[2010] UKFTT 135 (TC)

 

 

 

 

 

 

Value Added Tax --  Disallowance of input tax because the description in the VAT invoice was asserted not to match the goods purchased  -  manufacturer’s evidence  -  review jurisdiction of Tribunal  -  Appeal dismissed

TC00444

 

FIRST-TIER TRIBUNAL                                      Appeal Number: LON/2005/1196

 

 

 

 

 

PREMIER JOINT VENTURES LIMITED

            Appellant

 

 

 

-and-

 

 

 

 

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

            Respondents

 

 

 

Tribunal:  HOWARD M. NOWLAN (Tribunal Judge)

SHEILA CHEESMAN

 

 

 

 

Sitting in public in London on 3 March 2010

 

 

 

 

 

Robert Kelsey, managing director of the Appellant, in person

Neil Sheldon, counsel, on behalf of the Respondents

 

 

 

 

©CROWN COPYRIGHT 2010

 

DECISION

 

Introduction

 

1.     This case involved the disallowance of the Appellant’s claim for input tax in relation to a purchase of Intel Computer Processing Units (“CPUs”) that the Appellant subsequently exported.     

 

2.     HMRC contended that the jurisdiction of the Tribunal was to consider whether the decision of the relevant officer to deny the claim for input tax was reasonable.   If we concluded that it was reasonable, addressing only the information known to the officer at the time when the decision was made, it was contended that we should dismiss the appeal.

 

3.     When the Appellant made its claim for an input deduction in relation to the purchase of the CPUs, the experienced HMRC officer’s suspicions were aroused both by the circumstances of the purchase and sale, and by some of the information that he noted on seeing the inspection report of the goods carried out by freight forwarders.   The relevant circumstances that attracted the officer’s attention were the feature that a company that had done no previous business suddenly effected transactions involving sales worth £6.7 million, claiming a repayment of £1,131,223.10 VAT.     These facts were obviously consistent with the common features of the export leg of Missing Trader Intra-Community (“MTIC”) or “carousel” fraud transactions.          The features of the freight forwarders’ report that attracted the officer’s attention in relation to the input tax, the claim for which is the subject of this Appeal, were that the information given by the “closed box” inspection report revealed that the boxes in which the CPUs were said to have been contained had been damaged and/or opened, and the font of the printing on the boxes was not precisely in the usual style for Intel products.

 

4.      Intel itself packs new CPUs delivered from its factories in sealed boxes that carry two numbers.    One indicates the box number, and the other indicates the number of the manufacturing run of the CPUs contained in the box.    Both numbers are chosen on a random basis, and are known only to Intel, who will disclose them only to taxation and other authorities upon request.   The manufacturing lot numbers are changed fairly frequently but numerous boxes might contain CPUs from the same manufacturing run, all carrying the same manufacturing lot number.   The box numbers are, however, always unique to each box.    Intel always retains details of the two numbers affixed to every box of CPUs that it supplies and seals.

 

5.      HMRC contacted Intel to ascertain whether the box and manufacturing lot numbers printed on each of the relevant boxes, all of which numbers had been recorded on the freight forwarder’s report, corresponded to the numbers ever affixed by Intel to a sealed box of CPUs supplied by it, and none of the numbers corresponded. 

 

6.     The officer accordingly disallowed the claim for input tax.    He had concluded that the wrong font and the wrong numbers on the boxes indicated that something had been packed into boxes that were designed to look roughly like Intel boxes.    He did not know what had been in the boxes but the manufacturer’s evidence certainly enabled him to conclude that the boxes were certainly not factory-packed boxes, and were not what they were endeavouring to look like, so that it was perfectly possible that they would not contain what the Appellant’s invoice recorded that they contained, namely Intel CPU’s.    He considered that the further evidence given to him by the Appellant, largely geared to the Appellant’s suppliers having paid VAT on their modest profit margins, and their protestations that the goods were what the invoice indicated that they were, did not assist in demonstrating that the invoices did correctly record the nature of the goods supplied.

