Future Phonic Ltd v Revenue & Customs [2013] UKFTT 169 (TC) (09 January 2013)
DECISION
Introduction / issues in dispute
1. This
decision concerns two appeals against HMRC’s decisions to disallow the VAT
input tax credit of the appellant, Future Phonic Limited in relation to two
purported purchases of Garmin satellite navigation devices in May and June of
2005.
2. HMRC say
the supplies described on the invoices relied upon by the appellant to make its
input tax claim had not taken place and so no entitlement to deduct input tax
arose. HMRC rely principally on evidence from a manager from Garmin to say it
is is highly unlikely that the appellant was supplied with the particular types
of Garmin products in the quantities claimed.
3. The
appellant argues the supplies did take place, and that HMRC exercised their
discretion to accept other evidence of the supplies unreasonably.
4. The
appellant also raises an argument that HMRC’s treatment infringes EU
principles of non-discrimination in that they have made assessments in relation
to supplies of the goods as between domestic suppliers earlier in the chain of supply
to the appellants but have refused a claim in relation to the appellant who
was involved in intra-community trade.
Evidence and witnesses
5. We had 3
lever arch files containing the HMRC decisions, pleadings, correspondence
between the parties and copies of witness statements and exhibits.
6. We heard
oral evidence from the following persons who also provided witness statements:
(1)
Saeed Farid, the director of the appellant.
(2)
Sean Biddlecombe, who was, at the relevant time, Director of
International Marketing for Garmin (Europe) Ltd, and who gave evidence on the
particular Garmin products, the mechanisms for distribution, and the details of
transactions in the products in the period June 2004 to June 2005.
7. The
statements of all the witnesses who gave oral evidence had been served in
advance, and those statements stood as the witnesses’ evidence in chief. In the
course of examination of Mr Biddlecombe further evidence was given.
8. We also
read witness statements (which also stood as the witnesses’ evidence in chief) but
did not hear oral evidence from the following:
(1)
Hassan Masood, director of Elite Global Limited.
(2)
George Beaddie, Higher VAT Assurance Officer of HMRC.
(3)
Jasvinder Singh Bhabra, an HMRC Officer working in the team responsible
for dealing with traders whose main business activities include buying and
selling mobile telephones, computer chips and other electrical equipment.
(4)
Carl Watson, Higher Officer of HMRC Southampton VAT Office.
(5)
Christopher Hodge, Intelligence Officer for HMRC.
(6)
Stewart Yule, Higher VAT Assurance Officer of HMRC.
(7)
Jennifer Ann Carter, VAT Assurance Officer of HMRC.
(8)
Charles Forward, Financial Controller of Garmin (Europe) Limited.
9. In
addition, with the appellant’s agreement, we received details of assessments
HMRC had made on other parties earlier in the alleged chain of supply to the
appellant through Mr Singh’s oral submissions.
Costs regime
10. No application as to the
costs regime applicable to the proceedings having been made, the Tribunal
invited representations from both parties as to whether the costs regime under
the VAT Tribunal Rules 1986 (“the old regime”) or the costs regime under the
Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the new
regime”) should apply or indeed whether an order should be made splitting costs
between the old and new regime depending on when they were incurred.
11. The appellant’s preference was
for the old regime to apply. HMRC did not have a preference as between the old
regime applying or a split order applying the old regime to matters before 1
April 2009 and the new regime to matters after that date.
12. Considering the Upper
Tribunal’s decision in Atlantic Electric [2012] UKUT 45 (TCC) the Tribunal considered that where substantial costs had been
incurred before 1 April 2009 the starting point ought to be to make an order
for splitting costs across the old and new regime unless there were good
reasons not to do so.
13. In this matter there was
substantial work undertaken both before and after 1 April 2009. There was no
clear expectation demonstrated by the parties as to which regime should apply
and no application had been made by the parties despite the issue being raised
in previous directions.
14. It was not apparent to the
Tribunal why it should not, in these circumstances, make a split regime costs
order and accordingly the Tribunal directed that up until 1 April 2009 the old regime
would apply. From 1 April 2009 the new regime would apply.
Background facts
15. On the evidence before us we
made the following findings of fact which we set out by way of background.
Further findings of fact are also set out later on in the discussion section of
our decision.
Appeals
16. The appeals are against two
decisions of HMRC dated 3 March 2006. The first decision of that date disallows
£905,800 input tax claimed by the appellant in the period 05/05. The second
decision disallows £397,566.25 input tax claimed by the appellant in the period
08/05.
The two transactions
17. The appellant claims it
bought goods from Elite Global Ltd (“Elite”) and Synergy Services Ltd (“Synergy”)
in the UK and sold these goods to Daystar Telecon S.L. (“Daystar”) in Spain. We refer to purchases from Elite as “Deal 1” and the purchase from Synergy as “Deal
2”. The purported goods were of two types of satellite navigation devices the
first being the Garmin Street Pilot 2610 in-car GPS system (“the 2610”) and the
second being the Garmin 76CS navigation system (“the 76CS”).
18. The two purported purchases
as shown on the supplier invoices are summarised as follows:
|
Supplier and invoice number
|
Date
|
Description of goods
|
Unit price (£)
Total inc. VAT(£)
|
Input tax (£)
|
|
DEAL 1
|
|
Elite
EG310505/1
|
31 May 2005
|
4000 Garmin GPS 76CS navigations systems
|
370.00+VAT
Total
1,739,000
|
259,000
|
|
Elite
EG310505/2
|
31 May 2005
|
8000 Garmin Street Pilot 2610 in-car GPS systems
|
462.00+VAT
Total
4,342,800
|
646,800
|
|
DEAL 2
|
|
Synergy
INV290605FUT
|
29 June 2005
|
6500 Garmin GPS 76CS systems
|
349.50+VAT
Total
2,669,306.25
|
397,566.25
|
19. The Purchase orders from
Daystar to the Appellant showed the following:
|
Date and invoice number
|
Goods
|
Unit price (£)
|
Total (£)
(no VAT)
|
|
Deal 1
|
|
27 May 2005
|
8000 GarminStreet Pilot 2610 Incar GPS
4000 Garmin GPS76CS Tom Tom Navigation
|
463.00
371.00
|
3,704,000.00
1,484,000.00
|
|
Deal 2
|
|
29 June 2005
|
6500 Garmin
GPS 76CS
|
350.00
|
2,275,000.00
|
20. The Sales invoices from the
Appellant to Daystar showed the following:
|
Date
|
Goods
|
Unit price (£)
|
Total (£)
(no VAT)
|
|
Deal 1
|
|
27 May 2005
No. 117
|
8000 Garmin Street Pilot 2610 in –car GPS systems
4000 Garmin GPS 76CS systems
|
463
371
|
3,704,000
1,484,000
5,188,000
|
|
Deal 2
|
|
29 June 2005
No. 138
|
6500 Garmin GPS 76 CS systems
|
350
|
2,275,000
|
21. The appellant, Elite and
Synergy were all registered for VAT at the relevant time.
Inspection reports by freight forwarder
22. The goods purported to be
supplied for both transactions were said to have been held at a freight
forwarder company called Jade Logistics Ltd. (“Jade”). Jade are said to have
inspected the goods and we note the following information from their stock
inspection reports for the appellant:
Deal 1 –the 2610s
(1)
Date inspected: 27 May 2005.
(2)
Type of stock: Garmin Street Pilot 2610 In Car GPS Head Units.
(3)
Quantity: 8000 items.
(4)
Approximate weight 420 grammes
(5)
Total weight 7600 kgs.
Deal 1 – the 76CSs
(1)
Date inspected: 27 May 2005.
(2)
Type of stock: Garmin GPS 76 CS in Car GPS Head Units.
(3)
Quantity: 4000 items.
(4)
Approximate weight – [left blank]
(5)
Total weight 1600kgs.
Deal 2 76CS only
(1)
Date of inspection:
(2)
Type of stock: 6500 Garmin GPS 76CS in car GPS Head Units.
(3)
Quantity: 6500 items
(4)
Approximate weight: [left blank]
(5)
Total weight: 2600kg
23. All three of the inspection
reports above stated the following:
(1)
Origin of stock: Central Europe
(2)
Level of inspection 100% (range 0% 10%/50%/100%)
(3)
Stock count 100% (range 0% /10%/50%/100%).
(4)
“We have inspected the goods and they (sic) have found them to be
present and correct and in good condition and free from customs stamps.”
24. Jade issued an invoice to
the appellant on 29 June 2005 which showed an inspection charge regarding 8000
2610s and 4000 76CSs in the total amount of £528.75.
Future Phonic Limited and its director Mr Farid
25. From Mr Farid’s witness
statement we found the following.
26. Mr Saeed Farid has been a
director of the appellant (then known as Farid Consultancy Limited) since 2000
which is when the appellant was registered for the purposes of VAT. The main
business activity on the appellant’s application was stated as being the
provision of IT consultancy services. Around 2000 the appellant acquired a
consultancy contract with T-Mobile UK Communications. In carrying out the
contract Mr Farid formed contacts within and outside that organisation. At
around the end of 2002 / start of 2003 he decided to use these contacts and
develop a wholesale business trading in mobile telephones and other
electronic/IT related equipment. An amended VAT certificate was issued by HMRC
pursuant to Mr Farid’s request which changed the trade classification to
“64200-Telecommunications”.
27. To take account of the
expansion of the appellant’s business activities, its name was changed on 31
January 2003 to Future Phonic Limited. On 2 June 2006 the appellant changed
its name to Ex More Limited. Although this name change took place after the
disputed transactions we mention this because the banking documentation showing
some of the payments made for the transactions refers to Ex More Limited. The
explanation for this given by Mr Farid, which we accept, was to the effect that
the systems underlying the production of bank statement print-outs reflected
the current name in which the account was held even if this was in relation to
transactions prior to the name change.
28. It was not until April 2005 that
the appellant entered into its first wholesale transaction. Before that the
appellant continued with the consultancy side of the business. In August 2005
Mr Farid decided to end the consultancy side of the business on the basis that the
wholesale trade side of the business was buoyant.
29. The appellant did not enter
into any formal distribution agreement with Garmin. It was not contractually
prevented from purchasing any Garmin products outside Garmin’s official
distribution channels.
30. Deal 1 was Mr Farid’s first
transaction in GPS devices. He could not recall whether he had received stock
offers of, or requests for, GPS devices prior to Deal 1. He recalled it had
been a very busy time and there were “faxes every day coming in and going out”.
