England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HONOURABLE MR.JUSTICE LIGHTMAN
FROM THE LONDON VAT AND DUTIES TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		3rd December 2003

Lord Justice Pill :

1. This is an appeal by Musashi Autoparts Europe Ltd (the appellants) from a decision of Lightman J dated 26^th February 2003 by which he allowed an appeal by the Commissioners of Customs and Excise (the
   Commissioners) from a decision of London VAT and Duties Tribunal of 8 August 2002 on a preliminary issue. That issue is whether the appellant taxpayer remains liable to interest on an amount of Value Added Tax (VAT) assessed by the Commissioners in circumstances to be described where the amount of VAT assessed has subsequently ceased to be due and payable on the ground that the supply was zero-rated.

The Facts

2. The circumstances are those of a supply of goods from the United Kingdom and their acquisition in another member state of the European Community by a person liable for VAT on the acquisition in accordance with the law of that member state. The appellants manufacture and supply component parts for motor vehicles and trade from premises in Gwent. They are registered for VAT. They had important customers in other member states to whom they supplied goods. On a visit to their premises in May and June 1999, officers of the Commissioners took the view that the appellants did not hold sufficient evidence that the goods had been removed from the United Kingdom and, for that reason, were not entitled to zero rate the supplies.
3. On 7 July 1999, the Commissioners raised an assessment under section 73 (1) of the Value Added Tax Act 1994 ("the Act") for VAT in a sum later reduced to £800,626 and for interest thereon in the sum of £55,084.09. The appellants subsequently supplied further evidence to the Commissioners who then accepted that the goods had been removed and the supplies were zero-rated. The Commissioners wrote to the appellants stating that they could make the necessary adjustment in respect of the assessment for VAT in their accounts for the period in which the evidence was received but no such adjustment could be made in respect of the assessment for interest. The appellants appealed to the tribunal against the assessment with a view to challenging the assessment in respect of interest.

The statutory framework

4. The Act is accepted, for present purposes, to comply with the Sixth Council Directive of 17 May 1977 (77/388/EEC) dealing with turnover and taxes. Section 4 (1) of the Act imposes a charge on the supply of goods and services made in the United Kingdom. Section 30 makes provision for zero-rating:

"(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section –

(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply;

and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(8) Regulations may provide for the zero-rating of supplies of goods, or of such goods as may be specified in the regulations, in cases where –

(a) the Commissioners are satisfied that the goods have been or are to be exported to a place outside the Member States or that the supply in question involves both –

(i) the removal of the goods from the United Kingdom; and

(ii) their acquisition in another Member State by a person who is liable for VAT on the acquisition in accordance with provisions of the law of that Member State corresponding, in relation to that Member State, to the provision of section 10; and

(b) such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled. "

5. Section 73 of the Act provides that the Commissioners may make assessments where there is default in making returns or keeping supporting documents:

"(1) Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.

…..

(9) Where an amount has been assessed and notified to any person under subsection (1) … above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced."

6. Section 74 of the Act provides:

"(1) Subject to section 76 (8), where an assessment is made under any provision of section 73 and, in the case of an assessment under section 73 (1) at least one of the following conditions is fulfilled, namely –

(a) the assessment relates to a prescribed accounting period in respect of which either –

(i) a return has previously been made, or

(ii) an earlier assessment has already been notified to the person concerned,

…

the whole of the amount assessed shall, subject to subsection (3) below, carry interest at the rate applicable under section 197 of the Finance Act 1996, from the reckonable date until payment."

It is by reference to prescribed accounting periods that the obligation to account for and pay VAT in respect of supplies arises (Section 25 (1) of the Act).

7. The expression "reckonable date" is defined in section 74(5). For present purposes it may be taken to be the date on which a return is required to be made for the prescribed accounting period to which the amount assessed relates.
8. Section 76 provides, insofar as is material:

"(3) In the case of ……… interest ……. referred to in the following paragraphs, the assessment under this section shall be of an amount due in respect of the prescribed accounting period which in the paragraph concerned is referred to as "the relevant period"-

…

(e) in the case of interest under section 74, the relevant period is the prescribed accounting period in respect of which VAT (or the amount assessed as VAT) was due.

…

(7) In the case of an amount due by way of … interest under section 74 –

(a) a notice of assessment under this section shall specify a date, being not later than the date of the notice, to which the …. amount of interest is calculated;

(b) if the ….. interest continues to accrue after that date, a further assessment or assessments may be made under this section in respect of amounts which so accrue.