 

7.     The Appellant’s main contention was that there was nothing wrong with the information given in the VAT invoice that he had received from his supplier, and that he had no ground for supposing that he had bought anything other than genuine Intel CPUs.

 

8.     We accept HMRC’s contention that the issue is not whether the Appellant knew that he had not bought goods that fitted the description of the goods given in the invoice.     Once HMRC produce evidence that casts material doubt on whether the goods did correspond to the description of the goods in the invoice, it is for the Appellant to prove the required relationship, and we should only allow the appeal if we consider that the officer’s decision, based on his own concerns, and the further evidence and information given to him by the Appellant, was unreasonable.   We do not consider that the officer’s decision was unreasonable, and this appeal is accordingly dismissed.

 

The evidence

 

9.     Evidence was given to us by Mr. Robert Kelsey, managing director of the Appellant, by John Flynn, who had been Product Fraud Manager of Intel ® Corporation at the time, and by Mr. John Andrews, a senior officer of HMRC involved in combating MTIC (Missing Trader) fraud.     All of the evidence given was straightforward and honest and there was little dispute about it.

 

The facts in more detail

 

10.     Mr. Kelsey apparently traded through the medium of other companies, though had formed the Appellant in order to conduct “project management and business consultancy”.    The company was said to have been formed to undertake some property venture in France which was in the event abandoned, and so the company had done virtually nothing between its being registered for VAT purposes from 1 May 2003 until its VAT period 07/05.

 

11.     In the Appellant’s VAT period 07/05, the Appellant claimed a repayment of £1,131,223.10 based on sales of £6.7 million.      The appeal related, however, only to the purchase and sale of four boxes of Intel CPUs, all made respectively on 24 May 2005 and 25 May 2005.     These CPUs were packed in 4 boxes, and the relevant disputed input claim was for £21, 887.      The great majority of the balance of the input recovery claim had been accepted in a fairly routine manner, and although the claim was initially disputed for another purchase and supply of Intel CPUs, this claim was eventually accepted about one year after the claim was made.

 

12.     The circumstances of the purchase and sale of the Intel CPUs in respect of which the input tax claim remained in dispute were as follows.

 

13.     The Appellant indicated that he had traded in electronic components through one or more of his other companies, and in this way he had dealt with a company called Xicom Systems Limited.     We were not specifically told who had introduced the Appellant to the following deals, and it may well be that it was Xicom Systems, but we were nevertheless told in a straightforward way that the Appellant was offered a participation in some simple transactions under which, without it seeking out either a supplier or customer, it could purchase Intel CPU’s from Xicom Systems, and then sell them for export to an identified customer.    In relation to the remaining disputed transaction, 4 boxes of CPUs had been purchased for a net price of £125,640 on 24 May 2005, and for £147,627 inclusive of VAT.     They were sold on 25 May 2005 to a Hong Kong company called Comex Limited for £131,184.

 

14.     By coincidence, Mr. Andrews made a routine visit to the Appellant on 24 May, and warned him of the dangers of dealing in CPUs, mobile phones and similar items where fraud was prevalent.   He also left Mr. Kelsey a copy of the HMRC Notice that gave all the details of the checks and precautions that traders should make and take when dealing in such goods, particularly when dealing with suppliers and customers in whom they did not have the utmost faith, and obviously when dealing in the “grey market” in such goods.

 

15.     Seemingly before Mr. Kelsey submitted the Appellant’s VAT return for the period that covered the dates 24 and 25 May, Mr. Kelsey sent Mr. Andrews copies of the documentation, including purchase order, supplier’s invoice, and his invoice to Comex, and the freight forwarder’s inspection report, all in relation to the deals undertaken on 24 and 25 May, that is the one that remains the subject of this Appeal, and the one where the claim was initially rejected but subsequently accepted.

