Tower Bridge GP Limited v The Commissioners for HMRC

The issue on this appeal is whether a taxable person (in this case Tower Bridge GP Ltd) is entitled to exercise a right to deduct input tax despite the fact that it held (and holds) no valid VAT invoice in respect of the supply in relation to which it claims to make the deduction. It says that it is entitled to make the deduction either as of right; or because HMRC unlawfully exercised their discretion to refuse to allow the deduction to be made. Both the FTT (Judge Jones) and the UT (Fancourt J and Judge Herrington) found against the taxable person. This appeal is brought with the permission of the UT. The UT promulgated its decision on 12 February 2021. It may be found at [2021] UKUT 0030 (TCC), [2021] STC 522. The decision of Judge Jones is at [2019] UKFTT 176 (TCC).

The relevant facts are as follows. Tower Bridge GP Limited (“Tower Bridge”) is the representative member of the Cantor Fitzgerald Group VAT group (“CFG VAT Group”). Cantor Fitzgerald Europe Ltd (“CFE”) was a broker in equities, equity derivatives, foreign exchange markets and contracts for differences and Cantor CO2e Ltd (“CO2e”) provided brokerage, information and consulting services for products related to environmental markets, including selling carbon credits 'over the counter'. Both CFE and CO2e were members of the CFG VAT Group. CO2e arranged and undertook the relevant transactions, whereas CFE executed the transactions, and received and issued the invoices. I refer to CFE and CO2e collectively as “CFE” unless distinguishing between the two is relevant. At all material times, CFE was a taxable person.

In March 2009, CFE began trading in carbon credit transactions that were connected to VAT fraud. The FTT found that CFE neither knew nor should have known that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to VAT fraud from 15 June 2009. This appeal relates only to transactions entered into before that date.

Between 18 May 2009 and 3 June 2009, CFE purchased carbon credits from Stratex Alliance Limited (“Stratex”) in 17 separate transactions. The carbon credits were supplied to CFE and used for the purposes of its taxable business. The carbon credits supplied to CFE were to be used by CFE for the purpose of its own onward (taxable) transactions in carbon credits.

Given the volume and nature of its trades, Stratex was also a “taxable person” for the purposes of Directive 2006/112/EC (the Principal VAT Directive or “PVD”). Accordingly, VAT was due in respect of the supplies by Stratex to CFE of carbon credits.

The Stratex invoices, which were issued to CFE in respect of the 17 transactions, included amounts of VAT totalling £5,605,119.74, which CFE duly paid. Tower Bridge then claimed a deduction in respect of that input VAT in its VAT return for the period 06/09 (April-June 2009).

The Stratex invoices were not valid VAT invoices. They did not show a VAT registration number (“VRN”) for Stratex, nor did they name CFE as the customer. Although Stratex was a taxable person, it transpired that Stratex was not registered for VAT (and therefore could not include a valid VRN on the Stratex invoices) and that it fraudulently defaulted on its obligation to account to HMRC for the sums charged as VAT on the Stratex invoices.

At the time of transacting with Stratex, CFE did not know that Stratex was not registered for VAT or that it was a fraudulent trader.

CFE had its own internal invoicing, tax, legal and credit departments. The FTT found, in the absence of any evidence for why the Stratex invoices were processed and paid without query, that there was no effective checking by CFE of the validity of the invoices nor of the VRN or VAT registration of Stratex.

On 3 June 2009 CFE requested Stratex’s VRN. CFE also sought corrected invoices. Despite assurances being given by Stratex to CFE that it would provide CFE with details of its application for VAT registration, in the event no such documentation was ever received from Stratex and the invoices to CFE were not rectified.

On 2 September 2009 CFE first confirmed to HMRC that it had not been provided with Stratex’s VRN. HMRC Officers visited Stratex on 9 September 2009. They found that its Companies House registered address was the premises of a corporate service provider. A representative of the service provider informed the Officers that it was purely an agent for Stratex, who had come to them from a representative in Russia. Despite HMRC's attempts no contact could be made with Stratex. Thus, by the time that Tower Bridge filed its VAT return and made its claim for deduction, Stratex could not be traced; and the VAT for which it should have accounted could not be recovered.

In a decision dated 6 December 2012 HMRC denied Tower Bridge the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise their discretion to allow recovery of the input tax on the basis that: (i) Stratex was not registered for VAT; (ii) the transactions were connected to fraud; and (iii) CFE failed to conduct reasonable due diligence in relation to the transactions.

HMRC’s decision was varied by a review in a decision dated 12 April 2013 and by an amendment to the review decision on 25 June 2013, although the review upheld the decision to deny input tax relating to the Stratex invoices on the basis that those invoices were invalid.

The European source of legislation about VAT is the Principal VAT Directive.

