Zipvit – Supreme Court considers deduction of input VAT on supplies mistakenly treated as VAT exempt

22 April 2020

In Zipvit Ltd v HMRC [2020] UKSC 15, the Supreme Court has referred a number of questions to the Court of Justice of the European Union (CJEU) regarding the correct interpretation of Article 168 of the Principal VAT Directive, in connection with the question of whether a recipient of postal services may deduct input VAT in relation to those supplies where both parties and HMRC had mistakenly treated the supplies as exempt from VAT.


Zipvit Ltd (Zipvit) carries on the business of supplying vitamins and minerals by mail order. During the period 1 January 2006 to 31 March 2010, Royal Mail supplied Zipvit with a number of business postal services under contracts which had been individually negotiated with Zipvit. These included supplies of Royal Mail’s “multimedia®” service (the services).

The total price payable by Zipvit under the contract for the services was the commercial price plus the VAT element (insofar as VAT was due in respect of the supply). Both Royal Mail and HMRC understood the services to be exempt from VAT. Royal Mail therefore set out no charge for VAT in its invoices and did not account to HMRC for any sum relating to VAT in respect of the supply of the services. HMRC did not expect, or require, Royal Mail to account to them for any such sum.

In R (TNT Post UK Ltd) v HMRC (Case C-357/07), the CJEU held that the postal services exemption in Article 132(1)(a) of the Principal VAT Directive (2006/112/EC) (the Directive), applied only to supplies made by the public postal services acting as such, and did not apply to supplies of services for which the terms had been individually negotiated.

In light of the TNT Post judgment, Zipvit made two claims to HMRC for deduction of input VAT in respect of the services. These claims were calculated on the basis that the prices actually paid for the services must be treated as having included a VAT element. HMRC rejected Zipvit’s claims on the basis that Zipvit had been contractually obliged to pay VAT in relation to the commercial price for the services, but it had not been charged VAT in the relevant invoices and had not paid that VAT element. HMRC upheld their decision following an internal review.

Zipvit appealed against HMRC's review decision to the First-tier Tribunal (FTT).

FTT decision

The appeal was dismissed.

The FTT held that the services were standard rated as a matter of EU law, as the judgment in TNT Post indicated, and that the postal service exemption in national law should be interpreted in the same way, so that the services were properly to be regarded as standard rated as a matter of national law.

The FTT held that:

  • HMRC had no enforceable tax claim against Royal Mail because Royal Mail had not declared in its VAT returns any VAT in respect of its supply of the services, had made no voluntary disclosure of underpaid VAT, had not issued any invoice showing the VAT as due, and HMRC had not assessed Royal Mail as liable to pay any VAT. In those circumstances there was no VAT “due or paid” by Royal Mail in respect of the supply of the services, for the purposes of article 168(a) of the Directive (the due or paid issue).
  • In any event, since Zipvit did not hold valid tax invoices in respect of the supply of the services, showing a charge to VAT, it had no right to claim deduction of such VAT as input tax (the invoice issue).
  • Although HMRC have a discretion under national law to accept alternative evidence of payment of VAT in place of a tax invoice (under regulation 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518)) (regulation 29(2)), which HMRC had omitted to consider in its decisions, on due consideration whether to accept alternative evidence, HMRC would inevitably and rightly have decided in the exercise of its discretion not to accept Zipvit’s claim for a deduction of input VAT in respect of the services. The important point in that regard was that repayment of notional input VAT to Zipvit in respect of the services would constitute an unmerited windfall for Zipvit.

Zipvit appealed to the Upper Tribunal (UT).

UT decision

The appeal was dismissed.

The UT's reasoning on the due or paid issue differed from that of the FTT. 

The UT upheld the FTT's decision on the invoice issue and on the question of the exercise of discretion by HMRC under regulation 29(2).

Zipvit appealed to the Court of Appeal.

Court of Appeal judgment

The appeal was dismissed.

After an extensive review of the case law of the CJEU in relation to the due or paid issue, the Court of Appeal decided that the position was not acte clair.

The Court of Appeal reached the same conclusions as the tribunals below on the invoice issue and the question of the exercise of discretion by HMRC under regulation 29(2). The Court of Appeal considered the position regarding the invoice issue to be acte clair, so that no reference was required to the CJEU.

The Court held that it was unnecessary to make a reference to the CJEU on the due or paid issue, given that Zipvit's claims failed on the invoice issue.

Zipvit appealed to the Supreme Court.

Supreme Court judgment

In the Supreme Court, it was common ground that due or paid meant due or paid by the trader to the supplier, not by the supplier to HMRC.

The Supreme Court decided that neither the due or paid issue, nor the invoice issue, can be regarded as acte clair and that a reference should be made to the CJEU to clarify the position.


Deduction of the input VAT would represent a windfall for Zipvit, as it paid only the VAT-exclusive price for the services, and it would leave HMRC out of pocket, as Royal Mail did not account to HMRC for VAT in respect of the services.

This was a test case in respect of supplies of services by Royal Mail where the same mistake was made and the total value of the claims against HMRC was estimated to be between £500m and £1 billion. With such a large amount at stake, it is not surprising that the Supreme Court decided to make a reference to the CJEU. Although the UK is no longer an EU member state it must still adhere to the jurisdiction of the CJEU under the terms of the Withdrawal Agreement.

A copy of the judgment can be viewed here.

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