United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19560

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Richard Loach and David Loach (t/a Micronet Showroom v Revenue & Customs [2006] UKVAT V19560 (02 May 2006)

19560

VAT ASSESSMENT: New means of transport – Appellants partnership carrying on a business of selling new and used motor vehicles via the internet – Appellants sought to claim German VAT as input tax – Appellants originally contended that vehicles were VAT free and therefore entitled to claim German VAT as UK input – ground of Appeal withdrawn – Appellants submitted they were acting as agents – only required to pay VAT on agent's fee – no conclusive evidence on behalf of Appellants to support agency arrangement in the disputed transactions – Appellants incurred German VAT because they failed either to submit a claim to German authorities or provide the necessary proof to the German – Appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

RICHARD LOACH AND DAVID LOACH Appellant

TRADING AS MICRONET SHOWROOM

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

ALBAN HOLDEN (Member)

Sitting in public in Birmingham on 19 October 2005 and 27 February 2006

David Church, Accountant for the Appellant

Jonathan Cannan, Counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

The Appellants were appealing against an assessment dated 4 November 2003 in the sum of £44,112 plus interest for the periods 06/01 to 03/03.

The Appellants were a partnership carrying on a business of selling new and used motor vehicles via the internet.

The £44,112 represented the amount of input tax claimed by the Appellants for German VAT at 16 per cent charged by German suppliers in respect of motor vehicles supplied to the Appellants.

The Appellants in their Notice of Appeal dated 20 July 2004 claimed that they were entitled to recover the German VAT because

"the Assessment classifies certain imported cars as "VAT free new means of transport". This is incorrect as VAT has already been paid on these cars in another member state" (New Means of Transport Ground of Appeal).

At the hearing on 19 October 2005 Mr Church on behalf of the Appellants accepted that they were not entitled to recover German input tax because of the "New Means of Transport Ground". Instead he advanced two additional grounds of Appeal:

(1) The Appellants were acting as agents for their customers (Agency Ground).

(2) The Appellants have been subjected to double taxation which was plainly unfair and contrary to principles of natural justice (Double Taxation Ground).

We invited the parties to submit representations in writing in respect of these two new additional grounds of Appeal. After receiving the written representations we decided to reconvene the hearing on 27 February 2006.

The Evidence

We heard evidence on oath from David Church employed as an accountant by the Appellants. We also received a documents bundle.

The Facts

The Appellants' business was selling new and used motor vehicles on the internet. They concentrated on motor vehicles in the upper range of the market, such as Porsche and Mercedes Benz. Their usual method of operation was first to identify the customer and then find a supplier to provide the motor vehicle required by the customer.

The customer would enter into a written agreement with the Appellants to source or secure a vehicle at a specified price. The agreement contained particulars of the manufacturer, model and year of the vehicle and any factory fitted options.

The standard terms and conditions of the agreement specified that

(1) The Appellants would act as the customer's agent to purchase and register a vehicle on his behalf.

(2) When the Appellants ordered the vehicle from the manufacturers or a third party supplier the contract for the supply of the vehicle was between the customer and the manufacturer. The Appellants would not become owners of the vehicle at any time.

(3) The purchase price for the vehicle included one year's UK road tax, value added tax, import costs, UK registration and manufacturers' warranty at the date of the order.

(4) The customer would lodge a deposit of 20 per cent of the purchase price with the Appellants. The payment of the balance of the price would become due at least ten days before the scheduled delivery date of the vehicle.

(5) On receipt of the deposit the Appellants would place an order for the vehicle.

(6) The customer's right of cancellation and return of money paid was governed by the terms of his contract with the manufacturer or third party supplier.

(7) If the customer cancelled the contract, the Appellants were entitled to an administration fee which ranged from £300 in one set of standard conditions to £995 in another set.

(8) English law would govern the terms and conditions of the Agency.

Mr Church gave evidence at the first hearing that their customers' deposits were fully refundable in some but not all circumstances. In a letter to Mr Cannon dated 3 September 2003, Mr Church stated that the Appellants' standard terms and conditions provide that a customer was entitled to a full refund if a supplier imposed a price increase of more than five per cent. Full refunds were also made for many other reasons, for example, if the Appellants were unable to locate or provide the vehicle on order. The Appellants only imposed a cancellation fee if the customer cancelled without good reason.

