TC09676 - [2025] UKFTT 01278 (TC)

Mr Sykes submits that this conclusion is in breach of the principle of fiscal neutrality. In this context fiscal neutrality means that a trader should be relieved “entirely of the burden of VAT paid or payable in the course of all his economic activities … provided that those activities are themselves subject in principle to VAT” (see Finanzamt Steglitz v Zimmermann (Case C-174/11) [2016] STC 2104 at [47]).

In Finanzamt Offenbach am Main-Land v Faxworld Vorgründungsgesellschaft Peter Hünninghausen und Wolfgang Klein GbR (Case C–137/02); [2005] STC 1192, the advocate general said at [37-38] in relation to the principle of fiscal neutrality that:

“The normal operation of the VAT system requires that input tax on supplies acquired by a business at both preparatory and operational stages be deductible from its output tax … any deviation from that normal operation, and therefore from the principle of neutrality, can in my view be accepted only where there is clear authorisation in the legislation, as interpreted where appropriate by the Court.”

Mr Sykes argues that HMRC’s approach represents a clear departure from the principle of fiscal neutrality as TSI, being a taxable person which only makes taxable supplies, is left in a position where it is bearing the burden of the import VAT.

It is not however the case that the principle of fiscal neutrality means that a taxable person cannot be left bearing the burden of VAT. This is clear from the decisions of the CJEU in DSV and Weindel. In both cases, traders who appear to have only been making taxable supplies were left bearing the burden of import VAT.

The reason for this is that the conditions for the deduction of the import VAT set out in article 168 PVD were not satisfied as there was no direct and immediate link (in the sense explained above) between the import of the goods and the relevant output transactions.

The connection between these two principles is apparent from many of the cases decided by the CJEU, including some of those I have already mentioned (see for example AB SKF at [56-57] and Sveda at [17-18]. This was recognised by the Tribunal in ABP at [49]. The principle of fiscal neutrality and the right to deduct under s 68 PVD go hand in hand. The effect of this in my view is that, if no deduction is permitted by Article 168 PVD, this is not a breach of the principle of fiscal neutrality.

Mr Sykes considers it bizarre that the test for recovery of import VAT is whether the cost of the goods is reflected in the price of supplies made by the taxable person when the cost of the goods may have nothing to do with the transaction of importation or the value of the goods charged to import VAT (for example, the goods may have been purchased many years previously). However, his suggestion that what is relevant is, instead, the costs of importation is, in my view, no less arbitrary.

In the present case, TSI did not pay the costs of shipping the goods to the UK but did pay the costs invoiced by the shipping companies in dealing with the customs formalities. If TSI’s position is correct, would this be sufficient to enable it to deduct the import VAT? Presumably if TSI in Germany had paid all of the costs of the services involved in importing the goods to the UK (with TSI just paying the import VAT itself) no deduction for the import VAT would be available as there are no import costs which have been borne by TSI. It is not apparent why the fact that the importer has (or has not) incurred relatively small costs of import should determine whether import VAT is recoverable.

Mr Sykes suggests that, even if there are no third party costs, there would always be internal costs related to an import of goods (for example, the costs of employees involved in making the necessary arrangements for import). However, this seems to me to be too tenuous a link between the import and the relevant output transactions to constitute the required direct and immediate economic link.

Mr Sykes also gives the example of a taxable person who leases a van or other equipment outside the UK for the purposes of their business and then imports the van into the UK. It makes no sense, he says, that no deduction is available for the import VAT whereas, if the taxable person owned the van and imported it into the UK, a deduction would be available. Whilst I accept that this may be the result, (although I do not express any concluded view on this), the fact that there may be anomalies cannot override the fact that, if Article 168 PVD does not permit a deduction, this is not a breach of the principle of fiscal neutrality.

In the context of fiscal neutrality, Mr Sykes also seeks to draw support from the decision of the CJEU in Véleaclair SA v Ministre du Budget, des Comptes publics et de la Réforme de l’État (Case C-414/10). The Court notes at [28] the requirement for fiscal neutrality and emphasises at [27] that, in principle, the right to deduct input tax cannot be limited. However, the issue in that case was whether the claim for credit for import VAT as input tax could be made before the import VAT had in fact been paid. The issue was therefore only one of timing. There was no dispute as to whether the import VAT could be deducted as input tax in the first place. This decision does not therefore provide any support to TSI’s case.