Looking back at that time Mr Farid reflected that it was a time of, in his
words, “greed and ambition”. He told us the details of the stock became
secondary and that he was “anxious to get going”.
Sean Biddlecombe’s evidence
31. Mr Biddlecombe’s witness
statement of 14 April 2011 adopts the contents of a statement given by Mr
Forward dated 6 March 2007. Mr Biddlecombe gave further evidence at the hearing
which was cross-examined by the appellant and also answered further questions
from the Tribunal.
32. Mr Biddlecombe’s evidence
covered the corporate structure of Garmin, the process for forecasting,
producing and delivering products in Garmin’s official channels, the
specifications of the products and their pricing. We set out the facts from this
evidence in relation to these matters below. Our views on the weight of Mr
Biddlecombe’s evidence on the grey market for the products, worldwide
production numbers, remuneration of employees, and his views on whether the
products were supplied in the disputed transactions are discussed further following
[110] below.
33. In May and June of 2005 Mr
Biddlecombe was Director of International marketing. His title has subsequently
changed to General Manager. He has worked for Garmin since 1994.
34. We found Mr Biddlecombe to
be a highly credible witness who was knowledgeable about the Garmin products in
issue, and the Garmin businesses.
Garmin’s corporate structure – operation of supply chain for Garmin
products – the position in 2005
35. Garmin Limited (“GL”) is the
Group holding company. Products are produced in two countries, the USA and Taiwan.
36. There were three sales
organisations, Garmin International Inc. (“GI”) which covers the Americas,
Garmin (Europe) Limited (“GE”) which covers Europe, Middle East and Africa
(“EMEA”), and Garmin (Asia) Corp (“GC”) which covers Asia and Oceania.
37. There were two segments to Garmin’s
production activities. The first was in car navigation and fitness and marine
products, and the other aviation. At the relevant time there were two factories
in Taiwan which manufactured for the first segment. They sold to GE in
Southampton and GI in Kansas. The aviation segment was strictly controlled and
aviation products were only built in Kansas. GE received aviation products only
from GI.
38. As well as selling to GI and
GE the Taiwan factories also had a sales outlet to Asia (GC).
39. Each of the sales
organisations had a network of distributors within its geographic region, they were
the sole official suppliers of Garmin products.
40. The normal way in which products
are ordered and distributed was as follows:
(1)
GE placed an order on GL which in turn placed an order on GC. A similar
process was followed for GI purchases from GC. Goods were shipped from GC to GE
in Romsey where they were received in GE’s bonded warehouse.
(2)
GE’s distributors placed orders on GE and GE shipped out directly to
them. At the time of the transactions in issue the way GE operated was to forecast
its requirements and fulfil orders from its inventory. Since then there has
been a policy of building to order based on distributor forecasts.
(3)
All significant volumes of Garmin product in the relevant geographical
location were meant to transit through the local Garmin entity. Therefore goods
destined for countries in EMEA ought to have transited through GE.
41. There were shipments between
Garmin entities but these would tend to be small volumes.
42. For global accounts such as
Kenwood (a customer in Belgium) there was a similar process except that the
purchase order was received centrally in GI who then placed both GE’s and GI’s
purchase requests with GL.
43. On occasions products were “drop
shipped”. The term “drop shipped” means for instance that Taiwan might ship directly say to Kenwood in Belgium. The invoicing for such an arrangement would
follow the terms of the distribution agreements between Garmin and its
distributors but the product would go direct to Kenwood.
44. Mr Forward was only aware of
one shipment that was drop shipped. It was not clear over what period if any he
was referring to. This was in November 2005 and this was on a different product
(a C310). In cross-examination Mr Biddlecombe mentioned the direct delivery of
satnavs to BMW (see [70-71] below). We concluded that drop shipping of Garmin
products was a rare practice.
45. In relation to placing of
orders by distributors, GE’s main distributors had a weekly shipping slot. They
had regular stocking orders which they supplemented with short notice
requirements. GE did not ship without an e-mail or paper order.
46. Each entity whether GE, GI
or GC produced sales forecasts to the factory setting out their expected requirements.
Mr Biddlecombe was involved in that process for GE. In addition global production
figures were distributed to the local entities. Mr Biddlecombe would get weekly
reports every Monday for each factory which showed part numbers entries, how
much had been built, planned production, and actual production. He would see
the forecasts and sales history of local dealers including for dealers in Taiwan, China and the Philippines but understandably these would not be of particular interest to
him.
47. He therefore was aware of forecasting
and production beyond GE.
48. Mr Biddlecombe told us that
the number of units Taiwan decided to produce was driven by forecasts. He said
the production manager would have to secure components from China, Taiwan and US e.g. chips, screens, and batteries. The negotiation for the underlying
procurement was handled centrally in US office so e.g. the contract for Intel
is negotiated in the US.
49. The Taiwan factories only manufactured Garmin branded products.
50. We were shown a schedule which
set out details of sales for years preceding 2005 (1993 to 2004) and for the
first 7 months of 2005 for GE’s major customers. Sales to non UK country distributors were set out in a separate schedule. We accept these documents as an
accurate record of such sales.
51. There was a two step
distribution model for products within EMEA. If GE was selling to France then it would sell and deliver the goods to the French distributor and then they
would be sold on to domestic retailers. The exception to this was that in the UK, GE acted as the distributor.
52. We were asked by the
Respondents to note a reference to “Synergy SpA” on the separate schedule. At
the time this was the exclusive distributor in Italy. Synergy SpA was based in Milan and Mr Biddlecombe had dealt with them for the past 15 years. Garmin bought the
business in 2007 and it was now called Garmin Italia. We accept that there was
no connection between the “Synergy SpA” in Garmin’s schedule and the
appellant’s purported supplier in Deal 2.
53. We were shown another
schedule which set out Garmin Europe’s Middle East sales in 2003, 2004 and the
first 6 months of 2005. We accept this as accurate.
The products
54. Both products were GPS
devices. The 2610 was introduced in August 2003 and the 76CS was introduced in
April 2004.
The 2610
55. We were shown a copy of the
catalogue for this product. It was one of the first generation satnav devices.
It gave turn by turn instructions and audio guidance.
56. We accept the evidence given
by Mr Forward that the weight of the boxed unit was 2.2kg.
57. According to the catalogue
the weight of the unit was .93 pounds (which converts to 0.42 kg) and the unit
was powered using adaptor cables.
The 76CS
58. We were shown a copy of the
catalogue for the product. The 76CS is a hand held GPS device, the size of an
old-fashioned mobile phone. It is used for hiking, walking, camping or when in a
boat to give a position to a waypoint. It was primarily of interest to persons carrying
outdoor pursuits or sailors of small dinghies. Maps could be loaded on to it
e.g. a map of buoys for marine use or street maps. The “C” in 76CS signified a
colour screen and “S” signified the sensors which were compass, pressure,
altitude change and pressure change.
59. We accept the evidence given
by Mr Forward that the weight of the boxed unit was 0.61kg. The boxed unit
included a manual.
60. From the catalogue
information we find that the weight of unit itself is 7.6 ounces (which
converts to 0.215kg) with batteries. The unit used two AA alkaline batteries.
Pricing of product
61. Mr Biddlecombe explained that
pricing of the products varied. He said £700 was not an unreasonable price for
the 2610 and £600 was not unreasonable for the 76CS but was on the high side.
62. Mr Biddlecombe was shown a
print out from a Garmin website referring to the retail price of $589.27 for
the 76CS (described as being “for domestic US market only”). He said that was
not an unreasonable price and thought that that was a cheaper price than in
Europe but thought this might be explained by the fact that in the US there was a one step distribution process, rather than a two step one in Europe.
Base-maps for the products
63. Both products had built in
base maps which related to a particular geographical region and which could not
be erased
64. A European product would
come with a European base map, a US one with a US base map.
65. The base map would show
major routes, up to the equivalent of A roads, coastline and state borders. More
detailed maps could then be overlaid – e.g. a European map for driving, or
coastal maps, or Ordnance Survey maps for the UK.
66. With the European 2610 there
would be a CD in the box which contained the detailed European street map.
67. For the 76CS there was no
cartography in the box. A CD could be bought separately or downloaded
separately. The idea was that if, say a hiker, wanted data for France then he or she would buy that there. The retailer would not necessarily know for
which area the customer wanted a map which is why it was not included.
68. It was possible for a non
European device to function in Europe but it would simply show the basic co-ordinates
of a position with no map.
Product updates
69. While it was possible that there
may have been updates to the maps there were no updates to the devices
themselves.
Quantities and values of transactions in Garmin products and in these
particular products
2610s
70. We were shown a schedule of distributor
purchases from GE between 1 July 2004 and 30 June 2005 which had been produced
by Mr Forward of GE and which we accept as accurate. The data was sorted by the
number of units purchased. The largest unit order was for an amount of 5930 and
was made up of 28 invoices. This was for BMW motor bikes. The invoices went to Germany; the products were drop shipped to Australia.
71. The machines ordered by BMW
were specially configured to come up with the BMW logo on front page and to
show the BMW dealer database.
72. The total number of units
bought in the year to 30 June 2005 was 24,864.
76CSs
73. We were shown a schedule of distributor
purchases from GE between 1 July 2004 and 30 June 2005 which had been produced
by Mr Forward of GE and which we accept as accurate. From July 2004 through to
June 2005 the total of 76CS sold by GE was 6950.
74. We were shown a schedule which
set out sales quantities per order for the 76CSs which had been produced from
information provided by Mr Forward of GE and which we accept as accurate. On
the schedule the number 10 for example showed that a particular customer had
bought 10 products.
75. We noted the vast majority
of the orders were for single or double digit quantities. There were a small
number of triple digit orders with amount ranging between 100 and 200.
76. Some of the orders listed
the quantity as zero. We accept Mr Biddlecombe’s evidence that that these denoted
replacements which had been made under warranty.
HMRC’s VAT treatment of other traders in supply chain
77. With the agreement of the
appellant we received the following details orally from Mr Singh.
Deal 1
78. There was documentary
evidence (a chain of invoices for the units the subject of the appeal ) of a
chain of supply which started with Shakedown Productions, which invoiced
Ellerwood, which invoiced Elite, which in turn invoiced the appellant. Shakedown
was de-registered on 19 July 2005. It was assessed in 3 January 2006 for April
to June 2005 in the amount of £4,205,273.00. No returns were submitted by it, and
no input tax was claimed. Shakedown was assessed for underdeclared output tax.