Mr Church also indicated at the first hearing that where the original customer had cancelled the order and been refunded in full, the Appellants would continue with the order and seek a new buyer so that they did not lose the deposit with the supplier.

The Appellants did not as rule disclose to their customers the identity of the manufacturer or third party supplier. The order for the vehicle would be placed in the name of the customer. The contract with the manufacturer or third party supplier in the customer's name would be faxed to the Appellants and signed by one of the partners.

When the vehicle was ready for delivery the manufacturer or third party supplier and the Appellants would issue separate invoices in the name of the customer. The manufacturer's invoice may include the commission received by the Appellant for securing the vehicle.

The European Community suppliers of the motor vehicles generally supplied the vehicles free of VAT provided the Appellant and the supplier exchanged their respective VAT registration numbers. Occasionally some suppliers held reservations about dealing with the Appellant on that basis and would require the Appellant to give a VAT bond which would be released when the supplier received the V5 DVLA document showing that the vehicle had been registered in the United Kingdom. The Appellant would then account for the acquisition tax on the import of the vehicle which was deductible as input tax on the same return. The Appellant would account for output tax on the supply of the vehicle to its customer.

The Appellant would register the vehicle in the customer's name so that it could be taxed. New vehicles may be pre-registered in the name of the Appellants or their supplier. Mr Church accepted in cross-examination that the Appellants occasionally took vehicles as the principal in the transaction.

The assessment for £44,112 related to seven transactions, five involving the purchase of Mercedes-Benz vehicles with the remaining two being Porsche vehicles. In these instances the German suppliers charged German VAT on the supplies of the vehicles to the Appellants. The German suppliers were not prepared to treat the supplies as exempt for VAT because they had not received a certified copy of the vehicle registration certificate or proof that the recipient of the supplier's invoice had been taxed in the United Kingdom. The German suppliers would not release the VAT bond until the required information had been provided. For some reason the Appellants were unable to provide the information. They instead chose to recover the German VAT on the seven transactions as input tax under the United Kingdom VAT regime

When the Respondents discovered that the Appellants had claimed German VAT, they disallowed it on the ground that there was no legal authority to treat German VAT as input tax. The Respondents issued an assessment to recover the amount of input tax that had been claimed for the German VAT. The Respondents pointed out that the proper course of action for the Appellants was to seek redress from the German VAT authorities. The Respondents offered to assist the Appellants in making the appropriate application. Mr Pete Cannon, Senior Officer for the Respondents, wrote a letter to Mr Church of the Appellants confirming that United Kingdom VAT had been brought into account on the sale to the final customer in three of the transactions. Mr Canon was unable to do the same in respect of the remaining four transactions because he had not been supplied with the relevant invoices.

The Appellants accounted for acquisition tax and the corresponding claim as input tax on five of the seven transactions.

At the resumed hearing on 27 February 2006 the Appellants produced the originals of their agreement with the customer and the supplier's invoice in the name of the customer in just one of the seven transactions in dispute. The Appellants were unable to produce any documentation in respect of four transactions. They produced two supplier's invoices one with VAT and one without VAT for one transaction. Mr Church fairly stated that he could not be sure which of the two invoices the Appellants paid.

The documentation for the final transaction consisted of the Appellants' customer agreement and the supplier's invoice for the vehicle but in the name of a different customer from the customer against which the Appellants claimed the German VAT. Mr Church postulated that the customer against which German VAT had been claimed was a replacement customer. However, Mr Church was unable to produce any documentation for the replacement customer. Further, Mr Church did not know whether the original customer authorised the Appellants to continue with the transaction. Mr Church confirmed that no new contract had been agreed with the supplier of the vehicle following the substitution of the replacement customer.

Reasons for Our Decision

New Means of Transport Ground of Appeal

The legal position is that where a "new means of transport" is supplied between persons in different member states VAT is charged and accounted for on acquisition in the member state to which they are delivered. A motor vehicle is new if it is less than six months old or has travelled less than 6,000 kilometres. Thus in the Appellants' case a supply of a Mercedes Benz motor vehicle from a German supplier was taxable for VAT in the United Kingdom. The Appellants recovered the acquisition tax as input tax. Of the seven disputed transactions the Appellants paid acquisition tax on five of the transactions. It would appear that they did not pay the acquisition tax on two of the transactions. The Respondents, however, were not raising the assessment on the basis that the Appellants did not pay the acquisition tax on two of the transactions. The assessment related to the amount claimed as input tax by the Appellants for German VAT imposed by the German suppliers in the seven transactions.