(8) If, within such period as may be notified by the Commissioners to the person liable … for interest under section 74 –

(a) ….; or

(b) the VAT or other amount referred to in section 74(1) is paid, it shall be treated for the purposes of …. Section 74 as paid or remedied on the date specified as mentioned in subsection 7(a) above."

9. The Value Added Tax Regulations 1995 (SI No.1995/2518) provide, at Regulation 31, that every taxable person shall, for the purpose of accounting for VAT, keep a series of records. These include:

"31(1) (f) copy documentation issued by him relating to the transfer, despatch or transportation of goods by him to other Member States,

(g) documentation received by him relating to the transfer, despatch or transportation of goods by him to other Member States,

(h) documentation relating to importations and exportations by him."

10. Regulation 32 provides, insofar as is material:

"(1) Every taxable person shall keep and maintain, in accordance with this regulation, an account to be known as the VAT account.

(2) The VAT account shall be divided into two separate parts relating to the prescribed accounting periods of the taxable person and each such part shall be further divided into 2 portions to be known as "the VAT payable" and the "VAT allowable portion"."

Sub-paragraphs (3) and (4) specify what each portion of the account shall comprise for "each prescribed accounting period". It includes every "adjustment" to the amount of VAT payable by the taxable person for that period which is required, or allowed, by or under any Regulations made under the Act and every "adjustment" to the amount of input tax allowable to the taxable person for that period which is required, or allowed, by or under any Regulations made under the Act. Regulation 34 sets out the procedure for the correction of errors in returns.

11. Regulation 39 provides:

"(1) Where a person is required by regulations made under the Act to make a return to the Controller, the amounts to be entered on that return shall be determined in accordance with this regulation.

(2) In the box opposite the legend "VAT due in this period on sales and other outputs" shall be entered the aggregate of all the entries in the VAT payable portion of that part of the VAT account which relates to the prescribed accounting period for which the return is made, except that the total of the output tax due in that period on acquisitions from other member States shall be entered instead in the box opposite the legend "VAT due in this period on acquisitions from other EC member States".

(3) In the box opposite the legend "VAT reclaimed in this period on purchases and other inputs" (including acquisitions from other member States) shall be entered the aggregate of all the entries in the VAT allowable portion of that part of the VAT account which relates to the prescribed accounting period for which the return is made.

(4) Where any correction has been made and a return calculated in accordance with these Regulations then any such return shall be regarded as correcting any earlier returns to which regulations 34 and 35 apply. "

12. Regulation 40 provides:

"(1) Any person making a return shall in respect of the period to which the return relates account in that return for –

(a) all his output tax,

(b) all VAT for which he accountable by virtue of Part XVI of these Regulations………..

The amounts to be entered on that return shall be determined in accordance with these Regulations.

(2) Any person required to make a return shall pay to the Controller such amount of VAT as is payable by him in respect of the period to which the return relates not later than the last day on which he is required to make that return.

(2A)…

(3) The requirements of paragraphs (1) or (2) above shall not apply where the Commissioners allow or direct otherwise."

13. It is Regulation 134 which provides for the zero-rating of supplies under section 30(8):

"Where the Commissioners are satisfied that –

(a) a supply of goods by a taxable person involves their removal from the United Kingdom.

(b) the supply is to a person taxable in another member State,

(c) the goods have been removed to another member State, and

(d) the goods are not goods in relation to whose supply the taxable person has opted, pursuant to section 50A of the Act, for VAT to be charged by reference to the profit margin on the supply,

the supply, subject to such conditions as they may impose, shall be zero-rated."

14. In exercising their powers under the Act, the Commissioners also issue Notices. VAT Notice 703 (November 1996), with the Regulations, lays down the conditions which must be met in full for a removal of goods to another member State to be zero-rated. Paragraph 8.4 provides:

"Conditions for zero-rating supplies to other EC Member States.

If you supply goods to a customer who is registered for VAT in another EC Member State, you may zero-rate your supply in the UK provided:

you obtain and show on your VAT sales invoice your customer's EC VAT registration number, including the 2-letter country code prefix (see Appendix A(2)); and

the goods are sent or transported out of the UK to a destination in another EC Member State; and

within three months of the date of supply, you obtain and keep valid commercial documentary evidence that the goods have been removed from the UK (see paragraph 8.7).