79. Ellerwood was deregistered
on 5 November 2005. It denied onward supply to Elite and no assessment was
raised by HMRC in respect of such a supply. No assessment was raised against
Elite. No input tax reclaim was made by Ellerwood. Elite put in its return. It
is not known how the supply or the failure of the supply from Ellerwood was dealt
with.
Deal 2
80. There was documentary
evidence of a chain of supply which started with Able Trading Ltd which
invoiced Pearl Craft UK, which invoiced Synergy, which in turn invoiced the
appellant. Able Trading Ltd was deregistered as a missing trader on 23 August
2005. On 12 September 2007 it was assessed for a number of periods including
June 2005. The amount was £8,685,329.08. No return was submitted. No input tax was
claimed. An assessment was made for under-declared output tax.
81. Pearl Craft UK was deregistered
as a missing trader on 11 November 2005. An assessment for period June to August
2005 on 23 January 2006 was made for £7,029,593.00. No returns had been
submitted therefore no input tax had been claimed. An assessment was made for
under-declared output tax.
82. On 20 August 2007 Synergy was
notified of an assessment for the 06/05 period. There was a nil return. An assessment
was made for output tax in that period. Input tax was claimed. In making the
assessment HMRC disregarded the input tax on the Pearl Craft invoice on the basis
that supplies in the quantities shown were unfeasible and the invoice was invalid
under Regulations 13/14 of VAT Regulations 1995. The assessment was for £402,915
and was not challenged by Synergy. The Pearl Craft invoice included output tax
but input tax on that was disregarded.
Law
83. At the time the purported
supplies were made to the Appellant, Council Directive 77/388/EEC (“the Sixth
Directive”) was in force. Insofar as is material, Article 17 of the Sixth
Directive stated as follows:
“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…”
84. These provisions are
reflected in section 24 of the Value Added Tax Act 1994(“VATA”). Section 24(1)
of VATA states as follows, insofar as is material:
“Subject to the following provisions of this
section, “input tax”, in relation to a taxable person, means the following tax,
that is to say—
(a) VAT on the supply to him of any goods or
services…
being (in each case) goods or services used or to be
used for the purpose of any business carried on or to be carried on by him”
85. Section 26 of VATA concerns
the exercise of the right to deduct. Section 26(1) states as follows:
“The amount of input tax for which a taxable person
is entitled to credit at the end of any period shall be so much of the input
tax for the period (that is input tax on supplies, acquisitions and
importations in the period) as is allowable by or under regulations as being
attributable to supplies within subsection (2) below”.
86. Article 18 of the Sixth
Directive also concerns the exercise of the right to deduct. It states as
follows, insofar as is material:
“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 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 paragraphs 1 and 2”.
87. Article 22(3)(a) of the
Sixth Directive, which again concerns the exercise of the right to deduct,
states as follows, insofar as is relevant:
“Every taxable person shall ensure that an invoice
is issued, either by himself or by his customer, or in his name and on his
behalf, by a third party, in respect of goods or services which he has supplied
or rendered to another taxable person or to a non-taxable legal person…”.
88. Article 22(3)(b) of the
Sixth Directive concerns the exercise of the right to deduct and sets out what
is required to be shown on an invoice for VAT purposes. It states, insofar as
is relevant, that:
“Without prejudice to the specific arrangements laid
down by this Directive, only the following details are required for VAT
purposes on invoices issued under the first, second and third subparagraphs of
point (a)…- the quantity and nature of the goods supplied …”.
89. The provisions in the Sixth
Directive concerning the exercise of the right to deduct are reflected in VATA
and in the Value Added Tax Regulations 1995 (“the VAT Regulations”). Section
24(6) of VATA insofar as is relevant states that:
“Regulations may provide-
(a) for VAT on the supply of goods or services to a
taxable person…to be treated as his input tax only if and to the extent that
the charge to VAT is evidenced and quantified by reference to such documents or
other information as may be specified in the regulations or the Commissioners
may direct either generally or in particular cases or classes of cases…”
90. Regulation 13(1) of the VAT
Regulations states that save as otherwise provided in the Regulations, where a
registered person:
“(a) makes a taxable supply in the United Kingdom to a taxable person”, he shall provide that person with a VAT invoice.
91. Regulation 13(2) states that
the particulars of the VAT chargeable on a supply of goods shall be provided on
a document containing the particulars prescribed in Regulation 14(1), and that
“such a document issued to the buyer shall be
treated for the purposes of paragraph (1)(a) above as a VAT invoice…”.
92. Regulation 14(1) of the VAT
Regulations states as follows, insofar as is relevant:
Contents of VAT invoice
14(1) Subject to paragraph (2) below and regulation
16 and save as the Commissioners may otherwise allow, a registered person
providing a VAT invoice in accordance with regulation 13 shall state thereon
the following particulars—
…(g) a description sufficient to identify the goods
or services supplied,
…(h) for each description, the quantity of the
goods…”
93. Regulation 29(2) of the VAT
Regulations states that:
“At the time of claiming deduction of input tax… a
person shall, if the claim is in respect of-
(a) a supply from another taxable person, hold the
document which is required to be provided under regulation 13…provided that
where the Commissioners so direct, either generally or in relation to particular
cases or classes of cases, a claimant shall hold or provide such other…evidence
of the charge to VAT as the Commissioners may direct”.
Decisions referred to
94. We were referred to the
following decisions in the course of the parties’ submissions
(1)
Plazadome Ltd v HMRC [2009] UKFTT 229 (TC)
(2)
Powa (Jersey) Limited v HMRC [2009] UKFTT 360 (TC)
(3)
Powa (Jersey) Limited v HMRC [2012] UKUT 50 (TCC)
(4)
S&I Electronics PLC v HMRC [2012] UKUT 87 (TCC)
Appellant’s arguments
95. Unequal treatment:
While the Respondents have disallowed the input tax claimed by the appellant
they have not similarly disallowed the input tax claimed by Elite and Synergy
on their alleged purchases of the equipment or repaid to Elite and Synergy the
output tax which they charged to and collected from the appellant. By favouring
one taxable person over another the Respondents are breaching Article 22(8) of
the Sixth Directive in that they are allowing those companies engaged in
domestic transactions (Synergy and Elite) to have their input tax credited
whereas they have disallowed the input tax credits of the appellant, the one
company that was involved in intra community trade.
96. Fiscal neutrality: It
is clear that some goods were supplied and that the principle of fiscal
neutrality precludes the generalised differentiation between lawful and
unlawful transactions except in limited situations.
97. The evidence shows the
goods described on the invoices were supplied. The appellant relies on the
transaction documentation, the stock check by Jade and the treatment by the
Respondents of others in the supply chain. There was nothing evidentially to
suggest the pricing of the products was inappropriate. The evidence from Garmin
deals with supplies through official channels and while Mr Biddlecombe’s
evidence deals with supplies through official channels in the UK there is no evidence on the amount of worldwide production of the products so as to be able to
calculate the size of the grey market for them.
98. HMRC’s discretion to
accept other evidence for the supplies – It was clear that some goods were
supplied. If, because the goods were not as described on the invoice, the
invoice would not comply with the regulations then prima facie input tax was
not creditable, but Regulation 29 of the VAT Regulations 1995 gave HMRC discretion
to accept other evidence of a supply. The Respondents failed to exercise that
discretion. This amounted to Wednesbury unreasonable exercise of
discretion. It was not good enough for the Respondents to say as they did that
the goods were not as described. It was manifestly irrational to fail to
consider issues such as the assessment of other suppliers in the chain, and not
to take account of the bona fides of the appellant. References in the Sixth
Directive to prevention of abuse can be distinguished as there was no avoidance
or abuse here.
Respondents’ arguments
99. Failure to prove goods
described in the invoices issued to it were supplied to appellant: The onus
is on the appellant to prove on the balance of probabilities that the goods
described in the invoices issued to it by Elite and Synergy were supplied to
it. Absent proof of supply it has no right to deduct input tax. The evidence
showed that the goods described on the invoice were not supplied.
100. On the basis of
information provided by Garmin not only has the appellant failed to prove that
it was supplied with Garmin 2610 and 76CS units described on the invoices
issued to it by Elite and Synergy but it is inconceivable that the appellant
was supplied with those units in the quantities claimed.
101. The evidence
from Garmin demonstrates that Garmin operates a tight distribution chain and
that it is highly unlikely that the appellant sourced Garmin 2610 and 76CS
products from any alleged grey market.
102. If sourced from
the grey market the products would have weighed the same as any other unit. The
discrepancies in weight further demonstrate the appellant was not supplied with
genuine Garmin 2610 or Garmin 76CS products.
103. HMRC’s discretion
to accept other evidence: The Respondents did not accept there was a supply
of goods. The appellant did not say the goods were counterfeit and has not
offered evidence of what else the goods were. There can be no scope for a right
to exercise discretion where there was no charge to tax. The Respondents cannot
be criticised for not exercising their discretion as no request was made and no
alternative evidence was provided.
104. Other
assessments: The Respondents’ treatment of others has no bearing on
question of fact of whether goods claimed to be supplied were supplied. The
earlier sale and the later sale are irrelevant to the question of whether
supplies were made. If the Respondents treated others incorrectly this should
not mean the appellant should be treated incorrectly as well.
105. Equal
treatment / non-discrimination: The arguments raised by the appellant had
been rejected in the Upper Tribunal cases of Powa (Jersey) Limited and S&I
Electronics PLC.
Discussion
106. The primary issue
before us is the factual one of whether the supplies purported to have been
made were in fact made. We consider in turn the relevance and weight of the
evidence, making further findings of fact where appropriate in order to reach a
conclusion on this issue in relation to the two Deals.
107. This part of the
discussion is structured as follows:
(1)
Could the quantities of 2610s and 76CSs described on the invoices have
been supplied through Garmin’s normal distribution chain?
(2)
Could the quantities of 2610s and 76CSs described on the invoices have
been supplied from the grey market?
(a)
Mr Biddlecombe’s evidence on the grey market.
(b)
Mr Farid’s evidence on the grey market.
(c)
Leakage of products into the grey market from the Taiwan factories
- Probability of significant
recorded over-production by Taiwan factories
- Probability of significant
un-recorded over-production by Taiwan factories.
(d)
Leakage of products into grey market from the regional entities (GE, GI,
GC) Could the quantities of goods described on the invoices have been amassed
from goods delivered to the various Garmin regional entities?
(e)
Leakage of products into grey market at level in the distribution chain
below the regional distributor.
