The CJEU’s judgment in Case C-156/20 Zipvit v HMRC clarifies that, for the purposes of Article 168(a) of the Principal VAT Directive, VAT is neither “due” nor “paid” (and, therefore, no input tax is recoverable) where the recipient of the supply, the supplier and the national tax authority had treated a supply which was actually taxable as exempt and both the supplier’s contractual right to charge an amount in respect of VAT in addition to the agreed price and the tax authority’s right to recover the relevant output tax from the supplier had become time-barred.

Zipvit ran a mail order business for vitamins and supplements, purchasing the necessary postal services from Royal Mail. Zipvit, Royal Mail and HMRC had treated these services exempt, but following another CJEU decision, it turned out that they were, in fact, taxable. The contract between Royal Mail and Zipvit allowed Royal Mail to on-charge any VAT in such a case, but Royal Mail did not make use of this right as HMRC had not required Royal Mail to account for the relevant output tax, and both claims had become time-barred. Zipvit nonetheless sought to recover the input tax which it argued should be regarded as included in the contractual price by virtue of the services being taxable.

Once the case had worked its way through various instances to reach the Supreme Court, the latter requested a preliminary ruling from the CJEU, asking broadly whether, in these circumstances, VAT could be said to be either “due” or “paid” for the purposes of Article 168(a). The questions referred also covered the right to input tax recovery in the absence of a valid VAT invoice and the relevance of circumstances such as the existence of a legitimate expectations defence to a claim by HMRC against Royal Mail.

Departing from the AG’s opinion (which suggested broadly that the case should be dealt with on the basis that input tax recovery was barred by the absence of a valid VAT invoice), the CJEU’s decision centres on the question of whether VAT was either “due” or “paid” within the meaning of Article 168(a). Given that the contract between Zipvit and Royal Mail gave the latter the right to on-charge any VAT in addition to the agreed price, the price paid by Zipvit was exclusive of VAT – “VAT cannot be regarded as being included in the price paid by the recipient of the services” – and therefore, no VAT was “paid” for the purposes of Article 168(a). Similarly, VAT could not be regarded as “due” in the absence of an enforceable claim against Zipvit to pay the relevant amount. These conclusions represent a further departure from the AG’s opinion – in its consideration of the “due” or “paid” question, the AG suggested that Article 168(a) should be read as referring to the relevant output tax, i.e. the amount of VAT (if any) that is due from, or paid by, the supplier, Royal Mail in this case. The CJEU’s judgment, on the other hand, seems to suggest that it should be read as referring to the amount in respect of VAT due from, or paid by, the recipient of the supply, Zipvit in this case.

So, it seems that the contractual framework between recipient and supplier should be regarded as key in determining the question whether any VAT was “due” or “paid” so as to result in a right to recover input tax. This would also suggest that the answer in respect of the “due” or “paid” question could be different in an equivalent case, if the contract did not allow the supplier to on-charge any VAT that may become due (although an attempt to recover input tax could still be scuppered by the absence of an invoice stating the VAT separately – and a further reference may be required to determine this point as the CJEU left it open here).