing which in his view, indicated HMRC wished to run wider arguments than the validity of the invoices and whether HMRC should have refused to exercise its discretion under Regulation 29(2). During exchanges in the hearing there was revealed a fundamental difference between the parties as to the scope and nature of HMRC’s denial of the input tax in this appeal.

HMRC’s position during the hearing was that HMRC is entitled to deny input tax recovery in this appeal even if the invoices on their face satisfied the conditions in Regulation 14(1). Ms Donovan pointed out that the Appellant had had notice of these arguments as it was clear in the correspondence that HMRC doubted that any supply had taken place and/or believed that the supplies were attributable to an exempt supply of shares by third parties. For example, in their letter of 14 November 2023:

“To date, no tangible documentary evidence has been provided to substantiate the above services. If we cannot be satisfied that a supply has taken place, in accordance with VATA94 section 24(1), the VAT will be denied on these invoices, as no supplies will be deemed to have been made on which input tax is deductible.”

Further, HMRC relied on a decision of this Tribunal in Block-Aid where Judge McGregor said:

“46.

While we agree with the Appellant that this is not a circumstance where a taxpayer is seeking to rely on alternative evidence because they do not have a VAT invoice, we do not agree that this prevents HMRC from arguing that a taxpayer needs to show evidence in addition to an invoice that supports the conclusion that a supply has been made”

Mr Levine objected to this argument principally because the Appellant had no notice that this argument was part of the appeal. Throughout the check, correspondence, assessment and appeal the issue had been whether the VAT invoices were correct and whether HMRC should have exercised its discretion to accept alternative evidence. The Appellant had prepared for the hearing on the basis that HMRC’s decision and the appeal concerned the adequacy of the invoices not wider issues around the purchase of the Property and connected supplies.

We have set out above HMRC’s decision-making process and statement of case in this appeal. Ms Brickell specifically confirmed during the hearing that her decision to refuse part of the input tax claim was an exercise of the discretion afforded to HMRC under Regulation 29(2) and not under any wider powers.

We accept that Ms Brickell conducted a wide-ranging check into the structuring of the purchase of the Property and the associated supplies, invoices and flows of monies. Further, HMRC raised their concerns about issues more fundamental than the adequacy of the invoices with the Appellant during the enquiry and those concerns are set out in the decision letter, review letter and the statement of case. However, it is clear to us that the decision made by Ms Brickell which was confirmed by the internal review and appealed by the Appellant, concerned just two issues, whether the BHNV and Colridge invoices were valid and, if not, whether HMRC was unreasonable in declining to exercise its discretion under Regulation 29(2) to accept alternative evidence.

We reject Ms Brickell’s attempt in the hearing to explain her position by saying that whilst she may not have drafted her decision letter in the right order, she had said in effect that HMRC was entitled to deny the input tax claim even if the relevant invoices were on their face valid. We find her decision letter very clear and, further, at no point after that decision (for example in the review conclusion letter) did HMRC clarify any such allegedly poor drafting.

The fact that HMRC had reflected the findings of its investigation and concerns about wider issues in correspondence with the Appellant is, in our view, irrelevant. HMRC could, if it considered it appropriate, have denied input tax recovery on more general grounds but it did not do so.

Ms Donovan referenced Treer Baubedort- Handel GmbH [2005]STC 525:

“34…In other words, the goods must have been delivered or the services performed and the taxable person must be in possession of the invoice or the document which, under the criteria determined by the Member State in question, may be considered to serve as an invoice.”

We agree, there must have been a supply to the taxpayer and (separately) it must be in possession of a VAT invoice.

We would also distinguish the decision in Block-Aid. That appeal appears to be concerned with wider issues than Regulations 14 and 29. A more representative extract from the decision provides:

“45.

HMRC’s position has been very clear from the outset that the source of the challenge is, or at least includes, the assertion that the supplies reported on the identified invoices were not in fact made to the Appellant.

46.

While we agree with the Appellant that this is not a circumstance where a taxpayer is seeking to rely on alternative evidence because they do not have a VAT invoice, we do not agree that this prevents HMRC from arguing that a taxpayer needs to show evidence in addition to an invoice that supports the conclusion that a supply has been made.

47.

The wording in section 26 of VATA 1994 is very clear that there must be a supply to the trader before an input tax credit can even be contemplated. The dispute is not about the invoice, but centres on an earlier stage in input tax deduction – was there a supply?”

The Tribunal does not set out the nature of the decision being appealed save to say:

“11.

The matter in dispute is whether HMRC were correct in disallowing the input tax.”

However, in our view paragraph 47 makes clear that appeal was concerned not only with the administrative condition in Regulation 29(2) but also with the wider more substantive question as to whether there was a supply. In that context it is not surprising HMRC and the Tribunal on appeal concerned itself with wider issues.

In our view HMRC’s original decision in the current appeal is different in that it is concerned solely with HMRC’s decision that the invoices did not comply with Regulation 14(1) and its refusal to exercise its discretion under Regulation 29(2) to allow alternative evidence. HMRC’s discretion in Regulation 29(2) is the ability to direct that a taxpayer should or is permitted to hold evidence other than VAT invoices. That discretion only applies where the taxpayer does not hold documents “required to be provided under regulation 13”, that is valid VAT invoices complying with Regulation 14(1). Importantly, in our view where a trader does hold Regulation 14(1) compliant VAT invoices HMRC has no discretion under Regulation 29(2) and it cannot be used as a route to deny input tax for other reasons.

Finally, we would also note that were HMRC right and Regulation 29(2) entitled HMRC to challenge input tax recovery more generally it would distort the burden of proof. The Tribunal’s jurisdiction in Regulation 29(2) matters is supervisory. On an appeal the taxpayer must show on a balance of probabilities that HMRC unreasonably refused to accept alternative evidence. Where HMRC is exercising a discretion that higher threshold is appropriate but cannot be the case in a normal substantive appeal on entitlement to input tax.

We therefore reject HMRC’s wider argument.