(f)
Deal 1 – Probability that 2610s sourced from EMEA grey market.
(g)
Deal 1 – Probability that 2610s sourced from worldwide grey market.
(h)
Deal 1 – Probability that 76CSs sourced from EMEA grey market.
(i)
Deal 1 – Probability that 76CSs sourced from worldwide grey market.
(j)
Deal 2 – Probability that 76CSs sourced from EMEA grey market.
(k)
Deal 2 – Probability that 76CSs sourced from worldwide grey market.
(3)
Transaction documentation and evidence from Mr Farid that the appellant
bought the goods and evidence from Mr Masood that Elite sold the goods to the
appellant.
(4)
Payment of invoices.
(5)
Weight of products compared with weight stated in inspection reports.
(6)
Relevance of pricing.
(7)
Relevance of HMRC’s treatment of other suppliers.
(8)
Weighing the evidence.
(9)
Conclusion on Deal 1.
(10)
Conclusion on Deal 2.
(1) Could the quantities of 2610s and 76CSs described on the invoices have
been supplied through Garmin’s normal distribution chain?
108. On the basis of
the Garmin evidence and schedules we find that it is unlikely that any products
obtained in the quantities that are shown on the relevant invoices were
obtained through the normal Garmin product distribution chain. We are satisfied
that such quantities obtained through the product distribution chain would
have shown up in the reporting schedules that were put before us and further
that they would have been noticed by Mr Biddlecombe. The amounts would have shown
up as abnormal both in terms of the percentage they represent of total units
distributed, but also in terms of the transaction amount. We received evidence
on what happens when there is over supply and how this is managed. None of that
evidence suggests that those mechanisms were deployed so as to result in
relevant amounts of the relevant products becoming available. Certainly if they
had we think Mr Biddlecombe would have known about it.
109. The appellant suggests
that Mr Biddlecombe’s evidence is limited because it does not address
production figures on a worldwide basis. We disagree. We received evidence
from Mr Biddlecombe as to his knowledge of worldwide production and forecast figures
and his estimates of the relative ratios of the consumption of production as
between EMEA the US and Asia (these were 1:1:0 for 2610s and 1:2.5:0.25 for the
76CS). We are satisfied that Mr Biddlecombe had such knowledge of the worldwide
production and forecast figures as to be in a position to give a reasonable estimate
of such ratios and that by applying them to the EMEA figures this provides us
with an approximate set of worldwide production figures. Based on those we find
it more likely than not that the quantities in the disputed transactions were not
supplied through Garmin’s normal distribution chain.
(2) Could the quantities of 2610s and 76CSs described
on the invoices have been supplied from the grey market?
110. The appellants
do not rely on supplies being made through the official channels. They say
there is a “grey market” in these goods the extent of which is not reflected by
Garmin’s figures, because it consists of sales made otherwise than by Garmin
distributors.
111. We must look at
and assess Mr Biddlecombe’s evidence on the grey market in relevant products,
and the evidence of Mr Farid too.
(2)(a)) Mr Biddlecombe’s evidence on the grey market
112. In cross
examination Mr Biddlecombe was shown a print out from the website of what
appeared to be an Australian importer of electronic products which stated that
that firm
“…now provides some products from internationally
based distributors other than the manufacturer’s locally licensed importer.
These are referred to as “direct import” products or “grey market” products and
will be shipped directly to you from overseas.”
113. It was not in
dispute between the parties that a grey market in the relevant Garmin products
(as described in the extract above and more broadly in the sense of genuine
products which are sold outside of the official distribution channels) could
have existed and Mr Biddlecombe acknowledged this in his answers given in both
examination and cross-examination.
114. In particular Mr
Biddlecombe told us of two sorts of grey market of which he was aware. One
arose in the US from the fact that US dealers sold units more cheaply than
European dealers; and one arose “intra-Europe” though the different margins
across the different distribution channels there.
115. US grey market
sales would for instance arise through someone in Europe buying the product
advertised on a US website such as Amazon marketplace. Sales made in this way
would result in the purchaser obtaining a product which was not fit for use in
Europe because the products would be equipped with US base maps.
116. The intra-Europe
grey market was mainly an issue in Eastern Europe and in particular Latvia and Lithuania.
117. Mr Biddlecombe
was not aware of the size of either of these grey markets. While he
acknowledged there could be a similar grey market in Asia he had no specific
knowledge about this.
118. He accepted that
in a situation where Garmin had surplus old stock and wanted to get rid of it
Garmin could reduce the price and dump the products on the market through for
example Amazon. Mr Biddlecombe could not give a figure for products that might
be dumped because of updating. Whatever the figure he thought it would be lower
for the 76CSs given there were higher margins on those and less product. He
thought that for the 76CS this would be under 1000 units and that the dumping
would take place over a number of weeks. If Garmin needed to get rid of excess
stock it would do this through the authorised distribution channels. Mr
Biddlecombe said he knew five companies which would take such stock quickly.
119. Taking into
account the description of the process by which products were manufactured
according to forecasts by distributors and evidence that Mr Biddlecombe gave in
cross-examination, that rather than it being the case that it was possible that
Taiwan produced more than was needed, there was a problem of back orders, we
were left with the impression that the scenario whereby Garmin was left with
excess stock in the relevant products was certainly not a commonplace one.
120. Mr Biddlecombe
was not aware of a practice of Taiwan overproducing and thereby building up “buffer
stock”. As discussed earlier he had sight of the production figures so we think
that if there was a practice of building up buffer stock, and this was recorded
in the production figures this is something Mr Biddlecombe would have been
aware of. The fact he was not so aware suggests to us that Taiwan was not building up “buffer stock” and recording this in the production figures.
121. Mr Biddlecombe
accepted that once in the grey market Garmin lost control of the product
distribution. However we are satisfied from the evidence that he gave that if
significant quantities of the products, and certainly products in the volumes
purported to have been supplied to the appellant were traded in the grey market
this would be something that would have come to Mr Biddlecombe’s attention. We
accept Mr Biddlecombe’s evidence that the official distributor would be
concerned about being undercut by significant grey market supplies and that
they would complain to him. He would therefore get to hear about any
significant grey market activity in the region he covered. Mr Biddlecombe told
us by way of example of an occasion when a Spanish distributor had sold into Norway. These sales became visible to the Norwegian distributor who then complained about
prices in its market. It turned out the sales were made in error but we think
this shows that if there was significant grey market activity in a
distributor’s market, the official distributor would get to hear about it, and would
be likely to complain to Garmin with the result Mr Biddlecombe would have heard
about it too.
122. We should
mention that in response to questions put to him Mr Biddlecombe said that in his
view it was highly unlikely that the quantities of the product of various non-European
specification, and European specification were being traded in Europe. He put the percentage chances of the goods in the appellant’s transactions coming
from the grey market at 1-2%, stated he would be “staggered” if volumes of such
products had come through US channels. We approach these statements with caution
conscious that they amount to opinions and given that Mr Biddlecombe was a
witness of fact. We do not therefore place weight on such views but must instead
look at the evidence of fact provided in order to reach our own opinion on the
likelihood or otherwise of the products described in the appellants’ invoices
coming from the grey market. But we accept that product designed for the US market would be less attractive to a non US customer.
(2)(b) Mr Farid’s evidence on grey market
123. Mr Farid’s
statement exhibits a document he says he obtained from the internet. This is
entitled “Garmin Reports Record First Quarter, Affirms 2005 Guidance”. The
document refers to a record first quarter ended March 26, 2005 and refers to
“Over 584,000 units” being shipped in this quarter.
124. As pointed out
by the Respondents this figure refers to shipments of all of Garmin’s products
not the shipments of the Garmin 2610 and 76CS models.
125. Mr Farid’s
statement also exhibits a transcript dated October 26, 2005 of Garmin’s third
quarter earnings call. This refers to more than 700,000 Garmin products being
shipped in the 3rd quarter of 2005. Again we note this figure refers
to all Garmin products and not just the shipments of Garmin 2610 and 76CS
models.
126. We were satisfied
that Garmin were supplying products other than 2610s and 76CSs. The transcript
of the earnings call referred to above refers to 49 new products being
introduced in the year to date and refers to a number of different products
such as “C-series, i-series, StreetPilot 2720 and M3”. Further, the fact that
the records of monetary values of products sold to major European customers in
2005 which we accepted as accurate, far exceeds the value that would be generated
if only 2610s and 76CSs were sold indicates Garmin were selling other products
in addition to 2610s and 76CSs. The evidence of Mr Forward, in explaining “drop
shipments” mentions the shipment of another product, a C310.
127. Mr Farid’s
statement exhibits a report from KPMG undated but copyrighted 2003 entitled
“The Grey Market”. The statement refers to various excerpts from the report
including:
“branded products have been diverted from the
authorised distribution channel within a country or are imported into a country
for sale without the consent or knowledge of the manufacturer...computers and
related products are among the industry sectors most effected by grey market
activity and information technology products valued at as much as 40 billion US
dollars in sales are passing through the grey market annually…authorised
distributors may purchase more units for end customers than they ultimately
require and may sell them to brokers instead of returning the excess units to
the OEM.”
128. We consider the
report of very limited relevance to the issue before us. As the Respondents
point out the report refers to the grey market for information technology
products in general and says nothing about the size of any grey market for
Garmin products, or even the Garmin products which are the subject of the
appeals before us. Further it is not clear that the report speaks to the size
of such a grey market during the period in issue.
(2)(c) Leakage of products into the grey market from
the Taiwan factories
Probability of significant recorded overproduction in
Taiwan
129. By “recorded
overproduction” we mean production by the Taiwan factories that was recorded in
the production figures circulated to the Garmin regional entities that was at a
given in point in time significantly in excess of the products required by the
official distributors.
130. It was put to Mr
Biddlecombe that if Taiwan built up stock and then there was a change in
product then Taiwan would sell this off. He said such a sell off would be
visible to him. Forecasts were done monthly at product number level. If inventory
at the 3 locations was sufficient, production would not be triggered. Mr Biddlecombe
derived his knowledge of Taiwan’s production from a weekly production report
that Taiwan produced.
131. On the basis of
this evidence we find that it was more likely than not that stock would not
have been allowed to build up, and further that if it did and was sold off Mr
Biddlecombe would have been aware of this. Mr Biddlecombe was not so aware. We
find that there was not significant recorded overproduction in Taiwan.