Unless you meet all of these conditions you cannot zero-rate your supply and you must account for VAT on the goods in the UK in accordance with paragraph 9.4 unless the goods are zero-rated in their own right."

Paragraph 8.7 specifies documents a combination of which is capable of providing evidence that the particular goods in question have been removed from the UK.

15. Paragraph 9.4:

"Supplies to VAT registered customers in other EC Member States.

Whether it is you or your VAT registered EC customer who arranges for the removal of goods to another EC Member State, you can zero-rate the supply in your records when the goods are supplied to your customer provided you meet the conditions set out in paragraph 8.4.

If you have not met the conditions within three months of the date of supply and the goods would normally be standard-rated in the UK, you must account for VAT accordingly. You must amend your VAT records and account for VAT on the taxable proportion of the invoiced amount or consideration you have received, i.e. for a VAT rate of 17.5% the VAT element would be calculated at 7/47. When you amend your VAT records, you must make an entry equal to the tax on the supplies concerned on the "VAT Payable" side of your VAT account. You must include this amount in Box 1 of your VAT return for the period in which the three month time limit expires. If you are subsequently able to meet all the conditions, e.g. you later obtain evidence of removal of the goods from the UK, you can then zero-rate the supply and adjust your VAT account for the period in which the conditions were met."

16. Section 63 of the Act enables a penalty for misdeclaration of VAT to be imposed in certain circumstances.

The decisions below

17. The Tribunal's reasoning is set out at paragraph 40 of the decision:

"We were impressed by the logic of Mr.Baldry's submissions [for the appellants]. His first proposition was, where no tax is due no interest can be due. That is unassailable. But it must be remembered that at one point of time there was an amount of tax due namely when the assessment was raised, and until the Commissioners were satisfied that the conditions had been met. At that point, the supplies concerned were zero-rated supplies whatever they may have been before. In our view, from that moment no tax was due from the Appellant in respect of the relevant supplies. As we have already said above, it would therefore be absurd to hold that the assessment was still valid, still in existence, and had not been reduced to nil. In our judgment, the effect of the Commissioners being satisfied must have been that the assessment was reduced to nil. Again, in our judgment it would be absurd to hold that where there was no liability for tax in respect of a supply there should nonetheless be a liability to pay interest upon a non-existent sum of tax. It is the supply that is taxable, either at the standard rate or zero-rate, and that supply took place at a point of time which was substantially earlier. It seems to follow that if the supply is zero-rated, then it must always have been zero-rated, rather than that it was apparently treated as zero-rated, then became standard rated and then once again became, though not from the moment of supply, zero-rated. Again, we are reinforced in the view that the interest is not payable by the fact that there is no express provision that it should be. It seems to us that for interest to be payable where there is no primary liability there ought to be express words. There are no express words. "

18. The judge set out the reasoning by which he reached a different conclusion at paragraph 22 of his judgment:

"I turn secondly to the legal effect of later satisfaction of the conditions for zero-rating and the legal effect of the credit. The later satisfaction of the conditions does not have retrospective effect, any more than subsequent amendments of a return retrospectively cures vices in the return which have in the meantime triggered the imposition of penalties under section 14(1) of the Act: see C&E Commissioners v Nomura Property [1994] STC 461 at 467. It does not in law "discharge" a prior liability under Regulation 40(2) or an earlier assessment made on the basis that the supply in question was standard rated in the sense of either of vitiating or of withdrawing or reducing to nil the prior assessments and the liabilities thereunder. According to the scheme of the legislation satisfaction of the conditions merely entitles the taxable person as at the date of such satisfaction to a credit for the VAT liability previously acknowledged or assessed. The liability and the previous assessment stand, but the credit can be offset against and satisfy the liability for VAT so far as it remains undischarged and entitles the taxable person to repayment of VAT so far as the credit exceeds what is necessary to meet that and any other outstanding liability for VAT and interest on VAT. The satisfaction of the liability under the assessment of VAT in no way discharges or undermines the assessment for interest. The liability for interest accrued (as it could only accrue) during the period of the liability for VAT. On satisfaction of the liability for VAT, there could be no further accrual of interest, but the liability for accrued interest continues undisturbed. The satisfaction of the conditions for zero-rating gives rise to no separate credit in respect of the liability for accrued interest.

