Summary

An assessment by the Revenue to VAT was not valid where it sought to impose an output tax charge in respect of certain supplies that did not, in the circumstances, take place in the prescribed accounting period and no tax point arose for the purpose of the Value Added Tax Regulations 1995 reg.86.

Facts

The appellant company in administration (E) appealed against an assessment by the respondent Revenue to VAT for a particular period. The assessment related to supplies of gas and electricity made by E's subsidiary to a company (M). M and the subsidiary had entered into a netting agreement under which outstanding debts between them were settled by netting off sums due from one to the other and the payment of any balance due. In accordance with the agreement, M had calculated an outstanding sum of £655,858. That sum was paid to E. However, the administrators sought further sums, and did not issue tax invoices to M. The administrators proposed to account for the VAT on the full amount. The tax return submitted in the September 2002 accounting period by the administrators showed output tax of £5,746,018. The Revenue rejected the administrators' approach and made an assessment in the amount of £6,608,250, being the difference between the sum claimed as input tax by M, in respect of the same transactions, on the total value of the supplies calculated by M under the agreement, and the amount declared by E. The Revenue considered that E had made a taxable supply of power to M in the period and VAT should have been accounted for that period since payment had been received in that period, which was, under the Value Added Tax Regulations 1995 reg.86, the tax point for that supply. The issue was whether the assessment was raised for the correct period. E contended that, for the purposes of reg.86, a supply was treated as taking place each time that a payment in respect of the supply was received by the supplier, or a VAT invoice relating to the supply was issued by the supplier, whichever was earlier, and that the purported assessment by the Revenue was wrong in law as it sought to impose an output tax charge in respect of supplies that did not take place in the prescribed accounting period.

Held

An invoice was issued in respect of the £655,858, and that sum was duly paid. No other invoice was issued and no other payment was made save that sum. Under the agreement, no other invoice could or should have been issued, nor payment made, until the dates laid down by the agreement. It would only have been the issue of the invoice, or the payment, whichever came earlier, that would have activated reg.86 and provided the tax point for any other sums receipts. Even if it had been a case of payment netting rather than novation netting, the result would have been the same given the terms of reg.86. There was nothing in the agreement, nor in the way it took effect, nor in reg.86, which would have had the effect of importing into the invoice that was issued the remaining sums to which the assessment related. No tax point arose in respect of any sum other than the £655,858 in the September 2002 period. The agreement was a novation netting, namely the amalgamation of two or more executory contracts into a single new contract to be performed at a future time, and not simply a payment netting.

Appeal allowed.