Probability of significant unrecorded over production
from Taiwan
132. By definition this
kind of overproduction would be outside the company’s official internal
controls and official reporting procedures. We accept Mr Biddlecombe’s evidence
that if someone were to be found engaging in such practices, this would be very
risky behaviour on their part and they would be likely to be fired. While it
cannot be ruled out we think such overproduction and sale is highly improbable.
133. In terms of whether
there is any evidence which supports a finding that there was significant
unrecorded overproduction at best there are only inferences that might be drawn
from the quantities stated in the transaction documentation the appellant
relies upon. On that basis alone we are unable to make any finding that there
was significant unrecorded overproduction by the Taiwan factories.
134. Even if there
was unrecorded overproduction it would, when disposed of, end up in circulation
in one or more of the regional markets covered by Garmin’s official
distribution network. We heard evidence from Mr Biddlecombe that if products in
any significant quantity appeared on local markets in EMEA this would be
brought to his attention. We accept that that would be the case. We find no
such significant quantities were brought to Mr Biddlecombe’s attention.
135. Given our
findings above we proceed on the basis that the goods purportedly supplied
must have derived from goods which fell within the recorded production figures
albeit outside of the official distributor channels.
136. However before
doing that we discuss the evidence on two matters which we considered but did
not think could assist us on determining whether the Taiwan factories had
overproduced but not recorded such overproduction.
137. We heard from
Mr Biddlecombe that the production manager in Taiwan was a long serving
employee who “knew the ropes”. We have no reason to think that is not the case
but we should make it clear that we do not rely on this for our finding that
there was not significant unrecorded overproduction by the Taiwan factories.
138. Similarly Mr
Biddlecombe told us about the factory reporting direct to the CEO Dr Ming Kau
and that there was an “element of trust” so that he would be very surprised if
stock was built up by the factory but not disclosed. In particular Mr
Biddlecombe told us he was not aware of Taiwan not disclosing buffer stock.
139. While we have
no reason to disagree that Mr Biddlecombe would be so surprised or that he was
not so aware we find ourselves unable to attach any weight to this evidence in
terms of finding whether there was significant unrecorded overproduction or not.
While we are satisfied the official production figures were visible to Mr Biddlecombe
we do not know one way or the other whether Mr Biddlecombe would have been in a
position to know that Taiwan had buffer stock but that it had not disclosed
such stock.
140. In cross
examination it was put to Mr Biddlecombe that the Taiwan factory could produce
more than was needed. He denied this was the case and said there was on the
contrary a big problem of back orders. While a problem of back orders tends to
indicate it was more likely than not that Taiwan did not have spare capacity,
it would in our view be predicated on an assumption that the Taiwan factories were over producing goods according to official forecasts and on such goods being
distributed through official channels and disclosed in the production figures.
It does not establish one way or the other whether there was unofficial overproduction.
(2)(d) Leakage into grey market from the regional entities (GE, GI, GC)
Could the quantities of goods described on the invoices have been amassed from
goods delivered to the various Garmin regional entities?
141. We have
considered the possibility of whether the Garmin regional entities procured
additional units to those required by the forecasts of distributors below them
and sold those into the grey market.
142. For the
following reasons we are satisfied that on the balance of probabilities it is
more likely than not that no such significant amounts of additional goods were
sold directly by GE, GI or GC into the grey market.
143. We heard
evidence from Mr Biddlecombe, which we accept, that Garmin’s employees whether
in Europe or the US were not incentivised through sales commissions at individual
entity level. What incentives there were beyond salary e.g. bonuses for
vice-presidents in the US or share options were linked to operating income at
the global level.
144. We accepted Mr
Biddlecombe’s evidence that ignoring the official distribution channels would
be looked at unfavourably from a corporate point of view and employees engaging
in such a practice would risk sanctions.
145. While the most
plausible scenario for goods being put into the grey market would be through a
surplus building up and having to be got rid of, we have already come to the
view above that the practice of having to dump goods was not commonplace, and
accepted evidence that even if this were to occur it would happen, certainly in
the case of EMEA, through official distribution channels. We heard that this
situation might arise where there was surplus stock due to a product update.
But we accept that there were no product updates to the 2610s and 76CSs which
would necessitate this type of action.
146. The absence of
product updates, the risk of sanctions and lack of obvious incentives for
employees to make grey market disposals, and the likelihood that a shortfall
between production figures and orders made by official distributors, all
suggest to us that no significant amounts of 2610s and 76CSs were disposed of
by the regional Garmin entities into the grey market.
(2)(e) Leakage into grey market at level of the
distribution chain below the regional distributor
147. On this basis
for units to be sourced from a grey market they would at some point have to
have passed through the hands of official country distributors or their
customers further down the chain from the Garmin regional distributors. We
consider the possibility of that below in relation to any possible intra EU
grey market and any possible worldwide grey market.
148. We are conscious
the documentary data only refers to the Garmin European entities. We have though
estimated ratios given by Mr Biddlecombe in his evidence and evidence that he
had regular sight of the global production figures. As discussed above at [109]
we think those ratios may be relied on to derive rough estimates of global
production amounts.
Deal 1
149. Deal 1 concerns
the purported purchase of 8000 Garmin 2610 units and 4000 Garmin 76CS units on
31 May 2005 from Elite.
(2)(f) Deal 1- Probability 2610s sourced from intra EMEA grey market
150. Garmin’s data
which we accept as accurate shows that a total of 26,864 units were sold to its
distributors in EMEA between 1 July 2004 and 30 June 2005.
151. We accept the
data for 2610s shows that no single distributor purchased more than 5930 units,
and only 16 distributors purchased more than 200 units each in the entire year.
We accept from Mr Forward’s evidence that the largest single purchase of Garmin
2610 units in this period was for 900 units, and that the number of transactions
of more than 500 units was 4.
152. The Respondents
invite us to note the following from the Garmin schedule. A company as large as
BMW spent far less than appellant – it spent $2.2million in the whole of the first
7 months of 2005 on all Garmin products. Retailers such as Dixons, Maplin, Argos, and Comet spent less on all Garmin products in the first 7 months of 2005 than the
appellant spent in 1 day.
153. 8000 units out
of 24,864 represent 32% of annual sales in EMEA for the 2610.
154. Taking account
of both the size of the market share for the year, and the profile of the
frequency of purchases and size of their orders we think it is highly unlikely
that 8000 Garmin 2610 units were amassed from any intra EMEA grey market. To
amass a quantity of that size, given the distribution of products, would entail
a large number of the purchasers holding surplus stock, and a concerted
campaign by a purchaser to identify these purchasers and the need in turn to secure
purchases from them.
155. We find on the
balance of probabilities that the 8000 units were not sourced from any intra
EMEA grey market in 76CSs.
(2)(g) Deal 1- Probability 2610s sourced from worldwide grey market
156. Applying the 1:1:0
(EMEA to US to Asia) ratio of Mr Biddlecombe to 24864, gives a rough quantity
of 50,000 units worldwide for the year. 8000 units represent 16% of the
worldwide total of units supplied for the year.
157. This represents
a significant slice of the global market share and while we do not have
evidence before us of the profile and frequency of purchases made outside of Europe, we do not have any reason to think such profile and frequency would be radically
different. Taking account both the size of market share and purchase profile we
think it is highly unlikely that 8000 units could be amassed from the worldwide
grey market.
158. Even if the
assumption we have made around the profile of purchases is put to one side we
would still be of the view that it is highly unlikely that 8000 units were
sourced from the worldwide grey market given that Garmin 2610s distributed into
the Americas and in Asia would not have base maps appropriate for EMEA.
159. We find on the
balance of probabilities that the 8000 Garmin 2610 units could not have been
sourced from any worldwide grey market in 2610s.
(2)(h) Deal 1- Probability 76CSs sourced from EMEA grey market
160. The purported
purchase was of 4000 units on 31 May 2005. Garmin’s data, which we accept shows
that 6950 units were sold in EMEA between 1 July 2004 and 30 June 2005. 4000 units
therefore represent 58% of the EMEA sales for the year.
161. Mr Forward’s evidence,
which we accept, states that in this period, only the top 10 customers of GE
purchased more than 200 Garmin 76CS units each, and that those top 10 customers
purchased 4,232 units in total between them. In a schedule produced by Garmin
of their sales of 76CSs for July 2004 to June 2005 we note that the order
amounts are typically single or double digit figures. The largest amount
ordered in a single transaction appears to us to be for 200 units. Mr Forward’s
evidence which we accept states that the top 10 customers of GE were the only
ones with purchases over more than 200 units over the year and they accounted
for 4,232 of the 6950 units sold.
162. Taking account
of both the size of the market share for the year, and the profile of the
frequency of purchases and size of their orders we think it is highly unlikely
that the 4000 Garmin 76CS units were amassed from any intra EMEA grey market. To
amass a quantity of that size, given the distribution of products would entail
a large number of the purchasers holding surplus stock, a concerted campaign to
identify such purchasers and the need in turn to secure purchases from them.
163. We find on the
balance of probabilities that the 4000 76CS units were not sourced from any
intra EMEA grey market in 76CSs.
(2)(i) Deal 1- Probability 76CSs sourced from
worldwide grey market
164. Applying the
1:2.5:0.25 (EMEA to US to Asia) ratio of Mr Biddlecombe to 6950 (and accepting
his evidence that the Asian market was insignificant in the period in issue)
gives a rough quantity of 26,000 units worldwide for the year. 4000 units
represents 15.4% of the worldwide total of units supplied for the year.
165. This represents
a significant slice of the global market share and while we do not have
evidence before us of the profile and frequency of purchases made for markets
outside of Europe, we do not have any reason to think such profile and
frequency would be radically different. Taking account both the size of market
share and purchase profile we think it is highly unlikely that 4000 units could
be amassed from the worldwide grey market.
166. Even if the
assumption we have made around the profile of purchases is put to one side we
would still be of the view that 4000 units were sourced from the worldwide grey
market given that Garmin 76CSs distributed into the Americas and in Asia would not have base maps appropriate for EMEA.
167. We therefore find
on the balance of probabilities that 4000 Garmin 76CS units could not have been
sourced from any worldwide grey market in 76CSs.
(2)(j) Deal 2- Probability 76CSs sourced from EMEA grey market
168. The purported
purchase was of 6500 Garmin 76CS units. The relevant Garmin EMEA evidence is
set out above. 6500 units represent 93% of the annual sales.