23. Accordingly in my view upon the true construction of the legislation and most particularly the Notice, the assessment for interest stands undisturbed and undischarged, and the liability continues to be enforceable by the Crown."

Submissions

19. For the appellants, Mr Baldry seeks to uphold the decision and reasoning of the tribunal whereas Mr Beal, for the Commissioners, seeks to uphold that of Lightman J. Mr Baldry accepts that the Commissioners' assessment, when initially raised, was valid. From the time the information required under the Notice is provided, the supply is, by virtue of paragraph 9.4 of the Notice, zero-rated. No VAT is due in respect of the supply and any outstanding assessment made by the respondents must be withdrawn or reduced to nil. Upon such action, there is no liability for interest on the amount assessed because interest in only due when there is an amount of VAT due and payable under an assessment. Liability to interest assumes that VAT is due and payable and, upon a zero-rated supply, it is not. Moreover, there is no "payment" of VAT within the meaning of section 74(3) and there can be no liability to interest under the section. Section 74 contemplates a true payment or alternatively a true set-off of an amount due (as in P and O Steam Navigation Company v The Commissioners of Customs and Excise [1991] VATTR 327) and not a mere adjustment. If VAT on the supply ceases to be due, no liability to interest remains. A charge to interest could have been made a condition, in present circumstances, for the zero rating of supplies, under section 30 (9) but it was not. A sanction against poor record-keeping appears in section 63 of the Act, it is submitted, and the Act should not be construed with a view to providing a sanction by way of interest.
20. Mr Baldry seeks to rely on the decision of this court in Mellham Ltd v Burton (Collector of Taxes) [2003] STC 441 as providing support for his submission that a "payment" within the meaning of section 74 does not extend to a set-off. Section 87 of the Taxes Management Act 1970 provides that tax shall carry interest from the date when the tax becomes due and payable until payment. The case turned on its facts. Corporation Tax of £100,000 was due but was not paid and interest was claimed by the Revenue. It was argued that, had the money been paid, it would immediately have been repaid or set-off under other statutory provisions. Buxton LJ stated, at 447 G:

"It seems to me quite obviously to be the case that there can be no repayment and no right to repayment if the sum out of which the repayment is to come has not been paid in the first place. This is not an objection that the appellants' right is simply conditional but rather the objection that the right does not arise at all until the advance Corporation Tax is paid. That is not so much a matter of legal analysis as one of fact. The factual position cannot in my judgment be improved by the appellant claiming as "payment" a set-off that can only arise once an actual payment is made".

The case throws no light on the meaning of the word "payment" in section 74 (1), in my view.

21. Counsel does not seek to challenge the decision of the London Tribunal, Judge Medd QC presiding, in the P and O Steam case where, in successive returns, the taxpayer first overstated and then understated an entitlement to input tax. Mr Baldry accepts that the set-off constituted a "payment" under what is now section 74 of the Act so that liability to pay interest for the period between returns arose (this finding was not challenged in this Court (1994 STC 259)). He submits, however, that the decision does not help upon the present issue because the adjustment procedure now under consideration does not involve a set-off.