A “taxable person” is any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity: article 9. Although a taxable person is, in principle, required to be registered, the definition is satisfied even if that taxable person is not registered. The supply of goods for a consideration within the territory of a member state by a taxable person acting as such, is subject to VAT: article 2. The VAT is payable by the taxable person carrying out a taxable supply of goods or services: article 193. Every taxable person who carries out supplies of goods or services in respect of which VAT is deductible must be identified by an individual number: article 214. Where a taxable person makes a taxable supply, he must issue an invoice: article 220.

The recipient of a taxable supply, if he is also a taxable person, is entitled to deduct the amount of VAT he paid in relation to that supply. Thus article 167 provides:

Article 168 (a) provides:

These articles establish the principle. Other articles deal with how the right to deduct is to be exercised. Article 178 relevantly provides:

The articles referred to in article 178 (f) include cases in which the reverse charge procedure applies or where there is an intra-community supply. In those cases it is not a requirement of the PVD that the taxable person must hold an invoice that complies with article 226. He need only comply with national formalities.

Article 179 provides:

Article 180 provides:

Article 182 provides:

Chapter 3 section 2 of the PVD deals with invoices. Article 217 defines what is meant by an invoice; and article 219 provides:

The contents of the invoice are laid down by article 226 which relevantly provides:

Article 228 provides:

The PVD is transposed into domestic law by the Value Added Tax Act 1994 (“VATA”) and regulations made under it. The relevant regulations for the purposes of this appeal are the VAT Regulations 1995 (“VATR”).

Section 24(1)(a) VATA defines “input tax” in relation to a taxable person as:

Section 24(6)(a) VATA provides that regulations may provide for VAT to be treated as input tax:

Section 25(2) VATA provides that a taxable person shall be:

Section 26 VATA relevantly provides as follows:

Regulation 29 VATR provides:

Regulation 13(2) VATR provides that the particulars of the VAT chargeable on a supply of goods must be provided on a document containing the particulars prescribed in Regulation 14(1) VATR. Regulation 14(1) VATR states, in so far as is relevant:

The argument for the CFG VAT Group, presented by Ms Shaw QC, is that the right to deduct under article 168 (a) of the PVD has direct effect. That right is an integral part of the common system of VAT. The substantive conditions that must be met in order for the right to deduct to arise are:

The person claiming the right is a taxable person; and

The goods or services supplied to him are supplied for the purposes of his own taxable transactions and supplied by him to another taxable person.

Those conditions are satisfied on the facts of this case. If the taxable person can demonstrate that the substantive conditions for deduction are met, then the fact that it cannot comply with formal requirements does not detract from the directly enforceable right to deduct. In order to evaluate that argument, it is necessary to examine the case-law both of the CJEU and also of the national courts.

In principle, where the right to deduction arises, the taxable person’s ability to exercise that right is not affected if another supplier in the chain of transactions fails to account for his own VAT, even if that failure is fraudulent: Optigen Ltd v Customs & Excise Commissioners (Joined Cases C-354/03, C-355/03 C-484/03), [2006] Ch 281. But the right to deduct may be refused if the taxable person knew or should have known that by his purchase he was participating in a transaction connected with fraud: Kittel v Belgium (Joined Cases C-439/04, C-440/04), [2008] STC 1537.

Before turning to the case law about the formalities required in order to exercise the right to deduct, it is necessary to refer to the provisions of the Sixth Directive (EC Council Directive 77/388) which was the governing directive considered by most of the early cases. Article 18 (1) (a) provided that in order to exercise the right to deduct the taxable person must hold an invoice drawn up in accordance with article 22 (3). Article 22 (3) (a) required a taxable person to issue an invoice in respect of all supplies. The only part of the directive which addressed the contents of the invoice was article 22 (3) (b) which provided:

All other conditions for the exercise of the right to deduct were left to member states under article 18 (3). Thus EU law at that time was far less prescriptive about the contents of an invoice than the PVD.

In Jorion née Jeunehomme v Belgian State (Joined Cases C-123/87 and C-330/87) the question for the court was whether provisions of Belgian legislation prescribing the contents of the invoice necessary to exercise the right to deduct were compatible with EU law, even though they went beyond the contents prescribed by article 22 of the Sixth Directive. The case did not concern the question whether it was necessary to comply with the requirements about the contents of the invoice laid down by the directive itself. In the course of his opinion Advocate General Slynn said:

He continued:

The Advocate General thus recognised that even if an invoice was incomplete in a material respect, the taxable person might have the opportunity to establish his right to deduct. The court formulated the question before it at [12]:

It went on to say at [14] that in order to be entitled to make the deduction “a taxable person must hold an invoice drawn up in accordance with Article 22 (3) of the Sixth Directive.” Its answer to the question referred at [18] was:

From the answer that the court gave to the question, it seems to me to follow that if a member state did make the exercise of the right to deduct subject to the holding of a compliant invoice, then if the taxable person did not hold such an invoice the exercise of the right to deduction could be refused. Moreover on its way to reaching its conclusion on Belgian law, the court emphasised that the taxable person must hold an invoice that complied with the directive.

