To Infinity and beyond – the Upper Tribunal confirms that an underlying supply in order to claim input tax and that the principles in Teleos and Kittel are not the same.
In Infinity Distribution Ltd (In Administration) v The Commissioners for Her Majesty’s Revenue & Customs [2019] UKUT 0405 (TCC) the Upper Tribunal (“UT”) has authoritatively dealt with assertions by the taxpayer that (i) input tax can be claimed on an invoice that is formally correct despite there being no underlying supply, (ii) input tax can be claimed on an invoice where there was no taxable supply unless HMRC can prove that the taxpayer knew or should have known that there was no such supply, and (iii) the principles in Teleos and Kittel are the same.
HMRC denied Infinity’s right to deduct input tax on purchases of mobile phones as far back as 2006 on the basis that the invoices on which the tax was claimed were invalid for the purposes of the VAT Regulations 1995 because the phones could not have existed at the time. Infinity claimed that in order to deny the right to deduct input tax HMRC had to prove that Infinity knew that the phones did not exist and HMRC had not pleaded any such knowledge. The First-tier Tribunal agreed with Infinity and struck out HMRC’s case.
On appeal, the Upper Tribunal was categoric in allowing HMRC’s appeal. The UT rejected Infinity’s argument that there could be a right to deduct input tax if there was no supply at all as being light years away from the principles governing the VAT system [35] and made clear that the CJEU’s decisions in SGI and Valeriane SNC v. Ministre de l’Action et des Comptes Publics (“SGI”) and Case C-712/17, EN.SA Srl v. Agenzia delle Entrate “EN.SA” put the matter beyond doubt [39].
The position is now, if there were previously any doubt, clear: without an actual supply there is no right to input tax credit, if an invoice records a transaction that has not actually taken place then it cannot be relied upon to claim input tax credit simply because it satisfies some “formalistic” requirement [43]. Further, there is no authority within the CJEU decisions in Mahageben (supplies of woody acacia) and Stroy Trans for the proposition that even where there is no taxable supply, the taxpayer may deduct input tax unless HMRC can show that the taxpayer knew or should have known that there was no taxable supply.
HMRC also refused to permit Infinity to zero-rate various claimed dispatches of mobile telephones on the grounds that the goods had not been exported and that the conditions for zero-rating in Public Notice 725 had not been met. Infinity applied to strike out HMRC’s case on the basis that the test in Teleos is the same as that in Kittel, and HMRC had to prove that Infinity knew or should have known that the transactions were connected with fraud for the right to zero-rating to be refused [54]. The First-tier Tribunal disagreed with Infinity, as did the UT on appeal. The UT confirmed that the tests in Teleos and Kittel are not the same and that the burden of proof in the zero-rating appeal lay on Infinity throughout [58]. Properly understood, Teleos amounts to a defence for the taxpayer to prove [71].
Jonathan Kinnear QC and Howard Watkinson were instructed by HMRC Solicitors Office. They both continue to represent both HMRC and the taxpayer in leading cases concerning Tax.
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