Conclusions

a) Effect of assessment

22. The proposition is that, if eventually there is no liability for tax in respect of a zero-rated supply, there can be no liability to pay interest upon a non-existent sum of tax. That proposition has an obvious attraction but in my judgment it does not survive an analysis of the procedure provided by the statutory scheme.
23. Regulation 134 provides for the zero rating of supplies under Section 30 (8) of the Act. Conditions may, however, be imposed on the ability to zero-rate either by regulations or by the Commissioners (section 30 (8)(b)). By virtue of paragraph 8.4 of the Commissioners' Notice 703, obtaining, within three months, and keeping valid commercial documentary evidence that the goods have been removed from the UK is a condition of zero-rating the supply. Relevant documentation is required by Regulation 31 and is specified in paragraph 8.7. If the conditions have not been met within three months of the date of supply, the registered person's records must be amended and VAT accounted for, on the invoiced amount or consideration received, in the return for the period in which the three month time limit expires (paragraph 9.4 of the Notice).
24. The keeping of the records is required by Regulation 31 and the keeping of a VAT account by Regulation 32. An account is required for each prescribed accounting period. Regulations 39 and 40 make further provision for the contents of the return required for each prescribed accounting period and impose an obligation to pay. The taxpayer is clearly under an obligation to keep records and make periodic returns for specific periods. The obligations are specified in detail.
25. The combined effect of sections 73 and 74 of the Act is that the Commissioners may assess the amount of VAT due in the circumstances set out in Section 73 (1) which are admitted to have been present in this case when the assessment was raised. The amount correctly assessed by the Commissioners relates to a prescribed accounting period and is deemed to be an amount of VAT due. The whole of the amount assessed shall carry interest.
26. Paragraph 9.4 of the Notice permits taxpayers who were unable to meet conditions imposed in paragraph 8.4 within three months of the date of supply subsequently to zero-rate the supply if they are able to meet the conditions later. They may 'adjust' their VAT account for the period in which the conditions were met. Until that adjustment is performed in the manner provided by paragraph 9.4 of Notice 703 the tax was due.
27. The Commissioners have power to make an assessment, which carries interest, and that power was validly exercised. In these circumstances, I see no basis for holding that the assessment loses its validity by reason of the subsequent meeting of prescribed conditions by the taxpayer. It remains a valid assessment under the Act. Meeting the conditions has the effect that the taxpayer can adjust his account, in accordance with the Notice, for the period in which the conditions are met. It does not affect the accuracy or validity of the assessment with respect to the period for which it was made or remove the obligation to pay the interest assessed for the earlier period.

b) "Payment"

28. In R (Cardiff City Council) v Commissioners for Customs and Excise [2003] EWCA Civ.1456, it was the word 'paid' in section 80 of the Act which fell to be construed. The facts were quite different from the present case. Scott Baker LJ referred to Spargo's case ((1873) 8 Ch App 407) and stated that it was a matter of "looking at the reality of what has occurred ….Paid should be given a practical and commercial meaning rather than a narrow one." I find that approach appropriate to the different facts of the present case. The P and O case points away from a narrow construction though I would accept it does not cover the present situation.
29. In the context of this statutory scheme, the adjustment permitted does come within the meaning of "payment" in Section 74 (3). Accounts are required for specific periods with "VAT payable" and "VAT allowable" portions and aggregate entries required on returns to the Controller under both headings. I conclude that the entries, by which the effect of zero-rating has been achieved, constitute a payment. In the context of the periodic returns and netting-off contemplated by the regulations, the word should be given a broad meaning.

Result

30. I am pleased to have been able to reach a conclusion which gives an incentive to the keeping of good records; zero-rating from the start, which good records permits, will prevent the liability to interest which arose in this case.
31. I would dismiss this appeal.

Lord Justice Chadwick :

32. I agree that this appeal should be dismissed. In setting out the reasons which have led me to that conclusion, I gratefully adopt the account of the facts and the exposition of the statutory framework contained in the judgment of Lord Justice Pill.
33. The issue which the VAT and Duties Tribunal was invited to determine was whether the Commissioners of Customs and Excise were entitled to charge and recover interest on the amount of an assessment to Value Added Tax made on the appellant (as the taxable person) in respect of a supply of goods to a person in another Member State in the circumstances that (i) the assessment had been made on the basis that the appellant did not have the necessary evidence, within three months of the date of supply, that the goods had been removed from the United Kingdom, but (ii) the appellant was later able to establish that the goods had in fact been removed from the United Kingdom. To put that issue in context, it is necessary to have in mind the provisions of regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518) and paragraphs 8.4 and 9.4 of VAT Notice 703 (November 1996), which Lord Justice Pill has set out in his judgment.
34. There can be no doubt – and it is not in dispute – that, if (as was accepted for the purposes of the issue which the Tribunal was asked to determine) the appellant had failed within three months of the date of supply to obtain and keep valid commercial documentary evidence that the goods had been removed from the United Kingdom, it was required to account for Value Added Tax (VAT) on the basis that the supply was standard rated; as, but for regulation 134, it would be. The obligation to account for VAT in those circumstances is imposed by regulation 40(1) of the 1995 Regulations, read in conjunction with regulations 25 ("Making of returns") and 39 ("Calculation of returns"). The position is explained in paragraph 9.4 of VAT Notice 703:

"If you have not met the conditions [for zero-rating, set out in paragraph 8.4 of the Notice] within three months of the date of supply and the goods would normally be standard-rated in the UK, you must account for VAT accordingly. You must amend your VAT records and account for VAT on the taxable proportion of the invoiced amount or consideration you have received . . . When you amend your VAT records you must make an entry equal to the tax on the supplies concerned on the 'VAT PAYABLE' side of your VAT account. You must include this amount in Box 1 of your VAT return for the period in which the three month time limit expires. . . . "

Box 1 of the VAT return (Form 4 in schedule 1 to the 1995 Regulations) is for "VAT due in this period on sales and other outputs".