Mr Church on behalf of the Appellants originally contended that the requirement to pay acquisition and output tax in the United Kingdom on "new means of transport" only applied to the vehicles that were "VAT Free". Mr Church suggested that the vehicles in the seven transactions were not "VAT Free" because the Appellants paid German VAT on them. Respondents' counsel, however, pointed out that the term "VAT Free" was a term used solely in Notice 728 in order to explain how VAT applied to "new means of transport" purchased in another member state. Notice 728 did not have the force of law. Further the Notice did not cover the situation where for one reason or another, the supplier in the other member state did not treat the supply of the "new means of transport" as exempt from VAT. Mr Church on behalf of the Appellants accepted the Respondents' arguments and withdrew the ground of Appeal on "new means of transport".

Agency Ground of Appeal

The Appellants contended that they acted as agents for their customers in respect of the supplies of the vehicles in the seven disputed transactions. The Appellants relied on their standard terms and conditions which clearly set out their capacity as agent, and that the invoices of the German suppliers were made out in the name of the customers not the Appellants. In those circumstances the Appellants were only liable to output tax on their agency fee to their customers. They were not liable for output tax on the value of the supply of the vehicle.

Respondents' counsel outlined the legal framework for determining whether an agency existed within the VAT context. The first step was to identify the terms of the contractual arrangements between the parties. However, the contractual terms may not be determinative of the appropriate VAT treatment. Counsel quoted from Customs and Excise Commissioners v Reed Personal Services [1995] STC 588 at p 595e where Laws J explained that the parties' contractual arrangements though exhaustive for their private law obligations may not define and conclude issues surrounding the VAT treatment of supplies, particularly where three or more persons were involved in the supply. Finally Counsel cited section 47 of the VAT Act 1994 which dealt specifically with the VAT treatment of supplies through buying or selling agents. Under section 47 an agent can be regarded in certain circumstances as a principal in the supply of goods and liable to account for output tax on the total value of the supply rather than on his agency commission.

Section 47(1)(a) provides that

"Where goods are acquired from another member state by a person who is not a taxable person and a taxable person acts in relation to the acquisition, and then supplies the goods as agent for the person by whom they are so acquired

then, if the taxable person acts in relation to the supply in his own name, the goods shall be treated for the purposes of this Act as acquired and supplied or, as the case may be, imported and supplied by the taxable person as principal".

Section 47(2A) provides that

"Where, in the case of supply of goods to which subsection 1 above does not apply, goods are supplied through an agent who acts in his own name, the supply shall be treated both as a supply to the agent and as a supply by the agent".

In six of the seven transactions the Appellants have produced no documentary evidence of the contractual arrangements between the Appellants and their customers. Mr Church believed that the files relating to these transactions may have strayed during an office move in January 2005 and may now be archived off site. The Appellants have had over four months from the first hearing to the second hearing to locate these files. In the one transaction where a copy of the agreement between the Appellants and the customer have been supplied, it would appear that the Appellants have not provided a complete set of the documents involved in the transaction. There was no copy of the order form from the Appellants to the supplier and no copy of the Appellants' invoice to the customer.

The onus was on the Appellants to provide the necessary evidence to satisfy us on the balance of probabilities that a contractual agency arrangement existed between the Appellants and their customers in the seven disputed transactions. Mr Church on behalf of the Appellants contended that we can infer the agency arrangement from the standard terms and conditions which he said applied to all their dealings with their customers. We have seen in evidence at least two different versions of standard terms and conditions despite Mr Church's assertion that there was only one set. In his letter to Mr Cannon dated 3 September 2003 Mr Church suggested that the standard terms and conditions contained a clause requiring repayment of the customer's deposit if the manufacturer increased the purchase price by five per cent. We find no reference to that clause in the two versions of the standard terms and conditions supplied to the Tribunal. Mr Church also gave evidence that the Appellants occasionally took the vehicle as principal not as agent.

