QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| THE QUEEN
(on the application of UK TRADECORP LIMITED
|- and -
|THE COMMISSIONERS OF CUSTOMS AND EXCISE
Smith Bernal WordWave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Rupert Anderson QC, Mr Hugh McKay & Ms Nicola Shaw (instructed by The Solicitor for Customs and Excise, New King's Beam House, 22 Upper Ground, London SE1 9PJ) for the Defendants
Crown Copyright ©
Mr Justice Lightman:
i) that in verifying the Claimant's claims for input tax for the periods in the calendar year 2003 the Commissioners were under a duty to act proportionately; and
ii) that the Commissioners' failure to pay interest at LIBOR in respect of the period between (a) accrual of the Claimant's right to input tax (i.e. the date of submission of its claims); and (b) actual payment of that input tax breaches the Commissioners' duty to act proportionately.
In view of the fact that claims by the Claimant for repayment of input tax would continue to be made to the Commissioners in the future, the nature of the Claimant's business and low profit margins on goods which it purchases and sells which make its ability to trade dependent on expeditious repayments, the Claimant also asked the court to provide guidance as to the law in respect of the areas where the breaches had been alleged. Moses J made plain in his judgment giving permission the desirability of the provision of such guidance both to the Claimant and traders generally.
|Period||Goods dealt in||Amount||Exported to||Date of Claim||Date of Payment|
|Jan||Software CDs||309,119||Dubai||31 Jan 2003||14 May 2003|
|3 March 2003||16 June 2003,
29 March 2004
|Mar||Diamond Jewellery/ Pearl Necklaces||332,349||Dubai, Russia/ Spain||3 April 2003||15 July 2003|
|April||Mobile Phones||136,204||Holland||12 May 2003||17, 26 June 2003|
|May||Mobile Phones||123,510||Holland||30 May 2003||2 July 2003|
|June||3 x Mobile Phones||378,047||Holland, Austria||7 July 2003||2 April 2004|
|July||XXX cards||292,360||Denmark||6 Aug 2003||14 April 2004|
|Aug||XXX cards/ Diamonds||365,120||Denmark/
|4 Sep 2003||14 April 2004|
|Sep||Diamonds||514,888||Dubai||13 Oct 2003||15 April 2004|
|13 Nov 2003||23 January 2004|
|Nov||Mobile Phones||842||UK||24 Dec 2003||6 February 2004|
|Dec||No trading||501||No trading||12 Jan 2004||6 February 2004|
i) the Commissioners failed to discharge the burden upon them of showing that the measures they took in dealing with its claims for input tax in the periods 01/03-03/03 and 06/03-09/03 were, whilst enabling them effectively to attain the objective of protection of the exchequer, the least detrimental to the Claimant's fundamental right under the Sixth Directive to deduct input tax;
ii) the Commissioners acted disproportionately in failing to make, in respect of the periods 02/03, 03/03 and 06/03, the following part payments of the following amounts respectively:
Period 02/03, part payment of £69,785, on 14 May 2003
Period 03/03, part payment of £214,812.50 on 7 May 2003
Period 06/03, part payment of £129,360 on 8 September 2003
iii) the Commissioners failure timeously to give adequate reasons:
(a) in respect of the period 01/03 contravened their duty to give reasons in that they never notified the Claimant that the reason for their delay was that they were taking legal advice as to whether their belief that the software CDs were produced in breach of copyright obviated the need for them to meet the Claimant's claim for input tax;
(b) in respect of the period 02/03 contravened their duty to give reasons in that the Commissioners never notified the Claimant that one of the bases upon which they denied the claim for input tax was that they were concerned that the valuation document had been obtained after the date of export of the pearl necklaces;
iv) the Commissioners erred in law in proceeding, in respect of the periods 08/03 and 09/03, on the basis that a failure on the part of the Claimant to answer the questions put to it in their letter of 31 October 2003 obviated the need for the Commissioners to continue their investigations into the transactions the subject of those questions;
v) the Commissioners' failed to exercise their powers of care and management of the VAT system pursuant to Schedule 11 para 1 Value Added Tax Act 1994 ("the VATA") to pay interest at the High Court judgment rate in respect of the period between (1) accrual of the Claimant's right to repayment of input tax (i.e. on the date of submission of the claim for input tax as set out in the Grounds) and (2) actual payment of that input tax, breaches the Sixth Directive; and
vi) alternatively to (v), the Commissioners' failure to pay interest in respect of the period specified in (v) above breaches the Sixth Directive.
THE LEGISLATIVE FRAMEWORK
"Article 2. The following shall be subject to value added tax:
1. the supply of goods… effected for consideration within the territory of the country by a taxable person acting as such…
Article 4. 1. 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
2. The economic activities referred to in paragraph 1 shall comprise all activities of… traders…
(a) 'Chargeable event' shall mean the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled.
(b) The tax becomes 'chargeable' when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred.