35. The obligation to make a return in respect of each VAT accounting period (regulation 25) and to account in that return for output tax (regulation 40(1)) is supplemented by an obligation on the person making the return to pay to Customs and Excise "such amount of VAT as is payable by him in respect of the period to which the return relates" – regulation 40(2). Payment is to be made not later than the last day on which the taxable person is required to make the return (ibid).
36. The Tribunal found (at paragraph 8 of its decision dated 8 August 2002) that, between April 1998 and May 1999, the appellant had sold automotive components to customers in Member States other than the United Kingdom. On the basis that the appellant had failed within three months of date of supply to obtain and keep valid commercial documentary evidence that the goods had been removed from the United Kingdom, it ought to have included an amount of VAT at the standard rate on those supplies in its returns for each of the VAT accounting periods in which a three month time limit expired. It appears that the appellant was required, under proviso (a) to regulation 25(1) of the 1995 Regulations, to make monthly returns^[1]. So, if supplies were made in each month between April 1998 and May 1999 (both inclusive), the appellant ought to have included an amount of VAT at the standard rate in respect of the supplies in the return for 07/98, and for each month thereafter up to and including 08/99. It had not done so. In those circumstances the Commissioners were entitled to take the view, in July 1999, that the appellant's returns for each of the accounting periods 07/98 to 05/99 were incomplete or incorrect; and were entitled to assess the amount of the VAT due in respect of each of those periods^[2] on the basis that those supplies were standard rated – section 73(1) of the Value Added Tax Act 1994.
37. Section 74(1) of the 1994 Act makes provision for the amount assessed under section 73(1) to carry interest. So far as material in the present context, the section is in these terms:

". . . where an assessment is made under . . . section 73(1) [and] at least one of the following conditions is fulfilled, namely – (a) the assessment relates to a prescribed accounting period in respect of which . . . a return has previously been made . . . the whole of the amount assessed shall . . . carry interest . . . from the reckonable date until the date on which it was paid."

In the present context the "reckonable date" is "the latest date on which (in accordance with [the 1995 Regulations]) a return is required to be made for the prescribed accounting period to which the amount assessed . . . relates" – section 74(5)(b). So, by way of example, to the extent that the amount assessed by the Commissioners under section 73(1) of the Act (in July 1999) was an amount for which the appellant ought to have accounted in the return for the VAT accounting period 07/98, interest under section 74(1) would run from the last day of August 1998 – regulation 25(1) of the 1995 Regulations.

