An Apple a day didn’t keep HMRC away

Stack of smart phones with cracked and damaged LCD screens
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The taxpayer did not have sufficient evidence to claim input tax on iPhones purchased from Apple stores. Neil Warren analyses this unusual case decided at the upper tribunal (UT).

Business model

Scandico Ltd (UKUT[2017]0467) used employees described as ‘runners’ to buy Apple iPhones in a range of UK stores. These purchases were capped at two phones per store because Apple did not want the phones to be purchased by businesses and exported to countries where the model in question was not on general sale. But this is exactly what the taxpayer did, although it also made some sales in the UK.

Scandico claimed input tax on “till receipts” issued by the stores. This claim was then disallowed by HMRC because the receipts were less detailed tax invoices, and the value of the goods exceeded the monetary limit of £250 for such documents (VAT Notice 700, para 16.8.1). Input tax of £292,078 was disallowed on the company’s January 2011 return and £297,874 on the February return one month later.

Evidence for input tax

It was accepted by both the FTT and UT that the iPhones had been sold to the taxpayer (rather than to the ‘runners’ who then sold them to the taxpayer), and there had been onward supplies of the phones to UK and non-UK customers. So the input tax issue was all about whether HMRC had “exercised their discretion in a defensible manner” when it came to accepting alternative input tax evidence in the absence of a proper tax invoice.

HMRC maintained that there was no proper audit trail to support claims for input tax in accordance with 1995 VAT Regulations, SI1995/2018, Reg. 29(2).

For further analysis about alternative input tax evidence which is acceptable where a VAT invoice can’t be produced see my article ‘Record the right information’, which is part of a three part series on input tax.

The decision

Both the FTT and UT agreed that there were some odd arrangements in the business model of the company, particularly how the phones went from the Apple stores to the final customers. There was a “lack of documentary evidence supporting some of the stages of the arrangement” and “the case officer was certainly entitled to be extremely cautious.”

The UT solely focused on whether the evidence available to the HMRC case officer was sufficient to support the input tax deductions made by the taxpayer. The FTT had supported HMRC in dismissing the taxpayer’s appeal and the UT confirmed this decision was correct.


Scandico’s business model was based on Apple not knowing the final destination of the iPhones, hence it was always going to be impossible to get proper tax invoices to support claims for input tax.

The UT’s final comment was that the case officer “was not setting an impossibly high standard for Scandico to meet in order to claim the deduction.”

It was also noted that the fact Apple had accounted for output tax on these sales was not a relevant factor in the decision-making process. The taxpayer had to meet the documentary conditions for claiming input tax, ie hold proper tax invoices, or in the absence of such documents, provide alternative evidence to satisfy HMRC in accordance with SI1995/2018, Reg 29(2). This alternative evidence was not sufficient to justify a claim.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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15th Dec 2017 11:23

Wierd this one because VAT is not supposed to be a tax on business. Clearly in this case it is.
Everyone accepts that the company paid for the phones which quite obviously included vat as Apple had paid it over.
I can only think that "carousel" was in their minds when this decision was made or does Apple have that much influence, as the end user was not up to Apples liking.

Thanks (3)
15th Dec 2017 12:46

Yes there have been a number of these cases which have fallen either prior to the Tribunal or at the Tribunal. Most of the other cases involved supplies direct to the runners who were not employees of the company.
It was the new VAT MTIC fraud for a while a loophole which HMRC have now closed.

Thanks (0)
15th Dec 2017 12:49

This is why VAT as a tax is sometimes stupid.

Clearly Apple charge VAT on all the phones sold in the UK to individuals so the presumption should be that VAT has been charged unless HMRC can prove otherwise.

It's even stated in the case that Apple accounted for output tax on these sales- but apparently that's not good enough.

What a stupid system when despite all evidence to the contrary, unless you hold a document that has crossed all the t's and dotted all the i's HMRC will try and stuff you.

Thanks (1)
15th Dec 2017 14:23

I can't help thinking this is a problem of the company's own making. Because it tried to disguise business purchases as consumer purchases, it has not acquired the right documentation. (incidentally, is this fraud anyway?).

So it is the suspect business model that has led to the problem. Whilst HMRC have discretion to accept alternative evidence, are they legally required to? Are the required details for a full VAT invoice to support a claim not actually enshrined in legislation?

Whilst I have some sympathy with the view that there is evidence of the VAT claim being valid, I cannot have a lot of sympathy for a business model based on deception.

Thanks (3)
16th Dec 2017 10:35

its the stores fault... they do not issue - but should - correct vat/ sales documentation at the till. tills can easily be programmed to print the VAT requirements of an invoice for sale surely??

not just apple stores even down to the b2b stores [ sometimes... they do ask if you want a vat receipt @ the till but rarely ]

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to kiwilondon99
18th Dec 2017 14:29

But the point is that the company was trying to hide the fact they were business purchases.

Businesses are required to provide full VAT invoices to other "taxable persons" upon request. The business plan relied on Apple not knowing these were business purchases, hence they did not request the full invoice. The shop can't know it's required to issue a full invoice if it doesn't know who it is supplying.

So not the store's fault at all in this case I would say.

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19th Dec 2017 17:07

If this was an employee making the purchase and claiming on expenses the company would reclaim the VAT?
In which case the purchase now belongs to the company and it can sell or use it as they wish. The mistake is the employee not asking for a correct VAT receipt.
You accountants out there is this correct?

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to richards1
21st Dec 2017 14:40

Surely you have an AI that can answer that question for you.

If it helps any there is a reason, which I have already mentioned twice, that the employee did not ask for a correct VAT receipt. It is this action (which was not thought to be a mistake at the time) that has created the problem.

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