The Appellants' evidence showed that there was no uniform set of standard terms and conditions for the customers' agreements. Further, Mr Church conceded that the Appellants occasionally acted as principal. The Appellants' evidence highlighted the unreliability of drawing inferences from the standard terms and conditions. We find that the Appellant has failed to produce any satisfactory evidence of their contractual arrangements with the customers in the seven disputed transactions, and in particular whether they were acting as agents for those customers. The Appellants have not met the first step of the legal framework for determining agency identified by Respondents' counsel, namely, establishing the precise contractual arrangements that existed between the Appellants and their customers in the seven disputed transactions.

The Appellants have accounted for output tax on the full selling price of the vehicles to their customers in the United Kingdom. They have also accounted for acquisition tax in five of the seven transactions on the removal of the vehicles to the United Kingdom. In one of the seven transactions the Appellants have substituted a new customer for the purchase of the vehicle without agreeing a new contract with the German supplier. Those facts were consistent with the Appellants supplying vehicles as principal to their United Kingdom customers.

The Appellants have not satisfied us on the balance of probabilities that they were acting as agents for their customers in the seven disputed transactions. The evidence suggested that the Appellants were acting as principals in the supply of motor vehicles from the German supplier and in the Appellants' supply to their customers.

Double Taxation Ground of Appeal

Mr Church submitted that the Appellants and their customers suffered double taxation on a single transaction which was inconsistent with the principles of a common system of Value Added Tax throughout the European Community. The Appellants were required to charge output tax on the supply of the vehicle in the United Kingdom but unable to recover the German VAT as input tax in the seven disputed transactions. Thus the VAT charged on the supply of the vehicle was effectively double that which should apply on a single transaction.

Article 17(2) of the Sixth Directive (77/388/EEC) and Section 24 of the Value Added Tax Act (VATA) 1994 provide the legislative framework for taxable persons claiming input tax credit for VAT in the United Kingdom. The key feature of the legislative framework for the Appellants is that they can only claim VAT as input tax credit from the United Kingdom tax authorities, if the VAT is charged under domestic legislation. Thus the Appellants were not entitled in law to recover the German VAT as input tax credit from the United Kingdom tax authorities. Their proper of course of action was to pursue a refund of the German VAT from the German Tax Authorities pursuant to the Eighth Directive (79/1072/EEC).

The Appellants have provided no evidence that they submitted a refund claim with the German Tax Authorities. The Appellants instead chose to deal directly with the German suppliers regarding the recovery of German VAT. The Appellants have been unable to persuade the suppliers to exempt the supply of vehicles from German VAT because they have not provided them with the necessary documentary proof to satisfy the suppliers that the supply was exempt.

The Appellants' submission of double taxation is misconstrued. On the evidence the Appellants have not taken the appropriate action either to recover the VAT from the German authorities or to satisfy the German suppliers that the vehicle supply was exempt. The issue is not, therefore, about double taxation but about the Appellants' failure to take the appropriate steps in respect of the German VAT. The Appellants have incurred the German VAT because they have not complied with the correct procedures. In our view there is no merit in the Appellants' submission about double taxation.

Decision

We dismiss the Appeal for the reasons set out above.

The Respondents applied for costs in the sum of £750 plus VAT for the preparation and hearing on 27 February 2006. The Respondents considered that the Appellants acted unreasonably in that they changed their grounds of Appeal without notice at the first hearing when they realised there was no merit in their original ground of Appeal.

The general rule is that the Respondents will not apply for costs against unsuccessful Appellants except in a limited number of circumstances which include Appellants mis-using tribunal procedure. One of the examples given of misuse is where the Appellant has produced at a hearing relevant evidence which ought properly to have been disclosed at an earlier hearing and which could have saved public finds had it been produced timeously.

Our starting point is that we should only consider ordering the Respondents' costs in exceptional circumstances. We consider that the Appellants have mis-used the Tribunal procedure by altering the grounds of Appeal without notice generating extra and unnecessary expenditure of public funds.. We, therefore, order the Appellants to pay the Respondents' costs in the sum of £750 plus VAT.

MICHAEL TILDESLEY

CHAIRMAN

RELEASE DATE: 2 May 2006

MAN/