 

16.     The freight forwarder, Forward Logistics Limited, had sent a closed box inspection report to the Appellant, meaning that the boxes had not been opened to inspect the contents.    This report indicated the box and lot numbers on each box and, for the four boxes, there were comments added, indicating “discrepancies” that had been noted between sealed manufacturers’ boxes of Intel CPUs and the four boxes in this case.   Those discrepancies were as follows:

 

“Tape over part of label;   Font on label slightly different to normal;   Open box;   Scuff marks;   Knife marks

 

Label peeling slightly;    Label partly scuffed;    Font on label slightly different to normal;    Open box;    Scuff marks

 

Tape over part of label;    Sealed with *** tape;    Font on label slightly different to normal;   Open box;    Scuff marks;    Knife marks

 

Font on label slightly different to normal;    Label peeling slightly;    Open box;   Scuff marks;    Pen marks;   Knife marks”

 

17.     Mr. Andrews considered these comments troublesome, and so he e-mailed a contact at Intel, in order to check the box and lot numbers of the boxes carrying the comments just recorded, and the numbers on the boxes in the other consignment that was initially being verified.   

 

18.     The response from Intel was given by Mr. Flynn, who had obviously received earlier verification requests from Mr. Andrews, so that he clearly knew what information was required.   The response  (form now on largely ignoring the consignment where HMRC later accepted the claim) indicated that none of the numbers given could possibly have been genuine, because no boxes had ever been supplied by Intel that carried the combinations of box and lot numbers that appeared on the four boxes.

 

19.     On 30 June 2005 Mr. Andrews wrote to Mr. Kelsey, and confirmed a telephone conversation where he had obviously informed Mr. Kelsey that, although verification was continuing, he warned Mr. Kelsey that “most of the boxes in the shipments are likely to be counterfeit”.      He gave this warning both because Mr. Kelsey might wish to try to obtain further evidence to verify the goods in question, and also to warn him in relation to possible future deals with the “members of the same chain”.  

 

20.     In August 2005 Mr. Kelsey received a fax from his customer, Comex Limited, which said that “We have received the goods and upon initial inspection, we are fully satisfied that the goods appear to be genuine and in working order.    Based on the above we have accepted the goods subject to our customer’s acceptance or discovery of defects, and without prejudice.

 

Please note that these goods were sold locally in Hong Kong to a 3^rd party trading company.”

 

21.    Mr. Kelsey also obtained various letters from his own supplier, and from several companies further up the supply chain,  each indicating that the goods had been genuine and that they were surprised by HMRC’s enquiries, but none of them gave further definite information that put the genuine nature of the goods beyond doubt, or indeed that indicated that any of them had conducted more extensive checks that enabled them to give Mr. Kelsey any information that would dispel the doubts cast by the comments in the freight forwarder’s report, or by the evidence about the invalid numbers.

 

22.    On 19 September 2005 Mr. Andrews wrote to Mr. Kelsey, indicating that the input recovery claim was being denied as regards the four boxes.   This was on the ground that the VAT invoice from the Appellant’s immediate supplier did not, in its description of the goods, correctly identify the goods that had actually been supplied.   Mr. Kelsey asked for a Departmental Review, and that was given on 1 November 2005, the original decision to reject the claim being confirmed.

 

23.     Following the decision given in the Departmental Review, and in the course of the presentation of documents for this Appeal, the Appellant produced a Witness Statement from the Managing Director of the freight forwarder, indicating that an open box inspection of the 4 boxes had also been done when the initial closed box inspection was undertaken, that the report of this review had not been given to the Appellant at the time because the Appellant had not asked for it, or paid for it and that the open box review indicated that the goods had been genuine, and as claimed, and offering an explanation as to why the box numbers might not have tallied with the manufacturer’s records.

 

The relevant law

 

24.     The case involved several legal issues, but these can most conveniently be listed in summarising the contentions of the Respondents.