In Reisdorf v Finanzamt Köln-West (Case C-85/95), [1997] STC 180 the question was whether the German tax authorities were entitled to refuse to permit a deduction where the taxable person did not present the original invoice but only a copy of it. On the facts found by the national court, the original invoices were available and accessible. It does not appear from the report of the case that any of the information that an invoice was required to contain was missing from the copy. The argument for Mr Reisdorf was that while the existence of an invoice constitutes an important proof in the exercise of a right to deduct, continued possession of it cannot constitute a precondition to the enjoyment of that right, and that a duplicate or copy of the invoice should be regarded as being capable of providing the same evidence. In the course of his opinion Advocate General Fennelly said at [16] that the various provisions of the Sixth Directive governing the exercise of the right to deduct were all expressed in mandatory terms. He continued at [18]:

It is clear from this that what the invoice must contain was not a question considered by the court. At [19], referring to previous case-law he said:

At [21] he discussed the discretion allowed to member states to accept alternative documents other than the original invoice. In that connection he said:

The Advocate General’s opinion is clear: in order to exercise the right to deduct the taxable person had to have an invoice (or alternative documentation) compliant with the Sixth Directive. As we have seen, that only required the invoice to state the price exclusive of tax and the corresponding tax at each rate as well as any exemptions.

The court considered the questions referred together. At [22] it said (in a passage on which Ms Shaw relies):

It is true that the court said that exercise of the right to deduct is “normally” dependent on possession of the invoice. But what the court was considering was whether only the original invoice would do. It was not saying anything about an invoice that was defective in the sense of not containing the particulars required by article 23 (3) (b) of the Sixth Directive.

Albert Collée v Finanzamt Limburg an der Lahn (Case C-146/05), [2008] STC 757 concerned an intra-community supply of cars. Following an investigation, the German tax authorities refused to allow the taxable person to deduct input tax invoiced on a particular transaction on the grounds that the sale was a sham. In the light of that decision, the taxable person amended its accounts so as to show the sale proceeds as exempted intra-Community supplies and recorded the transaction thus in its VAT return. The Sixth Directive required a taxable person to issue an invoice in respect of goods supplied under an intra-community supply, but made no provision about the contents or timing of such an invoice. German VAT regulations required the taxable person to produce supporting documents of any intra-Community supply and that the evidence “must be clear and easily verifiable from the supporting documents produced.” National case-law interpreted that requirement as requiring that accounts must be updated regularly and immediately after the relevant transactions. When the revised return was presented, the tax authorities refused to allow a tax exemption in respect of that supply on the basis that the prescribed records had not been updated regularly and completed immediately after the relevant transaction. It is important to note that this was a requirement of German law; not EU law. In the course of her opinion Advocate General Kokott referred to the principle that intra-Community supplies were exempt from VAT; and pointed out at [20] that the Sixth Directive did not include any specific rules as to the taxable person’s evidence of such a supply. At [30] she made it clear that the case did not concern the interpretation of the directive itself; but the national case law and administrative practice adopted by the German authorities. She went on to say at [39]:

So the only question was whether non-compliance with national formalities could deprive the taxable person of the exemption from VAT.

The court also emphasised at [24] that none of the provisions of the directive related directly to the question of what evidence needed to be supplied by the taxable person. In the course of its judgment the court said at [29]:

This, too, emphasises that what the court was concerned with was a national measure rather than the directive itself. It continued at [31]:

When, therefore, the court gave its ruling that the exemption was available even if the taxable person had failed to comply with “some of the formal requirements”, it was concerned with a national measure only. Moreover the court limited non-compliance to “some” of the formal requirements. Since there were no EU formalities that had to be complied with, this case does not support an argument that EU formalities can simply be disregarded.

The court went on to consider whether the fact that the taxable person concealed the occurrence of the intra-Community supply was relevant to the question referred. As to that, the court said at [35] that the national legal system must allow for corrections where the person issuing the invoice acted in good faith and that he has “wholly eliminated the risk of any loss in tax revenues”. It continued at [36]:

This, in my judgment, is much the same point as that which the Advocate General made in her opinion at [39].

In Ecotrade SpA v Agenzia delle Entrate (Joined Cases C-95/07 and C-96/07), [2008] STC 2626 the taxable person made a mistake about the operation of the reverse charge procedure. It registered the supplies in question as exempt. The net effect of the taxable person’s mistake was nil. The same amount of VAT would have been payable if they had been correctly analysed. Once again, EU law prescribed no relevant formalities that had to be complied with. Following an inspection the Italian tax authorities assessed the transactions to output VAT but refused to allow the taxable person to deduct input VAT on those same transactions. The reason for that was Italian national legislation which precluded the exercise of the right to deduct after two years, while at the same time permitting the tax authorities four years in which to claim underpaid VAT. Once again, therefore, it was national legislation rather than EU legislation that was in issue.

