How to treat input tax: alternative evidence for claiming input tax
The use of discretion
In EC law the right to deduct is given by Article 167 of the Principal VAT Directive. This is quite separate from the ability to exercise that right given by Article 178. In principle you must hold the correct evidence before being able to exercise the right to deduct.
There may be times when the correct evidence is not held. However, there may be alternative evidence to support a claim to input tax. Article 182 of the Principal VAT Directive provides that, where an invoice is not held, “Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction”. In the UK, under regulation 29 of the Value Added Tax Regulations 1995, the Commissioners have discretion to allow claims that are not supported by the correct evidence. See VIT11500 and VIT31000.
Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff will not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. Nevertheless this obligation must be balanced against a duty to protect the public revenue.
Factors for HMRC staff to consider when exercising discretion where the supply is not of goods specified in the Invalid Invoice Statement of Practice
HMRC staff should refer to the VAT input tax deduction without a valid VAT invoice: Revised Statement of Practice.
The factors will vary depending upon the individual circumstances of the taxpayer. Example questions are contained at Appendix 2 of the Statement of Practice and are listed below. These are only examples, they are not absolute and not all questions will be appropriate to all taxpayers. HMRC staff should prepare bespoke questions that suit the individual circumstances of the taxpayer’s business.
Invalid Invoice Statement of Practice: Appendix 2
Questions to determine whether there is a right to deduct in the absence of a valid VAT invoice
- Do you have alternative documentary evidence other than an invoice (for example a supplier statement)?
- Do you have evidence of receipt of a taxable supply on which VAT has been charged?
- Do you have evidence of payment?
- Do you have evidence of how the goods/services have been consumed within your business or evidence about their onward supply?
- How did you know the supplier existed?
- How was your relationship with the supplier established? For example:
- How was contact made?
- Do you know where the supplier operates from (have you been there?)
- How do you contact them?
- How do you know they can supply the goods or services?
- If goods, how do you know they are not stolen?
- How do you return faulty supplies?
- the supply is of goods not specified as subject to widespread fraud and abuse; and
- the taxpayer can provide satisfactory alternative evidence of the supply (questions 1-4); and
- there are no grounds to suspect abuse or fraudulent intent on the part of the claimant
HMRC staff should normally exercise their discretion to allow the taxpayer to deduct the input tax.
Where a taxpayer fails to provide satisfactory alternative evidence of the taxable supply then it will not be authorised to deduct. Where HMRC staff intend to deny a taxpayer its right to deduct, and the supply is not specified, they can proceed without seeking endorsement from VAT Fraud Team (VFT) except in SI cases covered by the SI VAT governance process.
Factors for HMRC staff to consider when exercising discretion where the supply is of goods specified in the Invalid Invoice Statement of Practice
Goods subject to widespread fraud and abuse are listed in Appendix 3 of the Invalid Invoice Statement of Practice. This list differs from the statutory definition used when considering Joint and Several Liability (see Notice 726) Joint and several liability for unpaid VAT.
Invalid Invoice Statement of Practice: Appendix 3
Supplies of goods subject to widespread fraud and abuse
- Computers and any other equipment, including parts, accessories and software, made or adapted for use in connection with computers or computer systems.
- Telephones and any other equipment, including parts and accessories, made or adapted for use in connection with telephones or telecommunications.
- Alcohol - those alcoholic liquors liable to excise duty, which are defined by section 1 of the Alcoholic Liquor Duties Act 1979 or in any regulations made under that Act.
- Oils - all oils that are held out for sale as road fuel
- an invalid VAT invoice is held; and
- the supply is of specified goods
as well as providing alternative evidence of the taxable supply taxpayers also have to show that they took reasonable commercial steps to ensure that their supply and supplier were genuine. HMRC expects taxpayers dealing in specified goods to be able to answer behavioural questions such as (although not limited to) example questions 5 and 6 in Appendix 2 of the Statement of Practice.
Note that these example questions will not necessarily be appropriate in every case. HMRC staff need to ask any and all relevant questions necessary to establish whether the taxpayer took reasonable precautions to check the integrity of its supply. Further examples include what payment arrangements had the taxpayer agreed with its suppliers (see VAT input tax deduction without a valid VAT invoice: Revised Statement of Practice).
Where the taxpayer was advised to carry out VAT number checks on its trading partners, HMRC staff will normally consider whether or not such checks were carried out.
- the taxpayer has provided at least some alternative evidence of the supply; but
- HMRC is not satisfied that the taxpayer took reasonable steps to ensure the integrity of their supply and supplier
then generally the taxpayer will not be authorised to deduct. Before issuing a decision HMRC staff must first seek approval from VFT. Only where an endorsement is given by VFT can such a denial of input tax proceed.
When HMRC staff must make a submission to the VAT Fraud Team
HMRC staff must make a submission to VFT using the template at VATF VAT Fraud Manual VAT 85000 only where the following criteria are met:
- the taxpayer holds an invalid invoice, and
- has received a taxable supply of goods associated with fraud and abuse, and
- HMRC is satisfied the taxpayer holds at least some alternative evidence of the supply, but
- HMRC is not satisfied the taxpayer took reasonable steps to ensure they checked the integrity of their supplier and supply.
Submissions to VFT are not required for other cases involving invalid invoices and specified goods, or any cases involving invalid invoices and non specified goods, except SI cases which are subject to the SI VAT governance process.
Kittel Principle: knew or should have known of connection with fraud
The right to deduct input tax can also be refused where the taxpayer knew or should have known that its transactions were connected with fraudulent evasion of VAT. This is known as the Kittel Principle, and also known as the Knowledge Test. (see VATF VAT Fraud Manual VAT50000).
Officers will need to demonstrate that:
- there was fraudulent evasion of VAT somewhere in the supply chain, or the supply was made via a contra trader;
- the supply was connected with a fraudulent evasion of VAT; and
- the taxpayer knew or should have known of that connection.
In such cases the prior agreement of the VFT is mandatory and a submission in the format set out in VATF VAT Fraud Manual VAT 85000 is required.