 

The contentions of the Appellant

 

25.     The Appellant contended that:

 

• HMRC’s rejection of its input claim was unreasonable;
• the supplier’s invoice to the Appellant had contained all the information required to be recorded on a VAT invoice, and so was entirely in order;
• the Appellant certainly had no knowledge that the goods delivered to him, and by him, had been anything other than Intel CPUs of the type rightly described on the invoice, and of the type that he expected to acquire; and that
• it was illogical for HMRC to refuse the input claim in relation to the four remaining boxes, whose content remained in dispute, when in 2006 the initial rejection decision in relation to the other consignment that had originally been challenged as well, was dropped.

 

The contentions on behalf of the Respondents

 

26.     The Respondents contended that:

 

• our jurisdiction in this case was only to review the decision of the HMRC officers to reject the input claims in the decisions of September and November 2005:
• the nature of that supervisory jurisdiction was not that we could substitute our own decision for the judgment formed by the officer and the reviewing officer; but was simply a jurisdiction to allow the appeal only if we concluded that the decisions had been unreasonable;
• in approaching that question we should consider only the information that was available to the officers at the time when they took their decision, and so we should ignore anything contained in the Witness Statement summarised shortly at paragraph 23 above, quite apart from the fact that there were aspects of that Statement that the Respondents contended to be most curious, and that the person who gave the Witness Statement did not intend to be before the Tribunal to give evidence in person and to face cross-examination;
• whilst it was for the Respondents to persuade the Tribunal that the Respondents had grounds for their initial rejection of the input claim, based on the recorded damage to the boxes, and the wrong box and lot numbering, once a prima facie case had been advanced that the goods in question did not match the description in the invoices, thereafter it was for the Appellant to prove its case, on the balance of probabilities, that the goods did in fact correspond to the description;
• a claimed deficiency in the invoice, based on the assertion that the goods supplied did not match the description in the invoice, could be established, regardless of the fact that the invoice, in isolation, appeared to be a complete and valid VAT invoice, and that it tallied with the goods that the Appellant expected to be acquiring.       The invoice could be deficient simply because the goods did not in fact correspond with the description of the goods given on the invoice.
• Finally, whilst HMRC officers had a discretion to admit claims for input tax on the provision of other evidence than the content of a valid VAT invoice, this was entirely within the discretion of the officers.

 

Our decision

 

27.     It was unfortunate that the Appellant was not represented, because this led to each party advancing contentions that were somewhat irrelevant, were the contentions advanced by the other correct.    In other words the Appellant’s contentions that the VAT invoice, in isolation, contained all the details that one would expect to see, and the (possibly quite plausible) contention by the Appellant’s director that he was unaware of any mismatch between the nature of the goods and the description of the goods on the invoice, were both irrelevant if the Respondents’ contentions were correct.

 

28.       We accept the legal argument advanced by the Respondents that, for the Appellant to have a valid claim for input tax, and to demonstrate that its suppliers’ VAT invoice contained the correct information, it is vital that the description of the goods in the invoice tallies with the nature of the goods supplied.    This has been established in a number of cases and the decision by Mr. Demack in the recent case of Pexum Limited v. HMRC 2007 WL 1157879 not only confirmed this but indeed confirmed it in a case where the goods in question were also Intel CPUs.    It is slightly curious that this legal requirement stems from provisions geared simply to the detail of the information that must be included for a VAT invoice to be a valid invoice, when the deficiency in dispute relates entirely to the goods, but it seems to us to be settled law that this disparity is fatal to the valid nature of the VAT invoice.    It is in other words irrelevant that the Appellant might have thought that he was acquiring what was described in the invoice, and that he may have contracted to acquire what was described in the invoice.   The actual goods delivered must correspond.

 

29.      Once that proposition is established, we must consider how the test must be applied, and again we agree with counsel for the Respondents that:

 

• the test is a factual and objective test;
• it is for the Respondents to cast prima facie doubt on the normal reasonable assumption that the goods and their description in the invoice will correspond; and
• once such doubt has been cast, it is for the Appellant to demonstrate that the doubt is misplaced, and that, whatever might have been supposed by HMRC, the goods and their description do in fact correspond.

