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).
Scandico Ltd (UKUT0467) 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.
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 is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.