The court first considered whether the directive permitted the introduction of a limitation period for the exercise of the right to deduct; and held that it did. The principle of effectiveness was not infringed merely because the tax authorities had a longer period in which to recover unpaid VAT. At [63] the court said that the principle of fiscal neutrality required the deduction to be made if the substantive requirements were satisfied even if the taxable person had failed to comply “with some of the formal requirements”. It cross-referred to Albert Collée which, as we have seen, was concerned with a national formality. It continued at [64]:

That paragraph opens with the word “Therefore”. The conclusion that the court reached is accordingly based on the premise in the preceding paragraph, namely that national legislation cannot impose additional formal criteria which must be satisfied before the exercise of the right to deduct is permitted. Likewise, the reference to “additional” conditions means additional conditions imposed by national law, which go beyond what EU law positively requires. The same point is made in the paragraph of the case to which the court referred at the end of [64]. Nothing in that case supports the proposition that formalities laid down by EU law itself can be disregarded.

In Polski Trawertyn v Dyrektor Izby Skarbowej w Poznaniu (Case C-280/10), [2012] STC 1085 two individuals who intended to form a partnership bought a quarry intended to be exploited by the partnership. The invoice relating to that purchase was issued to the intending partners. The partnership claimed to deduct the VAT on that purchase as input tax. The Polish tax authorities refused to allow the deduction on the ground that the expenditure had been incurred by the intending partners rather than the partnership who, under national law, were different taxable persons than the partnership. A second invoice for legal fees incurred in setting up the partnership was issued to the partnership, but before it had been registered. The Polish tax authorities refused to allow a deduction of the VAT on that invoice on the ground that at the date of issue, the partnership did not exist and therefore the invoice was issued to a non-existent entity. The essence of the problem was that, under Polish law, the intending partners and the partnership were regarded as different taxable persons.

Advocate General Cruz Villalón reviewed the court’s case-law on the form and content of invoices. He referred to article 222 and, in particular, article 222 (5) which required the invoice to state the full name and address of the taxable person and the customer. He then said that the court had interpreted the requirements “fairly loosely”. He continued at [69]:

I would infer from this that where an invoice does not contain the information required by the directive itself, or contains an error in that information which is incapable of correction, the right to deduct cannot be exercised. The court said:

Reading those paragraphs together, it seems to me that the court was dealing with national legislation imposing formalities additional to those required by the PVD itself. That is what, in context, “some of the formalities” means in paragraph [43] in which the court refers expressly to “additional” conditions. I do not interpret this decision as derogating from the need to comply with conditions laid down by the PVD itself. On the contrary it is implicit in paragraph [42] that member states may make the exercise of the right to deduct dependent on conditions relating to the content of invoices which are expressly laid down by the directive.

At [45] the court noted that the inability of Polski Trawertyn to exercise the right of deduction arose from the fact that at the date of the invoice it was not yet registered. But it went on to say that because the national court found that those who paid the input tax and those who made up Polski Trawertyn “are one and the same person, that inability must be considered to result from a purely formal obligation”. They then agreed with the Advocate General that to deny the right of deduction in that situation would have the result of making the right to deduct ineffective. It was because of those special facts that the right to deduct was exercisable.

Ms Shaw placed some reliance on Bonik EOOD v Direktor (Case C-285/11), [2013] STC 773. But that was a case in which the taxable person had invoices in proper form and the issue was whether the underlying transactions they purported to record had taken place at all. I do not consider that it has any bearing on what we have to decide.

In Petroma Transport SA v Belgium (Case C-271/12), [2013] STC 1466 the Belgian tax authorities denied the exercise of the right of deduction on the ground that the relevant invoices were defective. Petroma provided intra-group services to other companies, employing staff for that purpose. The invoices were defective in that they did not include a break-down of the unit price or the number of hours worked by the staff of the service-providing companies, thereby making it impossible for the tax authority to determine the exact amount of tax collected. Although additional information was subsequently provided, the tax authorities did not regard it as sufficient partly because it was submitted late, and partly because of its informal character. At [21] the court formulated the question as being whether the Sixth Directive precluded national legislation under which the right to deduct VAT might be refused to taxable persons who were recipients of services and were in possession of invoices which were incomplete, in the case where those invoices were then supplemented by the provision of information seeking to prove the occurrence, nature and amount of the transactions invoiced. The court set out the general principles as follows:

These paragraphs emphasise the need to have an invoice which complies with article 23 (3)(b) of the Sixth Directive (the formal requirements of which, as I have noted, were sparse). They do not lend any support to the submission that compliance with formalities laid down by the directive are, in some sense, optional.