 

30.     The decision process just summarised stems from the basic fact that it is generally for the Appellant to prove its case, and in this context to establish, on the balance of  probabilities, that it was entitled to its input tax deduction.     Notwithstanding this, it is for HMRC to indicate first why the normal assumption, that will generally not be questioned, that the description and the nature of the goods will correspond, is dubious such that it needs to be proved by the Appellant.

 

31.      Leaving aside at this point the question of whether we can substitute our own judgement for that of the HMRC officer, or whether our jurisdiction is limited to allowing this appeal only if we consider that the officer’s judgment, and his refusal of the input claim, was unreasonable, we accept that whatever the nature of the test, it would be inappropriate in this case for our decision to differ from the judgment reached by the officer.

 

32.      We consider that the comments on the freight forwarder’s inspection report were sufficient to occasion real doubt as to whether the four boxes in question did contain genuine Intel CPUs.       Once the officer had ascertained from Intel that the box and lot numbers did not tally, we decide that the officer’s judgment and his decision to reject the input claim cannot be disputed.

 

33.     We accept that HMRC has not proved what was actually in the four relevant boxes.     HMRC did however know that the boxes simply cannot have been sealed factory-packed boxes of genuine Intel CPUs because we accept the Intel evidence that the box and lot numbers on the four boxes had never been supplied by Intel to anyone.   The fact that is then decisive, to our minds, is that the boxes had been faked to appear to be Intel boxes, and to have what appeared to be genuine box and lot numbers.   We reach this conclusion because the boxes were obviously similar to genuine boxes because no point was made about this feature in the report.   The lettering and font on the boxes was said to be “slightly different to normal”, which suggests that an attempt was made to make the printing look normal, when it was not.    Furthermore the box and lot numbers were ordered in the sort of way, in terms of the order of numbers and letters, that to anyone except Intel, and HMRC (when HMRC had obtained information from Intel) looked as if the numbers were genuine.    There was accordingly evidence that the boxes had been faked to appear to be what they were not.    That was indeed largely evident from the initial report, even before the critical information was obtained from Intel.  

 

34.     No particular evidence was given by the Respondents in relation to general experience in relation to Missing Trader fraud, and it was clear in this case that HMRC were not alleging in any way that the particular Appellant was aware that the purchases and sales that it made were part of an MTIC fraud.   Nevertheless we consider that the HMRC officer was certainly entitled to note that the facts of this case had many of the conventional attributes of an MTIC fraud transaction by others than the particular Appellant.   In view of this, and the obvious knowledge that the officer would have had that there were many examples of MTIC fraud transactions being effected with fake goods, we consider that the officer was entitled to make his judgment based on the information that he had, referred to in paragraph 33 above, all in the context that the feature that the goods in question might well be fake.   We do not base our decision on this feature, though we do consider it realistic.

 

35.     We consider that the officer was entitled to ignore the rather weakly-worded reply that the Appellant received from his own customer in Hong Kong.   That reply very much seems to us to indicate that the writer had no certain and direct knowledge of whether the goods were genuine or not.    More relevantly, when the purchase by the Hong Kong trader looks as if it may well have been a purchase in an MTIC fraud in which that purchaser may have been implicated, it would follow that the purchaser would not greatly care whether the goods were genuine or not.   Furthermore the purchaser would fairly obviously suggest to his supplier, the Appellant, that “the goods had been fine”. 

 

36.     We take the same view in relation to any letters passing between the Appellant and the various members of the supply chain to him.    No letter indicated clear and firm evidence that the boxes had been opened and inspected, or that any of the suppliers could prove that the contents had been genuine, or indeed explain all of the problems with the boxes, and box and lot numbers, that had emerged.

