In business-to-business transactions, Value Added Tax (“VAT”) is often seen as a given routine tax obligation, that is a part of conducting business. However, what happens when VAT is not explicitly mentioned in a contract or in an invoice? Can a seller later demand it? Is a buyer legally obliged to pay, even if they have already settled the original invoice?
A recent matter has highlighted this issue. While the Judgment turned on specific facts, it offers a reminder for businesses about the risks of relying on assumptions, and the importance of clarity regarding VAT in contracts.
The Background: An Honest Mistake
This matter involved a dispute over the liability of VAT between two VAT registered businesses. The seller had provided advertising services and issued an invoice to the buyer, but unintentionally failed to include VAT. The invoice showed a single figure, which was paid in full by the buyer.
It was only during an internal audit over a year later that the seller realised the omission. Seeking to correct the error and comply with its obligations under HMRC regulations, the seller issued a corrected VAT invoice. The buyer, however, refused to pay the additional amount, arguing that: the original invoice had been paid; the omission was the seller’s error; and there was no agreement to charge VAT.
The Legal Questions: What Does VAT Law Require?
Even though VAT was not referenced in the original invoice or the contract, the main issue was whether VAT could be implied into the transaction.
The seller argued that VAT is a statutory obligation under the Value Added Tax Act 1994, which applies automatically to taxable supplies made by VAT registered entities. On this view, VAT did not need to be mentioned, as it was chargeable by law, and the buyer (being VAT registered) would not suffer a loss because they could reclaim the amount as input tax.
The buyer, on the other hand, maintained that they had relied on the invoice and contractual documentation, which made no mention of VAT. From their view, the issue was not about tax law, but about contract law, being that the agreed price had already been paid, and the seller should bear the cost of their own mistake.
The Court’s Question: What Would a Reasonable Party Understand?
The Judge in the case reviewed both parties’ arguments carefully and grounded the decision in principles of contractual interpretation. Specifically, the court asked:
“What would the Defendant have reasonably understood here?”
Although the Judge accepted that VAT law imposes an obligation on the seller, he found that, in this instance, the surrounding circumstances created a reasonable impression that VAT was not chargeable, as:
- the original invoice did not include VAT;
- the contract and terms made no mention of VAT;
- a later statement included the phrase “value including VAT” but gave no breakdown or reference elsewhere to VAT; and
- the price paid matched that single figure.
On this basis, the Judge concluded that the buyer had reasonably understood the agreed price to be the full price, inclusive (or exclusive) of VAT, but ultimately final. As a result, the court found that the seller was bound by its original error, and the claim for VAT was dismissed.
Key Takeaways for Businesses: Why Clear VAT Terms Matter
Businesses must note that this Judgment does not change VAT law, but it highlights how contract law can shape whether VAT is practically recoverable in a dispute. Here are a few key takeaways for businesses:
- Always state VAT explicitly in contracts, quotes, invoices, and statements, as this clarity prevents disputes.
- Even with long-standing trading relationships, it is not advisable to assume VAT will be understood, as the courts may not.
- If there is a mistake, note that fixing the invoice for HMRC purposes does not automatically entitle the seller to claim VAT from the other party.
- From a buyer’s perspective, it is helpful to carefully review documentation, as the absence of VAT may influence whether it is payable later on.
Conclusion
This case highlights how even small administrative oversights, like an omitted VAT charge, can lead to complex legal questions and unexpected outcomes. It serves as a valuable reminder of the importance of clear communication and documentation around VAT in commercial agreements. For sellers and buyers alike, ensuring that VAT is explicitly addressed in contracts and invoices can help prevent misunderstandings and protect business relationships. Ultimately, clarity benefits all parties and supports smoother transactions.
Written by: Angel Asare-Owusu, CS Litigation Paralegal
Please contact us if you would like more information about the issues raised in this article or any aspect of debt recovery on 020 8290 7400 or email info@jpcreditsolutions.co.uk
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