At [29] the court noted that the Belgian legislation did impose requirements additional to those in the directive itself; and that it was for the national court to decide whether those additional requirements satisfied the principle set out at [28]. At [31] it pointed out that it was not open to member states to make the exercise of the right to deduct VAT dependent on compliance with conditions relating to the content of invoices which are not expressly laid down by the provisions of the Sixth Directive itself. Again, it is implicit that member states may make the exercise of the right to deduct dependent on conditions relating to the content of invoices which are expressly laid down by the directive itself. The court continued at [34]:

What precluded refusal of the right to deduct was the provision of a corrected invoice before the tax authority had made its decision. Thus the tax authorities were entitled to refuse to allow the deduction to be made when claimed because of a failure to comply with a formal requirement imposed by national law. That case does not, therefore, state that the right to deduct may be exercised on the basis of an invoice with does not satisfy article 222 and which cannot be corrected so as to comply.

Barlis 06 — Investimentos Imobiliários e Turísticos SA v Autoridade Tributária e Aduaneira (Case C-516/14) was another case about an allegedly defective invoice. Legal services had been supplied to the taxable person, but the invoices were said by the Portuguese tax authorities to contain an inadequate break-down and description of them. As paragraph [2] of her opinion Advocate General Kokott said that EU law provides that the invoice must contain “certain minimum” information; and at [22] she said that the mandatory contents of an invoice were laid down “in a binding and exhaustive manner” by Article 226 of the PVD. She identified two questions that needed to be considered: (a) whether the invoices complied with article 222 and (b) the consequences for the right of deduction if the particulars they contained were found to be inadequate. The particulars in question were those in article 226 (6) and (7); namely the nature of the supply and the date of the supply. She described the purpose of the invoice as follows:

On that basis, the inclusion of the supplier’s VRN is an obvious component of the tax authority’s ability to check on whether the supplier has paid VAT. If a person is not registered for VAT, he is far less likely to have paid it. Likewise, the inclusion of the customer’s name is critical, because otherwise there is the possibility that the same invoice may be used in support of a claim to deduct more than once by different taxable persons. She went on to say that the invoice was a type of insurance for the tax authority and said that without an invoice no input deduction can be made. She continued at [35]:

She described these as “mandatory details”. She then went on to consider whether the description of the legal services supplied complied with the requirements of article 226 and said at [71] that it did not. So she proceeded to consider the second of the questions that she had identified. She began by saying:

At [77] she said that Member States were prohibited by EU law from granting the right of deduction if the taxable person did not hold an invoice drawn up in accordance with Article 226; and that this was confirmed by EU case-law. She continued:

This discussion distinguishes between non-compliance with article 226 on the one hand, and non-compliance with other (i.e. national) formalities. Compliance with article 226 is essential. At [85] she said:

She concluded at [87]:

She then went on to consider whether the invoice could be supplemented so as to comply with article 226. She said that in principle it could be; and that it would be proportionate to require the taxable person to obtain a corrected invoice from his supplier. That question does not arise on the facts of this case.

In my judgment the Advocate General’s opinion could not be clearer about the need to comply with the requirements of article 226 of the PVD as a precondition of the exercise of the right to deduct.

In the course of its judgment the court posed the question whether the invoices complied with article 226. It held that they did not, but that it was for the national court to decide whether the provision of additional information could be treated as invoices so as to bring them into compliance. The court then went on to consider the effect of non-compliance. It said (in a passage which I must quote at length, although omitting citations):

It is important to be clear about what the formal conditions were. They were the holding of an invoice drawn up in accordance with article 226. All that the court was saying was that if the information required to be in the invoice could be established by other means, then the taxable person could exercise the right to deduct. As I read this, therefore, all the court was saying was that if the tax authorities can be satisfied that the requirements of article 226 (6) and (7) were met, then the right to deduct could be exercised. For the court to have held that the right to deduct could be exercised on the basis of an invoice that did not comply with article 226 and could not be made to comply would have been a radical and unannounced departure from previous case law.

In Senatex GmbH v Finanzamt Hannover-Nord (Case C-518/14), [2017] STC 205 the taxable person’s VAT return was said by the German tax authorities to be defective, because the underlying invoice did not contain the addressee's tax number or VAT registration number; and did not refer to any other document from which those details could be deduced. The relevant details were subsequently provided. Once corrected the invoice complied with article 226 and, in particular, the requirement of the VRN. The main issue was whether the corrections to the invoice had retrospective effect. That question was governed by national law; and the court had to decide whether that was compatible with EU law. As other Advocates General had done, Advocate General Bot distinguished between the accrual of the right to deduction and the exercise of that right. He said:

He then went on to consider the temporal effect of a correction to an invoice. Although it is noticeable that compliance with article 226 was described as the fulfilment of formal conditions, he did not suggest that the right to deduct could be exercised on the basis of an uncorrected invoice. Later in his opinion he said:

At [46] he said:

In the course of its judgment the court said (omitting citations):

The court noted at [33] that it was common ground that the invoices were properly corrected. Thus the court was not dealing with a case in which the invoices were not and could not be corrected. At [35] the court said:

That statement does not suggest that possession of an invoice in corrected form is immaterial. On the contrary, it is one of two conditions necessary to exercise the right of deduction.