169. Taking account
of both the size of the market share for the year, and the profile of the
frequency of purchases and size of their orders it would be inconceivable to
accept that the 6500 Garmin 76CS units were amassed from any intra EMEA grey
market. To amass a quantity of that size, given the distribution of products
would entail a significant number of the purchasers (who for the most part
would hold single or double digit quantities) holding surplus stock, the need
to identify such purchasers and the need to in turn secure purchases from them.
170. We find on the
balance of probabilities that 6500 units could not have been sourced from an
intra EMEA grey market.
(2)(k) Deal 2- Probability 76CSs sourced from worldwide grey market?
171. Applying the
1:2.5:0.25 ratio Mr Biddlecombe gave to 6950 gives a rough quantity of 26,000
units worldwide for the year. 6500 units, the amount purchased in the single
transaction represents 25% of the worldwide total of units supplied for the
year.
172. This represents
a significant slice of the global market share and while we do not have
evidence before us of the profile and frequency of purchases made for markets
outside of Europe, we do not have any reason to think such profile and
frequency would be radically different. Taking account of both the size of
market share and purchase profile we think it is highly unlikely that 6500
units could be amassed from the worldwide grey market.
173. Even if the
assumption we have made around the profile of purchases is put to one side we
would still be of the view that it is highly unlikely that 6500 units could
have been sourced from the worldwide grey market given that Garmin 76CSs
distributed into the Americas and in Asia would not have base maps appropriate
for EMEA.
174. We therefore find
on the balance of probabilities that 6500 Garmin 76CS units could not have been
sourced from the worldwide grey market.
175. Mr Biddlecombe
did not dispute that there could be a grey market in the Garmin products. What
is in dispute is the size of it and whether it was sufficiently large for the
appellant to source goods in the quantities that appear on its invoices.
176. For the reasons
discussed above we consider the appellant’s evidence on the existence and size
of the grey market does not persuade us that quantities of the 2610s and 76CSs
as appear on the invoices could have been sourced from such a market.
177. We have found on
the basis of the Garmin evidence that there could not have been either an intra
EMEA or worldwide grey market large enough to enable 2610s and 76CSs to be
sourced in the quantities reflected on the appellant’s invoices.
178. We are further
of the view given the evidence of Mr Biddlecombe that it is likely that if such
quantities were in circulation in EMEA Mr Biddlecombe would have got to hear
about it through the network of distributors. We are satisfied that he did not
hear about such quantities being in circulation and this we think is a further
indication that such quantities of 2610s and 76CSs in the amounts stated in the
appellant’s invoices were not being traded in the grey market in EMEA.
(2)(l) Shift of evidential burden on grey market
179. The appellant
argues that on the basis the appellant states it bought the products in the
grey market the evidential burden then shifts to the Respondents to show the
size of the grey market. We disagree. The burden is on the appellant to show
that the supplies of the products described on the invoices were made. If the
appellant maintains that it bought the products in the quantities described it
is we think for the appellant to show that a grey market in such products
existed which was able to support such supplies. We have looked at the
appellant’s evidence on the size of the grey market but are not persuaded that
it supports the appellant’s assertion that relevant quantities of the products
could have been bought in the grey market. To the extent there is any issue of shift
in evidential burden we think any such shift is not therefore triggered. We
would add that even if it was for the Respondents to show the size of the grey
market the evidence that has been put forward satisfies us that any grey market
in the products could not have sustained quantities of the products said to
have been supplied to the appellant.
(3) Transaction document evidence, evidence from Mr Farid that the
appellant bought the goods, and evidence from Mr Masood that Elite sold the
goods to the appellant
180. We have
considered the various documents put in evidence before us documenting the two
transactions:
(1)
The appellant’s purchase orders to Elite dated 27 May 2005 and to
Synergy dated 29 June 2005.
(2)
Elite’s two invoices to the appellant dated 31 May 2005, and Synergy’s
invoice to the appellant dated 29 June 2005.
(3)
Daystar’s purchase orders to the appellant dated 27 May 2005 and 29
June 2005.
(4)
The appellant’s invoices to Daystar dated 27 May 2005 and 29 June 2005.
(5)
a vendor statement in relation to 6500 76CSs on 29 June 2005 by a
director of Synergy, Mr Cameron Thurston in which Mr Thurston confirms amongst
other things that “the stock exists”.
(6)
In relation to the purported supply to Daystar a “Delivery Pre-Alert”, a
Shipping Note, a Stock Allocation Authorisation, a Stock Release Authorisation
a CMR for Deal 1 and a ferry ticket.
(7)
Jade Inspection reports.
181. We have also
considered Mr Farid’s evidence that the appellant bought the goods from Elite
and Synergy, and Mr Masood’s evidence (which although we did not hear from him
was in a statement which we read) that Elite sold the goods to the appellant.
(4) Evidence of payment
182. In relation to
Deal 1 and payments to Elite there was evidence before us in the form of a
witness statement from Mr Masood, a director of Elite which states the products
were paid for by the appellant making a number of payments between 20 June 2005
and 12 July 2005 and in copies of bank statements exhibited to the witness
statement of the HMRC Officer, Jennifer Carter showing a series of transfers of
amounts between the appellant and Elite. From that we find that the Elite
received payments towards its invoice to the appellant. HMRC argued that the
issue of whether payment had been made was not relevant to whether or not there
had been a supply.
183. In relation to
Deal 2 with Synergy we did not have evidence before us to make a finding that
the invoice was paid by the appellant.
184. In the absence
of any explanation the fact that someone has paid an invoice for goods would
tend to suggest they have received some goods although it remains open to
question whether the goods they received were goods as described on the
invoices.
185. The evidence
that there had been some payment by the appellant is something which we take
into account in favour of the appellant.
(5 ) Weight of units compared with weight stated in inspection reports
186. The weight of
the boxed unit of 2610s is 2.2kg. The weight of the boxed unit of 76CSs is 0.61
kg.
187. Therefore 8000
boxed 2610 units would weigh 17,600 kg. According to the Jade inspection report
dated 27 May 2005 the total weight of the 8000 units purportedly purchased was
7,600 kg, a discrepancy of 10,000kg.
188. 4000 boxed 76CS
units would weigh 2,440 kg. According to the Jade inspection report dated 27
May 2005 the total weight of the 4000 units purportedly purchased was 1,600kg,
a discrepancy of 840kg.
189. 6500 boxed 76CS
units would be 3,965 kg. According to the Jade inspection report the total
weight of the 6500 units purportedly purchased was 2,600 kg, a discrepancy of
1,365kg.
190. It was not
established whether the Jade weights included any pallets the boxes were on or
not, but to the extent the Jade weights did include pallets we note that, given
that in each case the Jade amounts given are lower than the actual amounts,
including pallet weight within the Jade amounts would make the discrepancy
larger rather than smaller.
191. In the
inspection reports the number of items is recorded next to the heading “No of
BOXES”. We do not understand the appellant to contend that the weight is that
of the units, rather than the boxes but for the sake of completeness we record
that the unit weight of 2610s was 0.42kg. The unit weight of the 76CS was
0.215kg. 8000 2610 units would weigh 3,360kg. 4000 76CS units would weigh
860kg, and 6500 units would weigh 1397.5kg. So even if the weight was of the
units there would be a discrepancy.
192. In any event we
had evidence before us that both models came with various accessories and a
manual. We find it highly unlikely that if the 2610s and 76CSs were supplied such
boxes as were inspected would only contain the units.
193. In his evidence
Mr Farid suggested that the fact that the inspection report for the 2610s
stated 7600kg instead of 17600kg could have been a typographical error. In the
absence of any evidence to support that we do not make any finding to that
effect. In any case no explanation was put forward for the discrepancy for the
other two purported supplies.
194. We agree with
the Respondents’ contention that the weight discrepancies in the inspection
report undermine the reliability of those reports. Thus it undermines those
reports as evidence that goods were supplied, or that goods were supplied of
the relevant description. Having said that the discrepancy does not necessarily
establish one way or the other whether the goods described were supplied or
not. Having regard only to the Jade reports and weight discrepancies, it is
still possible that the goods as described on the invoice were supplied but
that either the inspection was not carried out, or that it was not carried out
properly.
195. A further point
which undermines the reliability of the inspection reports, and is relevant to
the purported supplies of 76CSs in Deal 1 and Deal 2, is that the 76CSs are
described in the inspection reports as “in car GPS head units” whereas 76CSs
are in fact hand-held portable units.
(6 ) Relevance of pricing
196. The appellant
says there is nothing evidentially to suggest that the pricing of stock was inappropriate.
The evidence was “all over the place” between £900 and £700.
197. From the
Respondents’ closing submissions we did not understand that them to be relying on
the pricing of the deals.
198. We would agree
there is nothing to suggest the pricing points towards there not being a supply
of the goods. Subject to other evidence, the fact that pricing is not inappropriate
is though merely consistent with goods of the relevant description being
supplied. It does not tend to establish that the goods as described were
supplied and not some other goods which were of similar price.
(7) Relevance of HMRC treatment of other suppliers
199. The appellant
argues that it appears as if assessments were raised against defaulting traders
for unpaid output tax which would only have been raised if taxable supplies of
the equipment had been entered into.
200. It is our
understanding that the appellant has a number of arguments in relation to how
HMRC has treated other entities in the purported chains of supply. The first
which we discuss here is that HMRC assessments of other suppliers are relevant
to the question of whether there were supplies of the goods in the disputed
transactions.
201. The second is in
the context of the appellant’s arguments around exercise of discretion under
Regulation 29 of the VAT Regulations and where amongst other matters the
appellant says it was manifestly irrational to fail to consider the assessment
of other suppliers.
202. The third is
that to the extent there is inequality of treatment within a supply chain such
inequality is unlawful under Community law.
203. In relation to
the first question, the appellant refers to assessments being made under s73
VATA 1994 which contains the words “…where it appears to the Commissioners…”
and suggests that something must have therefore been apparent to HMRC in the
way of facts. The assessments were not appealed and therefore became final.
204. To this the
Respondents say their treatment of others has no bearing on the question of
fact of whether goods claimed to be supplied were supplied. The earlier sale
and the later sale are irrelevant to the question of whether supplies were made
to the appellant. Even if the Respondents were incorrect on this, the incorrect
treatment of others does not mean the appellant should be treated incorrectly
as well. The Respondents appear to concede that where a decision in relation to
other suppliers in the chain was made after the decision in this case it should
not have included the supplies of Synergy to the appellant.
205. Assessments
in the Elite supply chain – Shakedown Productions was assessed in 3 January
2006 for under-declared output tax. The purported goods went to Ellerwood and
then to Elite. Ellerwood denied onward supply and no assessment was raised. No
assessment was made on Elite.