2. The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed.
Article 17. Origin and scope of the right to deduct
1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person…
Article 18. Rules governing the exercise of the right to deduct
1. To exercise his right of deduction, a taxable person must:
(a) in respect of deductions pursuant to Article 17(2)(a), hold an invoice drawn up in accordance with Article 22(3)…
2. The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.
3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.
4. Where for a given tax period the amount of authorised deductions exceeds the amount of tax due, the Member States may either make a refund or carry the excess forward to the following period according to conditions which they shall determine.
However, Member States may refuse to refund or carry forward if the amount of the excess is insignificant.
Article 20. Adjustments of deductions.
1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:
(a) where the deduction was higher or lower than that to which the taxable person was entitled; …
Article 21. Persons liable for payment of tax.
1. Under the internal system the following shall be liable to pay value added tax—
…(d) any person who mentions the value added tax on an invoice.
Article 22.8. Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provide that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.
Article 27.1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance."
DUTY TO INVESTIGATE AND ACT PROPORTIONATELY
(a) Maintenance of balance
i) the need to protect the Revenue (referred to by the Advocate General in Molenheide as the "overriding interest"). The need to protect the Revenue must figure large in a case such as the present given the background of widespread MTIC fraud and suspicious circumstances surrounding the Claimant's trades;
ii) the likely outcome of the investigation (so far as ascertainable) and (in particular) of acceptance or establishment of the claim and repayment of input tax;
iii) the effect (if any) of withholding funds on the trader and his business and the representations made in this regard. In this case there were references in general terms in the Claimant's letters to the Commissioners to the adverse effect on business occasioned by the withholding of input tax, but no suggestion was made of imminent insolvency or inability to trade. It must be incumbent on the taxable person to bring to the attention of the Commissioners, with any necessary supporting evidence, any relevant consideration within his special knowledge;
iv) the nature and complexity of enquiries necessary to verify the claim (including length of time involved and the likelihood of securing additional relevant information);
v) whether either the Commissioners or the trader have contributed to any delay in the verification process. The Claimant in this case unhelpfully elected not to specify the particular respect in which it originally contended in general terms that the Commissioners' investigations were unreasonable, unnecessary or not conducted with sufficient expedition and thus precluded any investigation or evaluation of the contentions by this court. On the other hand the Claimant itself did delay the verification process;
vi) whether an interim or part payment or full repayment should be made ahead of the conclusion of the investigations and for this purpose whether, having regard to the taxable person's "track record" or his provision of security or guarantees, a refund of a repayment is likely to prove recoverable if it subsequently turns out that the repayment was not due to the taxable person. In this case the Claimant made no response to the Commissioners' offer of interim payment on condition that security was provided and did not suggest that security was not available nor indeed did the Claimant request an interim payment;
vii) whether there is any scope for judicial review of Commissioners' conduct; and
viii) whether there is any recompense for delay in repayment.
(b) Judicial control
ENTITLEMENT TO DUDUCT INPUT TAX
DUTY TO PAY INTEREST
"In all preventive retention cases, the VAT administration must undertake in the event of the taxable person being ultimately successful in the main action concerning the retention, to pay interest on the sum retained from the moment when, in accordance with the normal deduction rules applied in that member state in the implementation of the Sixth Directive, the sum would have been paid to that taxable person."
"62. Fifth, the plaintiffs state that, under Belgian law, in the event of release of the retained VAT balances, interest is not payable by the treasury unless the sums retained have not been duly returned by 31 March of the year following that in which the refundable balances came into being and unless the amount refundable is at least BF 10,000, the last VAT return for the calendar year in which the VAT credit arose was signed at the place on the form indicated for that purpose and all the VAT returns have been filed within the prescribed time limits.
63. In that regard, it must be observed that it is not necessary, in order to attain the objective pursued by legislation such as that at issue in the main proceedings, namely to ensure recovery of the amounts due, for interest to be calculated from a date other than that on which the retained VAT balance would normally have been paid under the Sixth Directive, and therefore that the principle of proportionality precludes the application of such legislation. The same applies to the other conditions mentioned above: in particular, lateness in filing returns can be penalised in a manner unconnected with the retention procedure and without affecting the right to refund of the VAT balance.
64. The answer to be given must therefore be that it is for the national court to examine whether or not the measures in question and the manner in which they are applied by the competent administrative authority are proportionate. In the context of that examination, if the national provisions or a particular construction of them would constitute a bar to effective judicial review, in particular review of the urgency and necessity of retaining the refundable VAT balance, and would prevent the taxable person from applying to a court for replacement of the retention by another guarantee sufficient to protect the interest of the treasury but less onerous for the taxable person, or would prevent an order from being made, at any stage of the procedure, for the total or partial lifting of the retention, the national court should disapply those provisions or refrain from placing such a construction on them. Moreover in the event of the retention being lifted, calculation of the interest payable by the treasury which did not take as its starting point the date on which the VAT balance in question would have had to be repaid in the normal course of events would be contrary to the principle of proportionality."