At [41] the court said:

The court’s answer to the question referred was:

Senatex, then, was a case in which the failure to state the VRN on the invoice was ultimately corrected. Moreover, the court’s answer to the question referred does not suggest that the right to deduct could have been exercised absent the correction.

In Geissel v Finanzamt Neuss (Joined Cases C-374/16 and C-375/16) the issue was whether the invoice had correctly specified the address of the supplier. In both cases, although an address was given it was not an address at which the supplier carried out any economic activity. Advocate General Wahl noted at [27] that the material conditions for the deduction of input tax were not in issue. If all that mattered was whether the material (or substantive) conditions had been satisfied in order for the right to deduct to be exercisable it is difficult to see (a) why the German courts would have made the reference in the first place; (b) why the CJEU would have thought it necessary to answer the questions referred; and (c) why neither the Advocate General nor the court gave a very short answer. The very fact that the question was asked and answered in the way that it was is inconsistent with Ms Shaw’s submission.

The Advocate General said:

In the course of its judgment, the court said:

It seems to me to follow from this that if the VAT identification number is missing and cannot be supplied the invoice fails to comply with article 226 in an “essential” respect. If something is essential, I do not see how an invoice which lacks an essential component that cannot be otherwise supplied can be relied on in order to exercise the right to deduct.

Vădan v Agenţia Naţională de Administrare Fiscală (Case C‑664/16) concerned the ability to exercise the right to deduct without any invoice at all. The taxable person proposed to establish his right to deduct by means of an expert’s report. The court held that he could not. Advocate General Tanchev began his opinion by saying:

If Ms Shaw’s submission is right, then the Advocate General must have been wrong. It is also instructive to consider the question that was referred to the court. The first question was this:

If Ms Shaw were correct, the simple answer to that question would have been “yes”. But that is not what the court decided.

The court repeated the distinction between the substantive requirements of the right to deduct, and the formal requirements for exercising it. It repeated that the fundamental principle of the neutrality of VAT requires deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with “some formal conditions”. But it held on the facts that the failure to produce invoices could not be replaced by an expert’s report.

The next EU case to which I must refer is Zipvit Ltd v HMRC (Case C-156/20), [2022] 1 WLR 2637. Royal Mail had supplied services to Zipvit in the mistaken belief that they were exempt supplies, which is what domestic law provided. Consequently the invoices did not specify any VAT as payable. But the CJEU subsequently decided that the UK had not correctly transposed the directive and that in fact the supplies were not exempt; and should have been subject to VAT. The question was whether Zipvit could exercise the right to deduct, on the basis that the price paid for the supplies had to be treated as inclusive of VAT. The Supreme Court referred two questions to the CJEU (a) whether VAT had been due or paid and (b) was an invoice stating the amount of VAT necessary in order to exercise the right to deduct? The reference was made before the UK left the EU and so the consequences of the reference are the same as they would have been before the UK left the EU. Newey LJ explains this in HMRC v Perfect [2022] EWCA Civ 330, [2022] 1 WLR 3180.

The CJEU only found it necessary to answer the first question; but Advocate General Kokott considered both. She issued her opinion on 8 July 2021. She summarised her view as follows:

Although the Advocate General only referred to an invoice stating the amount of VAT passed on, that requirement derives from article 178 which in turn refers to the whole of article 226 as governing the contents of the invoice. It is clear from paragraphs 48 and 49 that possession of a compliant invoice is essential. This is reinforced by what she said at [76]; namely that possession of an invoice is a substantive condition and that the right of deduction “depends upon possession of a corresponding invoice”.

She examined closely the previous case-law of the court. She pointed out at [78] that the formal shortcomings which do not preclude the right of deduction always concern the details of the content of an invoice, never possession of an invoice as such (or the existence of an invoice). At [79] she said:

She continued:

It seems clear from this passage that the Advocate General did not regard the inclusion of the VRN in the invoice itself as one of the essential items of information, provided that its omission could be and is corrected. That is what happened in Senatex where the supplier’s VRN was in fact supplied to the tax authorities. As she said at the end of paragraph [80], the court gave retroactive effect to a corrected invoice. Among the cases she cited in paragraph [80] was Barlis; and her explanation of that case is the same view that I take of what it decided. I do not consider that she could have meant that it was permissible for the VRN never to be supplied, as that would have been contrary to what the court itself had said in Geissel and, indeed, to what she herself had said in Barlis . By contrast, one of the items that was essential was the recipient of the supply, who is expressly mentioned in paragraph [81]. One of the defects in the invoices in the present case is that they failed to name the customer.

The court ruled that Zipvit could not exercise the right to deduct because there was no VAT “due or payable” for the purposes of article 168. It did not, therefore, need to answer the question about the form of the invoice. When the case returned to these shores, the Supreme Court also found it unnecessary to rule on that question: [2022] UKSC 12, [2022] 1 WLR 2670.