206. The question
arises as to the significance of Shakedown Productions being assessed. If it is
significant what is the significance of Ellerwood and Elite not being assessed?
207. Assessments
in the Synergy supply chain - Able trading was assessed for under-declared
output tax on 12 September 2007 for a number of periods including June 2005.
The amount was £8,685,329.08. Pearl Craft UK Limited was assessed for
underdeclared output tax of £7,029,593.00 on 23 January 2006. The assessment on
Synergy for output tax in the period was for £402,915. The input tax on Pearl
Craft was disregarded on basis of unfeasible supplies and because the invoice
was invalid.
208. The question
arises as to the significance of Able trading, Pearl Craft UK limited and
Synergy being assessed.
209. In our view the
assessments do not assist with the factual question of whether the relevant
supplies were made to the appellant. The assessments are evidence that HMRC saw
something which caused them to conclude that a supply had been made. But that
might only have been an invoice. HMRC assess only on what information they have
to the best of their judgment on that information. That does not require there
to have been certainty that there was a supply. Unless there is evidence that
HMRC saw something else which convinced them that there was a supply the
assessment only shows that there was an invoice. Even if they did see something
we do not know what it was. Further, HMRC may have wrongly not questioned the
supplies or for reasons of policy / deployment of resources chosen not to
challenge the supplies.
210. In such
circumstances the Respondents’ treatment of others cannot be indicative that
the 2610s and 76CSs were in fact supplied to the appellant. We cannot see that
it weighs at all in the scales.
211. The appellant asks
us to attach significance to the fact that those assessments, not having been
appealed became final. However, the appellant offered no authority for the
proposition that because an assessment predicated on certain facts has become
final those facts bind this Tribunal. That cannot be right in that even if judicial
consideration had been given to such other assessments it would we think be
open to this Tribunal to be able to make its own findings of fact on the
evidence before it as to whether goods of the invoice description were supplied
or not.
212. The point on
relevance of assessments works both ways. For instance we do not regard the
fact a decision was taken not to assess Ellerwood for input tax on the grounds
it did not make a supply as conclusive that there were no supplies.
213. The appellant
says that there is a presumption that the supplies were made because of HMRC’s
assessments. They say that while the legal burden is on the appellant the
presumption arising from HMRC’s other assessments shifts the evidential burden
to the Respondents. For the reasons discussed above the assessments are not
relevant to the issue of whether the goods in this appeal were supplied and
therefore there is no issue of any shift in evidential burden to the
Respondents.
(8) Weighing the evidence
Deal 1
214. On the one hand
we have transaction documentation in the form of a purchase order, an invoice
in respect of the purported supply in respect of which payments were received,
an inspection report by Jade, and transaction documentation relating to the
supply of goods of the same type and quantity to Daystar. Further there is
evidence from Mr Farid that the appellant bought the products, and from Mr
Masood in the form of his witness statement that Elite sold the products to the
appellant and received payment for the goods. The appellant’s contention is
that these goods were bought in the grey market for 2610s and 76CSs. The
appellant was clear that it was not being suggested that the goods were
counterfeit.
215. Set against this
evidence was Mr Biddlecombe’s evidence in relation to production and
distribution of the 2610s and 76CSs and evidence from which we were able to
make findings in relation to the grey market for 2610s and 76CSs during the
period in issue which we shall refer to as “the Garmin evidence”.
216. There is a conflict
between the Garmin evidence on the size of the grey market on the one hand
which tends to show supplies of the relevant goods in the quantities claimed were
highly unlikely and, on the other, the transaction documents and inspection
reports, which on their face, indicate the supply of the goods as well as the
evidence of Mr Farid that the goods were bought, and the evidence of Mr Masood
that Elite sold the goods to the appellant and received payment for them.
217. The transaction
documents on their face indicate that whichever person prepared the document
proceeded on the assumption or belief that such supplies of the particular
products described were made. They do not of themselves establish whether the
supplies of the goods were in fact made.
218. We have already
discussed above that we think the reliability of the inspection report is in
question given the discrepancy of the stated weights.
219. Neither Mr
Farid’s evidence on purchase or Mr Masood’s evidence on sale tell us anything
more than the transaction documentation. Mr Farid told us that the details of
the products were secondary to him. He did not see or inspect the products
himself but relied on Jade to do this. Mr Masood’s evidence states that Elite
sold a number of Garmin manufactured navigation systems to the appellant and
that the sales are evidenced by the appellant’s purchase order to Elite and
Elite’s corresponding invoices to the appellant. We did not have evidence from
him which suggests he saw or inspected the goods for himself.
220. In weighing the
above evidence against the Garmin evidence we prefer the Garmin evidence. That
is to say it seems more likely to us that preparers of the transaction
documents, and the directors of the appellant and Elite, were incorrect in any
assumption they made that the stated quantities of 2610s and 76CSs were
supplied and that the Jade inspection was not as comprehensive or accurate as
it purported to be (or what it purported to be at all), than it was that the Garmin
evidence which came from a witness who we found highly credible was incorrect.
221. To the extent payment
was made for the goods we do not think this establishes that the 2610s and
76CSs were actually supplied.
222. It is for the
appellant to show us on the balance of probabilities that the supplies were
actually made. The appellant has not provided a plausible explanation backed by
evidence for how, in view of the Garmin evidence, the appellant could come to
purchase the 2610s and the 76CSs in the quantities they state.
(9) Conclusion on Deal 1
223. The appellant
has not shown on the balance of probabilities that the goods described in the
invoices issued to it by Elite were supplied to it. HMRC have shown that it is
unlikely that they were.
(10) Conclusion on Deal 2
224. Our analysis in
relation to Deal 1 applies equally to Deal 2 with the exception that there was
no evidence equivalent to Mr Masood’s to factor in with respect to Synergy and with
the observation that given the percentages of the European and worldwide market
for 76CSs the purported purchase would represent, the supplies of 76CSs in the
quantities stated would be even more unlikely.
225. The appellant
has not shown on the balance of probabilities that the goods described in the
invoices issued to it by Synergy were supplied to it.
Commissioners’ discretion under Regulation 29 of
the VAT Regulations
If the goods were not supplied is the discretion under
Regulation 29 relevant?
226. The Respondents referring
to Article 17(2)(a) of the Sixth Directive and section 24(1) of VATA say the
appellant has no right to deduct input tax because the goods in respect of
which it seeks to exercise that right were not supplied to it. They say there
is no scope for them to exercise their discretion to accept “such
other…evidence” of the “charge to VAT” as the appellant had failed to prove the
supplies as described on the invoices from Elite and Synergy took place which
meant that no “charge to VAT” arose in the first place.
227. The analysis is
accepted in other Tribunal decisions for instance the First-tier Tribunal
decision of Plazadome [27]. At [28] the Tribunal stated:
“…The invoice does not itself create an entitlement
to input tax but it evidences such an entitlement…”
228. In our view the
Respondents’ contention and the view of the Tribunal in Plazadome must
be right. The reference to “other evidence” [emphasis added] in
Regulation 29 of the VAT Regulations is consistent with this analysis. In the provisions
of Article 18 of the Sixth Directive which the regulations transpose, the
discretion of the Member State is clearly limited to the requirements set out
in the preceding paragraphs of Article 18 which amongst other requirements set
out a requirement to hold an invoice drawn up in specified way. The proviso in
Article 18(3) only refers to deduction which the taxable person “has not made
in accordance with paragraphs 1 and 2”. It does not extend to dispensing with
requirements in Article 17 which deal with the origin and scope of the right to
deduct. It cannot be within the Commissioners’ gift to allow a deduction for
input tax even though as a matter of fact no supplies were made. Based on our conclusions
above on this issue of fact any issue around exercise of the Commissioners’
discretion does not arise if no supplies were made.
Was there a supply of other goods?
229. The issue of
discretion may however arise to the extent that there was a supply, but a
supply of goods which were not as described on the invoice. The invoice, not
having described sufficiently any such goods could not be a valid invoice. But,
it would in principle have been open to the appellant to put forward other
evidence as to what those other goods were and their quantities with a view to
HMRC then exercising their discretion to allow a claim for input tax.
Tribunal’s jurisdiction over the discretion
230. We were not
specifically addressed on the Tribunal’s jurisdiction in relation to the
discretion but it should we think be uncontroversial that it would be a
supervisory jurisdiction as set out by Schiemann J In Kohanzad v C&E
Commissioners [1994] STC 967. There it was highlighted that when
considering a case where the Commissioners have discretion it was established
that the jurisdiction of the tribunal was a supervisory one in which it
determines whether the Commissioners exercised their discretion in a manner which
was not unreasonable on the basis of materials available to them at the time
they considered the exercise of their discretion.
Appellant’s complaint that HMRC’s lack of exercise of discretion amounted
to an unreasonable exercise of discretion
231. The appellant
says HMRC did not exercise discretion as a matter of fact.
232. The appellant
says it was not good enough for HMRC’s 3 March 2006 decision letters to state:
“The Commissioners do not believe the goods to be
those as described in the invoices numbered dated…received from…”
233. The appellant
gave the example of an invoice which said the goods were red Range Rovers when
in fact they were purple. There would in that situation still be a deduction.
There was, it was said, a continuum of descriptiveness. Denying a deduction in
this matter showed a lack of proportionality particularly as no allegation of
impropriety was being made.
234. The appellant
says that when the decision to refuse input tax was taken there had been no
exercise of discretion. If HMRC have not given decision this amounts to
exercise of discretion which is Wednesbury unreasonable. It was
manifestly irrational to take account of other matters such as failure to
assess other suppliers; also the appellant’s bona fides was not taken into
account.
235. The Respondent
says no request was made and the Respondent cannot be criticised for not
exercising discretion as no request for made and no alternative evidence was
provided. If the appellant is complaining about HMRC’s conduct in referring to
the 3 March 2006 letter then that is a matter for judicial review.
236. On the materials
before us we cannot see any evidence that HMRC was specifically asked to
exercise its discretion. That may not be fatal to the appellant. There is no
requirement in the legislation that HMRC must formally be requested to exercise
its discretion indeed as a general proposition where public bodies are
entrusted with discretion they are we think under a duty to consider exercise
of the discretion.
237. On the other
hand HMRC did not have evidence of supplies of goods other than those
described on the invoice being made.