 

37.      It was suggested to us by the Respondents that we should ignore the Witness Statement from the Managing Director of the freight forwarders, because this only appeared one year after the original closed box report had been supplied, and its information was thus not available to either HMRC officer when the initial decision was made to reject the input tax claim, and when the further decision was made in November.   The Respondents also drew our attention to numerous aspects of the Witness Statement, and the open box report that it claimed to reveal.   We will refer to these aspects shortly.

 

38.      We accept that if our jurisdiction was only to consider whether the officers’ decisions were reasonable or not, all by reference to the facts available to the officers when they made their decision, then we would have to ignore the claimed open box report, and this later evidence.

 

39.     Without the benefit of legal argument on behalf of the Appellant, we are not clear as to whether our jurisdiction is limited in the way claimed by counsel for HMRC.   In fact our decision is that this doubt on our part is irrelevant because we conclude that the further claimed evidence is not sufficient to make us alter our decision that the Appellant has not, on any basis, discharged the burden of proof in establishing that the goods actually supplied did tally with the description in the invoice.   We will however explain our doubt about the extent of our jurisdiction, and the reasons why our basic decision is not affected.

 

40.     There seems to us to be a distinction between the situation where the dispute is whether the goods delivered did or did not correspond with their description on the invoice, and the case where the HMRC officer has a discretion to rely on other evidence than that contained in the VAT invoice, to admit or refuse a claim for input tax.     We entirely accept that in the latter context, the HMRC officer has a discretion, and our jurisdiction in relation to that is purely supervisory.     And in that latter context, it is possible that the officer’s decision will be based on evidence that may have nothing to do with the terms of the invoice itself.    Indeed there may even be no invoice.  If there was evidence that confirmed, however, that there was really no mismatch between the nature of the goods actually delivered and the description of the goods on an otherwise impeccable VAT invoice, we are not clear that the fact that the claim should then be accepted has anything to do with discretion on the part of the officer.     Accordingly, if we were to accept that the much later evidence supplied by the freight forwarder supported the proposition that the goods had been genuine, then we would have been inclined to conclude that we would be able to allow the appeal in this case, and the fact that the evidence would not have been available to the officers when their decisions were made would not have been material.   This is because we would not have been considering the reasonableness of their decisions, but ruling on the basic question as to whether the invoice was indeed valid, as one that corresponded to the nature of the goods supplied.

 

41.      As we have already indicated, we have decided that there is in fact nothing in the Witness Statement from the freight forwarders that leads us to alter our decision that on any basis it has not been shown that the goods supplied did indeed tally with their description on the VAT invoice.   We say this because:

 

• the Managing Director of the freight forwarders was not present to give evidence in person, and to be cross-examined, and HMRC for their part were challenging this written evidence on a number of grounds;
• we agree with counsel for HMRC that it was decidedly curious that the Appellant had only been given a closed box report if an open box report had also been compiled, with that open box report only emerging on the scene a year later;
• it was said that the open box report had originally not been furnished because the Appellant had not paid for it, though it was suggested by counsel for HMRC that it actually appeared that the Appellant had paid more for his original closed box inspection report, on the charging basis revealed to us, than the open box report would actually have cost;
• the suggestion given by the relevant Managing Director, as to how there might be an explanation for the disparity between the box and lot numbers, made no sense to counsel, to HRMC or, on further consideration, to us; and
• without our being able to assess the credibility of the further evidence, some freight forwarders, or possibly employees engaged by them, have been less than honest in many MTIC cases.    This freight forwarder may have been transparently honest, but we had no way in which to reach that conclusion.

 

42.      Our conclusion is accordingly that HMRC has amply demonstrated a prima facie case for saying that the goods supplied did not correspond with their description on the VAT invoice, and that the Appellant has not demonstrated that the goods and the description did tally.

 

43.       The Appeal is accordingly dismissed.

 

 

HOWARD M. NOWLAN

(Tribunal Judge)

 

Released: 29 March 2010