On its way to Luxembourg, Zipvit was considered by this court: [2018] EWCA Civ 1515, [2018] 1 WLR 5729. Henderson LJ gave the only reasoned judgment. He considered Barlis and other EU case-law in some detail. At [108] he said:

At [113] he said:

He continued at [114]:

Henderson LJ’s explanation of Barlis is also the view that I take. He concluded at [117]:

Although we are not bound by the decision of this court on the invoice issue in Zipvit (because the Supreme Court decided the case on a different point), I do not consider that there is anything in that judgment that is out of step with EU case-law as it stood at the time of Zipvit. That case law distinguishes between the accrual of the right to deduct, and the right to exercise it. Up to that time the EU case-law seems to me to fall into a number of different groups. The first group concerns requirements of national law which impose formal requirements that go beyond what the PVD (or before it the Sixth Directive) itself requires. In those cases, the taxable person may exercise the right of deduction even if some of those additional national requirements have not been satisfied. The second group concerns cases in which an invoice which does not, initially, comply with article 226, is corrected by evidence subsequently supplied which brings it into conformity. In those cases the taxable person may also exercise the right to deduct. The third group concerns cases to which the reverse charge procedure applies, or which concern intra-community supplies, where there is no EU requirement to hold an invoice complying with article 226. In addition, the case-law holds that some components of the invoice required by the PVD are more important than others. The VRN, with which we are concerned, was described in Geissel as “essential;” as was the name of the customer in Zipvit.

The real question, I think, is whether EU law has moved on, and what the effect of that is.

The VATA and the VATR are “EU-derived domestic legislation” as defined by section 1B (7) of the European Union (Withdrawal) Act 2018. Section 2 of that Act provides that EU-derived domestic legislation, as it has effect in domestic law immediately before 31 December 2020 (“IP completion day”), continues to have effect in domestic law on and after that day. Under section 5 of that Act the principle of supremacy of EU law continues to apply so far as relevant to the interpretation, disapplication or quashing of any enactment or rule of law passed or made before IP completion day.

Section 6 deals with the interpretation of EU-retained law, which includes EU derived domestic legislation. It provides:

Retained EU case law means any principles laid down by, and any decisions of, the European Court, as they have effect in EU law immediately before IP completion day. Against that changed legal landscape I turn to the post-Brexit cases.

In both of the post-Brexit cases to which we were referred, the court gave its decision without an opinion from the Advocate General. Under article 20 of the rules of procedure of the CJEU this course is adopted where, after hearing the Advocate General, the court decides that the case raises no new point of law.

In Ferimet SL v Administracíon General del Estado (Case C-281/20) the invoices were issued in the name of a fictitious supplier, but the taxable person nevertheless claimed the right to deduct. This was another case in which the reverse charge procedure applied, with the consequence that the PVD did not lay down any requirements about the contents of an invoice. The court gave judgment on 11 November 2021. It held that because the taxable person knowingly mentioned a fictitious supplier on the invoices it had failed to satisfy “a material condition governing the right to deduct VAT”. Consequently, the tax authorities were entitled to refuse to permit the deduction. At [28] the court pointed out that in the case of the right to deduct arising under the reverse charge procedure, the taxable person was not required to hold an invoice drawn up in accordance with the formal requirements of the PVD. The court also said:

It went on to say at [43] that it was for the taxable person to prove that its supplier was itself a taxable person; but that that could be apparent from the circumstances. Since the reverse charge procedure did not require the taxable person to hold an invoice that complied with article 226 (see [28] and [35]), I do not consider that that case is directly applicable to a case in which the taxable person is so required. It is consistent with previous cases about the reverse charge procedure, and does not advance Ms Shaw’s argument.

In Kemwater ProChemie sro v Odvolací finanční ředitelství (Case C-154/20) the right to deduct was refused on the ground that the supplier of the services had not been identified. The court gave its decision on 9 December 2021. In Kemwater the court held that the purpose of naming the supplier on the invoice was to enable the tax authorities to check that the supplier was a taxable person. The court said:

What the court did not apparently recognise was that Ferimet was a case about the reverse charge procedure as regards which the PVD does not prescribe the contents of the invoice. The court went on to say:

The court held that the status of the supplier as a taxable person is a “material” condition. I take that to mean the same as what previous cases had referred to as “substantive” conditions. That meant that no right of deduction could be exercised unless that condition was satisfied. But importantly, for present purposes, the court held in terms that the status of the supplier as a taxable person could be inferred with certainty from the factual circumstances, such as the volume and price of goods or services purchased. It went on to say that it was not possible to deny the right of deduction where it clearly followed from the factual circumstances that the supplier necessarily had the status of a taxable person. When the court said that it would be contrary to fiscal neutrality to deny the right of deduction, what it must have been referring to is the exercise of the right of deduction. The court did not say anything about the need to correct invoices which did not comply with article 226. Since the supplier could not be identified, it must also follow that the supplier’s VRN was not available either. In that respect, I consider that despite the fact that the court adopted the procedure under article 20 of its rules of procedure, and must therefore have thought that it was not dealing with a new point of law, Kemwater broke new ground.