238. Having reached
the view that the goods were not as described it is not apparent to us that it
was incumbent on HMRC, in the absence of further information and evidence of
there being other goods from the appellant, to try to surmise what goods, if
any had in fact been supplied. We do not think it was unreasonable for HMRC not
to have considered exercise of the discretion until the input tax claimant had
identified that it wanted HMRC to consider its discretion and identified and,
if necessary, provided the relevant alternative evidence, or until information
had otherwise come into HMRC’s possession that there was a supply of some
description.
Would any HMRC exercise of discretion have made a difference?
239. If we are wrong
in our view that HMRC’s failure to consider exercise of its discretion in
circumstances where no evidence of other goods was provided we ought to examine
whether it would have made any difference to decision to refuse the input tax
claim if HMRC had considered its discretion. We do this on the basis of the
supervisory jurisdiction discussed above.
240. We disagree with
the appellant’s contention that not taking into account other assessments was
manifestly irrational. Unless those assessments were made on the basis of evidence
of the supply of goods other than the mere issue of an invoice (and there was
no evidence we were referred to which suggested this was the case), the making
of the assessments was not relevant to the exercise of the discretion.
241. Having reached
the conclusion that any goods were not as described on the basis of the
evidence before them it would then have been illogical to exercise discretion
to say there was a supply of the goods described on the invoice. On the
evidence that was before HMRC it would certainly not in our view be
unreasonable for HMRC to decline to exercise their discretion on the basis that
there was a supply of something else because no evidence was provided of what
that something else was. The fact other assessments had been made or invoices
relating to supplies of 2610s or 76CSs accepted told the officer nothing about
what goods, if any, were supplied in the appellant’s transactions.
242. On the contrary
it would appear to us irrational for HMRC, in the absence of evidence of the
other goods to have exercised their discretion to allow the input tax claim. To
use the appellant’s example it would be as if, having come to the view that no
red Range Rovers were supplied, HMRC ought to allow a claim for purple Range
Rovers even though there was no evidence that purple Range Rovers had been
supplied. None of the transaction documentation and inspection reports that
were before HMRC would have enabled HMRC to determine what goods if any were
supplied if they were not 2610s or 76CSs.
243. In relation to
the appellant’s argument that its bona fides, which was not challenged, ought
to have been taken into account we do not think that would mean that HMRC
should have accepted that this could overcome the lack of evidence showing that
goods were in fact supplied and if so what the goods were if they were not
2610s or 76CSs.
244. Accordingly to
the extent there was any failure on HMRC’s part in not considering it
discretion as to accepting other evidence in relation to a supply of goods
other than those described on the invoices we think this would not have made
any difference given there was no cogent evidence of the making of a supply of
goods and no evidence before HMRC of what those other goods were.
Non-discrimination
245. The appellant
argues that by favouring one taxable person over another the Respondents are
breaching Article 22(8) of the Sixth Directive in that they are allowing those
companies engaged in domestic transactions (Synergy and Elite) to have their
input tax credited whereas they have disallowed the input tax credits of the
appellant, the one company that was involved in intra community trade.
246. In response the
Respondents refer to the First-tier decision in Powa Jersey [116-120]
and to [59] and [60] of the Upper Tribunal decision
“As to non-discrimination, this appeal concerns the
decision by HMRC that the objective criteria determining the right to deduct
input tax were not met as regards these claims for repayment by PJL. If that is
the case, PJL were not entitled to such repayments, irrespective of the
position of anyone else. The FTT’s dismissal of this argument was therefore
entirely correct: see at para 120… whether HMRC could have applied a similar
approach to traders who served as buffers in the chains does not affect the
conclusion; and whether HMRC should have pursued those traders for an account
of the output tax received is a question of policy regarding the effective
enforcement of the VAT regime, with no doubt limited resources. Accordingly, I
consider that the process of non-discrimination is not engaged.
247. The Respondents
also drew our attention to the Upper Tribunal’s decision in S&I
Electronics [35] and [36] which after quoting from a First-tier decision (4
Distribution Ltd v HMRC [2009] UKFTT 242) which rejected a
non-discrimination argument and referring to Roth J’s rejection of such an
argument in Powa Jersey as set out above went on to say that it agreed
with the First-tier Tribunal’s decision in S&I Electronics that the
principle of non-discrimination was not engaged.
248. The appellant
says these cases, all of which relate to MTIC fraud, and where the denial of
input tax was about prevention of fraud, do not assist in the circumstances
here. In particular the appellant says that Powa (Jersey) does
not assist because that was about a right to deduct which was then lost under Kittel
(Joined Cases C439/04 and C-440/04) [2008] STC 1537. That case can
be distinguished from the situation here where there is no removal of a right
to deduct.
249. We are not
persuaded that the rejection of the non-discrimination arguments in the above
cases is to be restricted as the appellant suggests. The broader point is that once
it is established that an input tax claim is found to have been correctly
denied the way in which HMRC have treated others does not somehow reverse the
position that would otherwise apply to the appellant.
250. We were not
clear whether the appellant’s argument that cases where a right to deduct has
been lost are to be distinguished from cases where there is no right to deduct
in the first place is an additional argument or another way of highlighting
that the cases involve MTIC fraud whereas here no such allegation is made. If
it is an additional argument it would seem to us that there would if anything
be more hurdles to overcome in explaining why a right to deduct should be
created where none was available as compared to a situation where a right was
originally provided for but then lost.
251. In any case even
if we were wrong in our interpretation of the cases referred to by the
Respondents the appellant has not put forward any authority which explains the
legal basis for being able to find that the appellant is entitled to input tax
in relation to supplies that we have found were not made.
252. In making its
argument that the Respondents are favouring one taxable person over another the
appellant in its skeleton argument maintains that Article 22(8) of the Sixth
Directive is breached. Article 22(8) states:
“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…”
253. The primary
issue in this appeal has been about whether goods as described on the
appellant’s invoices were in fact supplied. It is therefore not clear to us how
Article 22(8) can be said to have been breached. That there must be goods or
services supplied for there to be input tax is not a Member State option under Article 22(8). It is not clear to us what “other obligations” can be said
to have been imposed that would engage Article 22(8).
254. In [34] of S&I
Electronics the Upper Tribunal quoted the following with approval from the
First-tier decision
“the effect of the Kittel principle is to
limit a trader’s right to repayment of VAT” rather than confer a discretion on
HMRC with the result that “HMRC’s action cannot affect the proper amount of tax
in this case”.
255. As discussed
above at [228] discretion on the part of HMRC is not relevant until there are
some actual supplies. Whether or not there are supplies is a question of fact. On
the basis that we found there were not supplies then there was no discretion to
apply and therefore no discretion that could have been exercised in a
discriminatory way.
256. We reject the
appellant’s arguments in relation to non-discrimination and find that they do
not alter our view that the appellant was not entitled to input tax.
Fiscal neutrality
257. The appellant
says that it is clear that some goods were supplied and that the principle of
fiscal neutrality precludes the generalised differentiation between lawful and
unlawful transactions except in limited situations.
258. The principle of
fiscal neutrality, which derives from Article 2 of the First Directive, has
been given particular expression in the circumstances of different
transactions. Thus it applies to require that taxable persons in the
distribution chain are to be tax neutral, to ensure that the overall VAT
collected is on the amount of the consideration given by the supply by the
final consumer, to require that "similar goods should bear the same tax
burden whatever the length of the production and distribution chain" and,
as a result, to prevent any general distinction in the levying of VAT between
lawful and unlawful transaction (Staatsecretaris v Coffeeshop Siberis
[1999]STC 742 at [14]) where competition between such transactions is not
precluded. Thus we accept the emanation of the principle cited by the
appellant.
259. However we see
no application for any aspect of that principle to the facts of this appeal.
This is not a case where there is any dispute about the amount of the
consideration for a supply, or the burden of VAT borne by a trader by reference
to supplies shown to be made and received by him in a chain of supply, or about
competition between two similar supplies, or about the difference between the
treatment of a legal and an illegal supply; it concerns instead whether or not
there was a supply, and if so whether the invoice adequately described it or
other evidence of the supply was received.
260. We have found
that it was not proven that there was a supply and even if there was neither
the invoice conditions were satisfied nor was such other evidence of the supply
provided. The principle of neutrality has no application.
Appellant’s application to adduce evidence from Jade in relation to pallets
used to stack boxes of the purported supplies
261. On the third day
of what was a 5 day hearing, after evidence had been given in examination by
way of further questions to Mr Biddlecombe on the issue of the size of pallets used
for Garmin products, the appellant made an application to adduce evidence from
Jade on the size of the pallets used.
262. The appellant
argued it had not put this evidence in as it did not know until Mr Biddlecombe
had answered further questions on the issue (that were not in his witness
statement or that of Mr Forward) that the size of the pallets was in issue.
The Respondents opposed the application saying the issue was peripheral, they
did not need to rely on evidence on pallet size, that such evidence was an
opinion of Mr Biddlecombe as he had not seen the pallets used, and that the
Tribunal could choose to give such evidence whatever weight it saw fit.
263. The following
day we ruled as follows. We tended to think that it would not be fair to allow
the application at this stage as there had been ample opportunity in the run up
to the hearing to adduce evidence from Jade. But, we were not convinced, as the
Respondents argued that the issue of pallet size / box size could be treated as
irrelevant simply because the Respondents chose not to rely on it. The question
of the size of boxes and pallet size and how many boxes could be fitted on a
pallet was a relevant issue.
264. Nevertheless, we
thought it would be disproportionate to take into account evidence on pallet
size, at this stage of the proceedings, without seeing if we could determine the
issue on evidence that had already been put in without having regard to pallet
size.
265. We ruled that if
the Tribunal were able to find in favour of the Respondents on the basis of the
evidence that had been put in but disregarding evidence on box size and pallet
size then that would dispose of the matter. If we were not persuaded on the
evidence that was put in that the Respondents succeeded then the appellant would
have leave to adduce additional evidence from Jade dealing with box and pallet
size and a further hearing would be arranged to hear that.
266. Our decision in
the substantive appeal as set out above does not deal with evidence relating to
the size of the boxes of the 2610s and 76CSs, or the size or number of pallets
used in relation to the purported supplies and we have not taken those matters
into account.
267. In the event, we
have been able to find in favour of the Respondents on the basis of the
evidence that was already before us, disregarding the issue of pallet/ box size
so no further hearing is required.
Conclusion
268. We dismiss the
appeal.
269. 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.
CHARLES
HELLIER
TRIBUNAL JUDGE
SWAMI RAGHAVAN
TRIBUNAL JUDGE
RELEASE DATE: 9 January 2013