38. Section 76(1) of the Act empowers the Commissioners to assess the amount due from a taxable person by way of interest under section 74. An assessment of interest under section 74 in respect of an amount of VAT assessed to be due under section 73(1) is "an assessment . . . of an amount due in respect of the prescribed accounting period . . . in respect of which the VAT (or amount assessed as VAT) was due" – section 76(3). Where a person is assessed under section 76 to an amount due by way of interest, and is also assessed under section 73(1) for the VAT accounting period in respect of which the VAT was due, the assessments may be combined and notified to the taxable person as one assessment – section 76(5). But the interest element must be separately identified in the notice (ibid).
39. In the light of those provisions – and on the basis (accepted for the purposes of the issue which the Tribunal was asked to determine) that the appellant had failed within three months of the date of supply to obtain and keep valid commercial documentary evidence that the goods had been removed from the United Kingdom – it could not be said that the assessment made by the Commissioners on 7 July 1999 was an assessment which the Commissioners were not then entitled to make.
40. The right of appeal to the VAT and Duties Tribunal is conferred by section 83 of the 1994 Act – read in conjunction with section 82 and schedule 12. An appeal lies with respect to (amongst other matters) – "(p) an assessment . . . under section 73(1) in respect of a period for which the appellant has made a return under this Act . . . or the amount of such assessment" and "(q) the amount of . . . any interest . . . specified in an assessment under section 76". As I have sought to point out, the assessments made in the present case, set out in the notice dated 7 July 1999, were required to be (and were) assessments in respect of particular VAT accounting periods; that is to say, in respect of each of the VAT accounting periods from 07/98^[3]. The question for the tribunal was whether the assessments in respect of any of the monthly accounting periods (up to 05/99) ought to be reduced or discharged.
41. The submission that those assessments ought to be discharged was founded on section 30(1) of the 1994 Act, read with section 30(8) of the Act and regulation 134 of the 1995 Regulations. Section 30(1) provides that, where a taxable person supplies goods or services and the supply is zero-rated, no VAT shall be charged on the supply. Section 30(8) provides for regulations to be made for the zero-rating of supplies of goods where (a) the Commissioners are satisfied that the supply involves the removal of the goods from the United Kingdom and their acquisition in another Member State by a person who is liable for VAT in that State and (b) "such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled". Regulation 134 of the 1995 Regulations is made under the power conferred by section 30(8) of the Act. Paragraphs (a) and (b) of regulation 134 reflect the requirements in section 30(8)(a) of the Act. Paragraphs (c) and (d) impose the additional requirements that the goods have been removed to another Member State and that the taxable person has not opted to be taxed in accordance with a margin scheme. If the requirements of those four paragraphs are met, then "the supply, subject to such conditions as [the Commissioners] may impose, shall be zero-rated".
42. It is plain, therefore, that the provision in section 30(1) of the Act – that no VAT is to be treated as charged on the supply – depends on the supply being zero-rated; and that whether or not a supply is zero-rated depends (in part, at least) on compliance with conditions imposed by the Commissioners. It is in that context that paragraph 8.4 ("Conditions for zero-rating of supplies to other EC Member States") of VAT Notice 703 ("Exports and Removals of Goods from the United Kingdom") has effect. And it is for that reason that (as that paragraph, itself, declares) a supply in the United Kingdom to a customer who is registered for VAT in another EC Member State may be zero-rated if, but only if, the three conditions set out in paragraph 8.4 are met The point is made explicit by the words which appear in bold type at the end of paragraph 8.4:

"Unless you meet all of these conditions you cannot zero-rate your supply and you must account for VAT on the goods in the UK in accordance with paragraph 9.4 unless the goods are zero-rated in their own right."

43. Paragraph 9 of Notice 703, as its cross-heading suggests, is concerned with "Records and accounts". It should be read in conjunction with Part V ("Accounting, Payment and Records") of the 1995 Regulations. In particular, paragraph 9.4 ("Supplies to VAT registered customers in other EC Member States") must be read in conjunction with regulations 32 ("The VAT account") and 39 ("Calculation of returns"), which Lord Justice Pill has set out and I need not rehearse save to note that regulation 32(1) and (2) requires every taxable person to maintain, as part of his records, a VAT account divided into separate parts each relating to one of his VAT accounting periods.
44. Paragraph 9.4 comprises three distinct elements. The paragraph begins with a statement of the correct accounting treatment in a case where, at the time of the supply, the conditions set out in paragraph 8.4 are met:

"Whether it is you or your VAT registered EC customer who arranges for the removal of goods to another EC Member State, you can zero-rate the supply in your records when the goods are supplied to your customer provided you meet the conditions set out in paragraph 8.4."

So, if at the time of the supply, the conditions in paragraph 8.4 are met, the entry to be made in the VAT payable portion of that part of the VAT account relating to the VAT accounting period then current will show the output tax in respect of that supply as nil.

45. Paragraph 9.4 then goes on to provide, in the passage which I have already set out, for the correct accounting treatment in a case where the conditions in paragraph 8.4 have not been met within three months of the date of supply. The assumption on which that part of the paragraph is based is that either there will have been no entry made in the VAT payable portion of the VAT account at the time of the supply, or that there will have been an entry made at that time which shows the output tax in respect of that supply as nil. In either case, the taxable person is required (in a case where not all of the conditions set out in paragraph 8.4 have been met - for example, where he has not obtained and kept, within three months of the supply, valid commercial documentary evidence that the goods have been removed from the United Kingdom) to make an entry in VAT payable portion of the VAT account equal to the taxable proportion of the consideration received for the supply. The amount of the output tax to be shown in that entry will be determined by the rate applicable to a supply to a United Kingdom customer. The entry must be made in the VAT payable portion of that part of the VAT account which relates to the VAT accounting period in which the three month time limit expires. That will be an accounting period which is later than the accounting period in which the supply was made.
46. The third element in paragraph 9.4 provides for the correct accounting treatment where, after the three month limitation has expired, the taxable person is in a position to meet each of the conditions set out in paragraph 8.4. It is in these terms:

"If you are subsequently able to meet all the conditions, e.g. you later obtain evidence of removal of the goods from the UK, you can then zero-rate the supply and adjust your VAT account for the period in which the conditions are met."

