First-tier Tribunal (Tax)

[2011] UKFTT 312 (TC)

TC01173

Appeal reference: TC/2010/01337

VAT – sale in Germany of clothing produced in the UK – whether sales to the purchasers should be zero-rated – sales to the purchasers in fact outside the scope of UK VAT – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

CUDWORTH OF NORDEN Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting (Judge)

Philip Jolly (Member)

Sitting in public in Manchester on 31 March 2011

Ms. Sarah Stone appeared for the Appellant

Joshua Shields of counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.           The Appellant appeals against the decision of the Respondents to reject a claim by the Appellant for overpaid VAT amounting to £7,837, submitted by the Appellant by way of voluntary disclosure dated 20 January 2008.  The decision to reject the voluntary disclosure was dated 22 May 2008, upheld on review by letter dated 7 May 2009.

2.           The facts were not in dispute and we find them to be as follows.  The Appellant is a small, family business run by Mr. Malcolm Cudworth.  He retails country and outdoor pursuits clothing from principal premises in Rochdale.  He sells via a factory shop, internet sales and mail order, but by far the largest element of his sales are from trade stands at country and agricultural shows, game fairs etc. throughout the UK and also in Germany.  It is the sales within Germany which are the subject of this appeal.  These sales are made by Mr. Cudworth personally.  He loads his stock into his own van and drives it, via the ferry, to the German destination where he will have pre-booked a trade stand at country fairs and shows.  From his stand he then supplies unregistered individuals for the duration of the show, returning home with any unsold stock.  He does not supply his purchasers with invoices but merely keeps his own manual record of what has been sold.

3.           The Appellant is registered for VAT in the UK but not anywhere else in the European Union.  Until 2008, Mr. Cudworth accounted for VAT at the standard rate on all sales to private individuals both within the UK and in Germany, making an adjustment for the children’s garments sold, which of course he zero-rated.  In effect therefore, Mr. Cudworth made no distinction between the sales of clothing in the UK and within the European Union.

4.           In January 2008, Mr. Cudworth questioned whether or not his standard-rating of the sales in Germany had been correct or whether in fact he should have zero-rated these sales.  He was advised by the Respondents’ Contact Centre that if he had overpaid tax by incorrectly rating his sales, the mechanism for reclaiming would be by way of a Voluntary Disclosure.  Knowing he could only go back for three years, Mr. Cudworth prepared a voluntary disclosure form in the sum of £7,837 submitting it on 20 January 2008.  The voluntary disclosure was rejected by the Respondents, both originally and on review.  The correspondence from the Respondents to the Appellant is not particularly helpful and it is not entirely clear the grounds upon which the voluntary disclosure was refused.  It appears that with the best of intentions, the officers were attempting to assist Mr. Cudworth by answering the points which he put forward to them rather than setting out precisely how such sales should have been treated for VAT purposes.  This was eventually done by Officer Greenough by letter dated 16 April 2009.  In adjudicating upon Mr. Cudworth’s appeal against the refusal of his voluntary disclosure, it is necessary for the tribunal to identify precisely how the sales in Germany should have been treated.

The statutory framework

5.           Pursuant to section 1(1) VAT Act 1994 (“the Act”), VAT is charged on the supply of goods or services in the United Kingdom, including anything to be treated as such a supply.  Pursuant to section 5(1), schedule 4 of the Act applies to determine what is, or what is to be treated as, a supply of goods.  Paragraph 6(1) of schedule 4 provides:-

“Where, in a case not falling within paragraph 5(1) above, goods forming part of the assets of any business –

(a) are removed from any member State by or under the directions of the person carrying on the business; and

(b) are so removed in the course or furtherance of that business for the purpose of being taken to a place in a member State other than that from which they were removed,

then, whether or not the removal is or is connected with a transaction for a consideration, that is a supply of goods by that person.”

The place of supply is determined by section 7 of the Act, section 7(7)(a) providing that where the place of supply of goods is not determined under any of the preceding provisions of the section, but the supply of the goods involves their removal from the United Kingdom, the goods shall be treated “as supplied in the United Kingdom where their supply involves their removal from the United Kingdom without also involving their previous removal to the United Kingdom”.

6.           Applying the legislation to Mr. Cudworth’s German sales, the position is that when Mr. Cudworth travels with his goods to Germany there is a deemed supply on the removal of the goods from the UK.  The deemed supply takes place within the UK and therefore falls to be taxed pursuant to section 1.  As we have already mentioned, Mr. Cudworth was not registered for VAT anywhere other than within the UK and his deemed supply therefore is a standard-rated supply.  When Mr. Cudworth eventually sells his stock from his trade stand to unregistered individuals, these sales are outside the scope of UK VAT.

Submissions

7.           It was Mr. Shields’ submission that the Respondents were correct to reject the voluntary disclosure as, pursuant to the legislative provisions, tax at the standard rate is payable on at least some aspect of the German sales and zero-rating was not applicable.

8.           Ms. Stone, whilst not specifically challenging the statutory framework or its application, submitted that she and Mr. Cudworth were aware of a number of traders who had made similar claims and had been paid out.  She referred us to a letter to one such trader dated 18 November 2009, this trader apparently making similar sales to those made by Mr. Cudworth.  Ms. Stone also complained of a lack of clarity.  She did not specify precisely where the lack of clarity lay but we understood her to be complaining about both the approach which the Commissioners had taken in correspondence and the statutory provisions and the wording of the public notice.

Conclusions

9.           We have to treat Mr. Cudworth’s case on its own and in accordance with the facts which appertain to it.  Unfortunately the letter from the other trader was not complete, and it was far from clear precisely what had been claimed by that trader and what if any repayment had been made to him.  We regret therefore that we are not able to take any account of the contents of this letter.  We do share the misgivings expressed by Ms. Stone at the approach taken by the Respondents, but as we said at the outset we think this was probably for the best of motives and in an attempt to argue point by point the issues raised by Mr. Cudworth.  The statutory provisions are however clear and it is clear to us that VAT at the standard rate was payable on the removal of the goods from the UK to Germany.  This is not how Mr. Cudworth in fact treated the VAT on his sales, but it would be wrong of us to allow the appeal and to allow the voluntary disclosure as that would in effect lead to a repayment of the tax to Mr. Cudworth, tax that was in fact due but at a different stage in the process.  We therefore have to reject the appeal and find that the Respondents acted correctly in refusing to accept the voluntary disclosure.

Quantum

10.        One issue however which is very much alive but is not technically part of this appeal is the quantum of the tax due from Mr. Cudworth to the Respondents on his transactions.  He accounted for tax at the point of sale to the customers.  Tax was therefore effectively charged on the sale price.  However, as the correct tax treatment would have been to account for tax on the removal from the UK, tax should be accounted for on the cost price.  This point was extremely belatedly picked up by the Respondents who have indicated to Mr. Cudworth that, subject to agreeing quantum, a refund will be made to him of the overpaid VAT.  It was not any part of our remit to fix quantum and we heard no submissions upon it.  We do understand that Mr. Cudworth will have some difficulty from his records establishing the cost price of the goods sold in Germany and we also understand that an issue will arise as to how far back Mr. Cudworth will be allowed to go in making his claim for overpaid tax.  These are however matters for negotiation between the parties and if Mr. Cudworth is dissatisfied with the final offer made by the Respondents, then of course that will be a further decision which can be appealed.

11.        The appeal is dismissed. 

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

LADY MITTING

JUDGE
Release Date: 11 May 2011