Can alternative evidence be used to recover VAT?

Who this will interest: UK taxpayers looking to claim VAT credits on transactions where the full paperwork is lacking

Key point(s): HMRC are obliged to consider alternative evidence where VAT invoices are lacking, not just where they are incomplete

Essentia’s take: A welcome application of common sense and applying the intent of legislators in the face of an HMRC attempt to have the letter of law defeat the spirit of the law.

Action points: review historic instances input tax being unclaimed in the absence of fiull VAT invoices to see if alternative evidence claims may be viable

The Case In Detail

UK VAT recovery require a valid VAT invoice from the supplier in order to recover the input VAT on the purchase. The rules (Regulation 29 of the VAT Regulations 1995) state that HMRC can accept alternative evidence, however this will be at HMRC’s discretion.

A recent case (Hotelbeds UK Limited vs HMRC) dealt with how HMRC used its discretion to allow alternative evidence and whether this was in line with Regulation 29. The case was won by the tax payer.

Background

Hotelbeds UK Limited (Hotelbeds) is a UK established and VAT registered business that bought and resold accommodation to business customers.

Prior to 1 March 2023 the business would acquire accommodation mainly from hotels which would charge VAT. Hotelbeds would then sell the accommodation to other business customers (many being tour operators) and charge VAT.

From 1 March 2023 Hotelbeds applied the Tour Operators Margin Scheme and therefore no longer recovered any VAT.

The case at hand deals with the period before 1 January 2023 when Hotelbeads recovered VAT on the purchase of accommodation services.

In order to recover, Hotelbeads had to have a VAT a valid VAT invoice. Unfortunately this was not the case in all instances as sometimes hotels would not raise an invoice, even though this is mandatory according to UK VAT rules.

The business had created internal procedures to follow up with hotels that had not provided invoices. According to the business 900 separate VAT registered suppliers were chased in respect of 300,000 individual supplies.

Alternative evidence such as payment receipts were available, along with detailed records of the purchases, suppliers, amount paid etc.

Hotelbeds submitted 4 Error Correction Notices (ECNs), requesting that HMRC accept VAT recovery of the input VAT via alternative evidence in those cases where no invoice had been issued by the supplier.

HMRC accepted and paid the first two ECNs but expressed serious concerns around the process of obtaining VAT invoices. The following two ECNs were rejected by HMRC stating the business had systematically failed to obtain invoices.

Court’s ruling

The High Court ruled that HMRC should have allowed payment of the input VAT based on the alternative evidence provided by Hotelbeds. It argued against HMRC’s view that discretion cannot be invoked because the available guidance only applies to cases where an invoice is incomplete. The Court said that HMRC was required to go back to the scope of the discretion which the taxpayer invoked and judge the request made against the principles of the tax in light of HMRC’s duty to protect the revenue.

In other words, in the absence of explicit guidance on this particular issue, HMRC should have gone back to the principles laid down in the relevant legislation and see if the alternative evidence was acceptable in light of its duty to protect the revenue.

The Court also observed that there was no serious indication of fraud, no perceptible risk that an input tax deduction might be obtained by others, no suggestion that such a risk ever materialised and HMRC had monies that were properly input tax which was not repaid when it was clear that output tax had been charged.

In light of the above the Court stated the refunds resulting from the third and fourth ECN should have been granted.

Takeaway

The main points of interest from this case:

• VAT recovery might be possible, even in the absence of a VAT invoice. However, for this to be the case alternative evidence should be available and it must be clear that there is no serious indication of fraud.’
• HMRC must also follow the principles laid down in the law when it comes to alternative evidence, mostly focused on its duty to protect the revenue.

The case might be relevant to businesses that have issues recovering VAT due to the absence of invoices from suppliers.

If you would like to discuss the case or have any other cases please reach out to us.