It is important to note that the adjustment – by a reverse entry in the VAT payable portion of the VAT account equal to the taxable proportion of the consideration received for the supply (on the assumption that the supply was not zero-rated) – must be made in that part of the VAT account which relates to the VAT accounting period in which the conditions are met. That may well be – indeed, is likely to be – an accounting period which is later than the accounting period in respect of which the obligation to account for VAT on the basis that the supply was not zero-rated arose.

47. In a case where the adjustment permitted by the third element in paragraph 9.4 of Notice 703 falls to be made in a VAT accounting period which is later than the accounting period in respect of which the obligation to account for VAT on the basis that the supply was not zero-rated arose, there is nothing in that paragraph to suggest that the obligation is, in some way, rescinded or otherwise extinguished. The obligation arose in the circumstances that, at the time when it arose, the conditions for zero-rating were not met. Nothing which occurs subsequent to the VAT accounting period in respect of which the obligation arose affects the fact that VAT was payable in respect of the supply in that accounting period; nor that it should have been accounted for in (and paid with) the return for that accounting period.. The scheme of the Act and the Regulations, read with Notice 703, is that the obligation to account in one VAT accounting period (when the conditions are not met) on the basis that VAT was payable in respect of the supply is matched by a reduction in the amount of VAT payable in a subsequent accounting period (when the conditions are met).
48. Where a taxable person has made a supply to a customer in another EC Member State and does not have the necessary evidence, within three months of the date of supply, that the goods have been removed from the United Kingdom, he is required by the statutory scheme to pay VAT on that supply at the time that he makes his return for the VAT accounting period within which the three month time limit expires. The scheme does not provide for repayment of the amount paid – a fortiori, it does not provide for repayment of that amount with interest. When, in a subsequent VAT accounting period, the taxable person obtains the necessary evidence, he is able to recoup the amount of the VAT which he has paid in respect of the earlier accounting period, indirectly, by paying less VAT (or by making a repayment claim) in respect of that subsequent period. There is, as it seems to me, no reason why the position should differ, in principle, in a case where the taxable person has not done what he was required to do under the statutory scheme – that is to say, where he has not paid the VAT which he should have paid at the time that he makes his return for the VAT accounting period within which the three month time limit expired. In such a case, for the reasons which I have sought to explain, the Commissioners are entitled to make an assessment in respect of the VAT which he ought to have paid, and for interest from the date when he ought to have paid it. When, in a subsequent VAT accounting period, the taxable person obtains the necessary evidence, he can recoup an amount equal to the amount of the VAT which he is obliged to pay under the assessment, indirectly, by paying less VAT (or by making a repayment claim) in respect of that subsequent period. But there is no provision which enables him to recoup the interest which has been the subject of a valid assessment.
49. Nor can it make any difference whether or not, at the time that the taxable person obtains the necessary evidence, he has paid the amount of the VAT which he is obliged to pay under the assessment. If he has not paid, he remains liable to pay. Absent any agreement he may make with the Commissioners, he remains liable to pay under the assessment notwithstanding that he can recoup the amount for which he is liable, indirectly, by paying less VAT in respect of a subsequent period. And, again, it can make no difference that, instead of insisting on payment under the assessment, the Commissioners are content for the liability to be satisfied by a notional set off of an amount equal to the amount which the taxable person would be otherwise be entitled to recoup.
50. Lord Justice Thomas: I agree with both judgments.

Note 1   See the Record of Trader’s Particulars included in the Appeal Bundle.    [Back]

Note 2   In fact, the notice of 7 July 1999 gives details of assessments in respect of each VAT accounting period from 04/98. No point has been taken on this. That may be for the reason that, notwithstanding the finding in paragraph 7 of the tribunal’s decision, it appears from the summary annexed to the Commissioners' letter dated 28 June 1999 that supplies to overseas buyers commenced in January 1998.     [Back]

Note 3   See Note 2    [Back]