Regulation 29(2)(A) VAT Rules 1995 … The True Ambit of Discretion?
Scandico Ltd (S) dealt in the supply of mobile phones. It wanted iPhones to export to developing markets. Apple would only sell two phones to each customer. So S employed a number of “runners” to visit Apple retail shops and purchase as many iPhones as they could. The employees were given cash to cover the purchases and would hand the phones and the till receipts to the company. S for its part met its PAYE and NIC obligations in respect of all employees. All VAT was accounted for by Apple on its sales. There was no suggestion of fraud or abuse. The phones were sold on by S either to other UK traders or EU traders in other Member States. S sought to deduct the input VAT on its purchases. However the till receipts produced by S were not valid VAT invoices since they did not include the customer’s name and VAT number.
HMRC denied S its right to deduct its input tax. HMRC concluded that on all the material produced by S, it was not satisfied that S had received the taxable supplies described in the till receipts and therefore that S had not incurred the “right to deduct in the first place“. S appealed to the FTT. The Tribunal was invited to decide:
(i) Was there a taxable supply to S (i.e. did the right to deduct arise in the first place); and
(ii) If it did was the officer’s exercise of her discretion unreasonable (albeit that HMRC’s decision was not expressed to be in the exercise of its discretion pursuant to Regulation 29 of the Value Added Tax Regulations 1995 (1995 Regs).
It was common ground that on the first issue the FTT’s jurisdiction was full merits whilst when considering the exercise of any discretion, it was merely supervisory. The Tribunal found that there was a taxable supply to S, but that on balance the exercise of the officer’s discretion was not unreasonable.
S appealed to the UT. The UT determined that (para 39) what the case officer decided was that, in the absence of VAT invoices from Apple to Scandico, there was not enough information provided by Scandico for HMRC to decide whether there has been a taxable supply or not. HMRC had therefore exercised the discretion conferred on it by regulation 29(2)(a) of the 1995 Regs by “declining to direct that the alternative evidence that Scandico provided should be treated as sufficient evidence of the supply of the iPhones to Scandico”. Furthermore (para 40) the UT “firmly disapproved” of the two stage approach which the parties had encouraged the FTT to adopt and which had been adopted in similar cases. Since the decision of HMRC to deny S its right to deduct was an exercise of discretion the FTT had been correct in its final determination and there were no grounds for the UT to intervene. It made no ruling as to whether there had been a taxable supply and did not consider the FTT’s decision that there had been!
The decision of the UT has worrying and significant consequences for taxpayers and those advising taxpayers who seek to deduct input tax on purchases made in the course of trade. The denial decision of HMRC did not involve the exercise of discretion. It was not expressed in such terms. It was a denial of the right to deduct which is fundamental and integral to the common system of VAT. It arises immediately and cannot be denied (save in circumstances of abuse (Halifax) or fraud (Kittel). Whether or not the right arises in the first place is a matter of substance to be determined upon consideration of all facts and circumstances (Bonik see below). As was conceded by HMRC before the Tribunal in this case a taxpayer’s appeal pursuant to s83(3) VATA against the denial of the right to deduct, was (or was thought to be) a full merits appeal. Why the issue of discretion was argued before the FTT is not known. It was not relevant. However it resulted in the somewhat startling decision of the Tribunal that whilst it was satisfied on all the evidence that the taxable supplies had been made, and S’s right had arisen, HMRC’s exercise of its discretion (to say that it didn’t) was not unreasonable!
What the UT has decided in Scandico is that the denial of the right to deduct falls within the ambit of the exercise of the discretion given to HMRC under Reg 29(2)(a), thereby restricting the Tribunal’s appellate jurisdiction to merely supervisory. As a consequence any officer of HMRC has the power to decide whether a right to deduct arises. If he or she decides (as in S’s case) that it doesn’t all the Tribunal can do on appeal is consider whether or not that decision was unreasonable. This places the decisions as to fundamental rights within the discretion of the officer of HMRC.
It is argued that such a decision is fundamentally wrong both in domestic and EU law.
There is a fundamental distinction between the right to deduct input tax and the exercise of that right. This is evident from consideration of the Principal VAT Directive (PVD) and was further emphasised by the CJEU in the case of Idexx (C-590/13 paras 41/42). The right to deduct is derived from Articles 167 & 168 of the PVD. By contrast the Rules governing the exercise of the right to deduct are to be found in Articles 178 & 180. Art 178 provides the conditions which the taxable person must meet “in order to exercise the right of deduction“. But if they cannot be met, Art 180 provides that:
“Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179″
It is Art 180 which gives the discretion to the Member State to permit a taxable person to exercise its right to deduct input VAT when it is not otherwise able to meet the conditions imposed by that State, e.g. it has no valid VAT invoice.
The Art 180 discretion (as to the exercise of the right to deduct) is found in domestic law in Reg 29(2)(a) of the 1995 Regs. That provides that at the time of claiming deduction of input tax in respect of a supply from another taxable person, a person shall hold the document required under Reg 13 (i.e. an invoice):
“provided that where the commissioners so direct ….a claimant shall hold or provide such other evidence of the charge to VAT as the commissioners may direct”.
Regulations therefore enable HMRC in cases where the taxable person cannot produce a valid VAT invoice on the production of “such evidence as they direct” to allow deduction. This discretion does not extend to the determination of whether the right arises which is “for the national court upon consideration of all facts and circumstances” ( Case C-285/11 Bonik (2013) STC 773 paras 29-31). It must follow, and has always been accepted, that any appeal against a substantive decision of HMRC (to deny a right fundamental to the common system of VAT) must be a full merits appeal and not merely supervisory. However, the UT in S has now determined that whether or not the right to deduct arises is but one part of HMRC’s exercise of its discretion pursuant to Reg 29(2)(a) as to whether or not, on the evidence produced, to permit a taxable person to exercise its right to deduct. It has extended the ambit of the discretion derived from Art 180 of the PVD, from the exercise of the right to the existence and origin of the right itself and in so doing has deprived the taxable person of its meaningful right of appeal.
An application for permission to appeal awaits determination.