It is also noticeable that in Kemwater the court did not refer to Geissel and on one view directly contradicts it. The only case that it cited was Ferimet. But Ferimet did not refer to Geissel either. Moreover, as I have said, Ferimet was a reverse charge procedure case for which the PVD itself laid down no formal requirements. The court in Kemwater did not explain why it was transposing a case dealing with the reverse charge procedure to the wholly different situation which it was considering.

Because judgment in Kemwater was given after 31 December 2020 we are not bound by it, although we may have regard to it. In my judgment it is at odds with the previous jurisprudence of the court; proceeded to a decision without the benefit of an Advocate General’s opinion; does not explain why it applied a case in which no EU formalities were prescribed to one in which they were; and does not deal with the cases which only gave effect to corrected invoices, or where the taxable person ultimately supplied the information that the PVD required the invoice to contain. Although I have had regard to it, I do not consider that we should follow it.

In my judgment, Tower Bridge did not have the ability to exercise its right of deduction as of right.

That leads to the second ground of appeal, namely the argument that HMRC ought to have permitted Tower Bridge to exercise the right of deduction. The primary means by which a taxable person may exercise the right to deduction is by possession of a valid VAT invoice, whose contents are prescribed by regulation 13 of the VATR. But the proviso to regulation 29 states:

It is common ground that the proviso gives discretion to HMRC. Where HMRC exercise a discretion entrusted to them, the role of the FTT is supervisory only: Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747. It is also common ground that where the proviso refers to “the charge to VAT” what it is referring to is the input tax which the taxable person claims to be entitled to deduct. That paved the way for Ms Shaw’s submission that all that HMRC were entitled to require was evidence that the person claiming the right was a taxable person; the goods or services supplied to him were supplied for the purposes of his own taxable transactions and supplied by him to another taxable person; and that the input tax had actually been incurred and paid. There was no other discretion to exercise.

In my judgment, however, there are in fact two exercises of discretion embedded within the proviso. The first is whether to entertain an application to establish the right to deduct otherwise than by a compliant invoice (“where the Commissioners so direct”). The second, if the first discretion is exercised in the taxable person’s favour, is the discretion to specify the documentary evidence that HMRC require in order to prove that the input tax has been incurred (“such other documentary evidence of the charge to VAT as the Commissioners may direct”).

HMRC refused to exercise their discretion to allow recovery of the input tax on the basis that: (i) Stratex was not registered for VAT; (ii) the transactions were connected to fraud; and (iii) CFE failed to conduct reasonable due diligence in relation to the transactions.

As we have seen from the EU case law the court has held that national tax authorities should allow defective invoices to be corrected by the subsequent supply of information which ought to have been in the invoices in the first place but was not. That is the primary purpose of HMRC’s discretion under regulation 29.

As Mr Puzey correctly submitted on behalf of HMRC, possession by the taxable person of a valid VAT invoice is HMRC’s first line of defence against fraud in the system. If the invoice does not contain any VAT number there is the possibility (that transpired in this case) that the transaction was fraudulent. If the customer’s name is missing that raises the possibility that the invoice may be used more than once to make duplicate claims, as Arnold J correctly noted in HMRC v Boyce [2017] UKUT 0177 (TCC). Arnold J also said, again correctly, that HMRC were being asked to make an exception to the general rule that the right to deduct cannot be exercised without a valid VAT invoice and that it is therefore for the taxable person to demonstrate why an exception should be made.

On the facts of this case, if an exception were to be made, there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid but fraudulently did not. As Judge Jones noted in his decision at [320], CFE had failed to carry out “the most basic of checks on Stratex”. In Collée at [36] the court expressly referred to the question whether the failure to provide the evidence could lead to a loss of tax revenues. These are perfectly legitimate matters for HMRC to take into account in deciding whether to exercise the first discretion in the taxable person’s favour.

Nor is this a case in which a defective invoice can be corrected by evidence subsequently supplied. Although it would, perhaps, be possible for the customer name to be supplied, the VRN cannot because it does not exist. The purpose for which Tower Bridge seeks to impugn HMRC’s exercise of discretion is therefore outside the primary purpose of the proviso to regulation 29.

Kittel has nothing to say about this kind of case, as Kittel applies even where the taxable person has a compliant VAT invoice.

In my judgment the attack on HMRC’s exercise of discretion fails.

The question of discretion also came up in Zipvit. Since the exercise of discretion was a matter of national law, it was not among the questions referred to the CJEU; and the Supreme Court did not need to deal with it, since Zipvit’s claim fell at the first fence. Nevertheless, Henderson LJ did deal with it. I have already quoted paragraph [114] of his judgment which sets out part of his reasoning on that issue. It needs to be supplemented by a further extract from paragraph [117] in which he said:

On either of these two bases, the same point applies here. It follows that even if HMRC made errors in reaching its original decision, remitting the question of discretion would inevitably result in the same outcome.

I would dismiss the appeal.

I agree.

I also agree.