United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20251

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Choudhary Trading Co Ltd v Revenue & Customs [2007] UKVAT V20251 (11 July 2007)

20251

VALUE ADDED TAX — output tax — sales of goods to Spanish trader — goods transported from UK to Netherlands — Spanish trader's VAT registration cancelled — whether transactions effected after cancellation of registration properly zero-rated — no — Appellant's enquiries inadequate — assessment for output tax correctly made — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

CHOUDHARY TRADING CO LIMITED

Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Susan Stott FCA CTA

Sitting in public in Manchester on 15 June 2007

Jessica Teerovengadum, counsel, instructed by E&K Solicitors for the Appellant

Richard Chapman, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The Appellant was registered for VAT in 1980 as a manufacturer of women's and girls' clothing and, we understand, was so registered continuously until December 2005 when it notified the Respondents that it intended to deal in electronic goods. Its managing (and only) director, Mohammed Akram, who gave evidence at the hearing, told us that for most of its life the Appellant had a steady turnover of between £750,000 and £1 million a year, but that the clothing trade was becoming unprofitable and in late 2005 he decided to embark on a different trade. Specifically, the Appellant was to deal in cameras and camcorders.

In December 2005, the Appellant entered into five contracts for the supply of such goods to a Spanish company, Talkount SA. One contract is dated 16 December, one 19 December, two 21 December and the last 28 December. In the aggregate, the Appellant contracted to sell 1,870 cameras and 3,490 camcorders at a total price, excluding VAT, of £4,756,300. Because the cameras were to be transported, on Talkount's instructions, from the United Kingdom to the Netherlands and, Mr Akram said, he believed Talkount had a valid Spanish VAT registration number, he zero-rated the supplies: that is, he did not add VAT to the price of the goods, and did not collect any VAT from Talkount. The value of the sales and the corresponding purchases were included in the figures inserted in the Appellant's VAT return for the prescribed period 12/05, that is for the calendar months from October 2005 to December 2005. It is, in fact, apparent from the return that the Appellant made no other sales of any kind during that three-month period. The outcome was that the Appellant claimed a net repayment of £816,455.61, representing the input tax incurred in the period. The return indicated that there was no liability for output tax.

The magnitude of the claim triggered an enquiry into the return, which was carried out by an officer of HM Revenue and Customs, Margaret Pearson, who also gave evidence before us. She discovered that Talkount's Spanish VAT registration had been cancelled with effect from 21 December 2005. She concluded that while the sales for which the contracts were dated 16 and 19 December 2005 were correctly zero-rated, those for which the invoices were dated 21 and 28 December should have been standard-rated. She proceeded to adjust the Appellant's return by increasing the output tax for which the Appellant must account by £436,238.51 (by treating the later sales as standard-rated), which had the effect of reducing the repayment to which the Appellant was entitled to £380,217.10.

Through its solicitors, the Appellant challenged the adjustment but its challenge was rejected, and the Appellant has therefore made this appeal. The sole question before us is whether, Talkount's VAT registration having been cancelled (as the Appellant accepts it was) on 21 December 2005, the Appellant's sales to it made on or after that date were required to be standard-rated, as the Respondents maintain, or could properly be zero-rated, as the Appellant contends, because it reasonably believed that the registration was extant. There is, however, a complication in that, albeit the sales were evidenced by contracts dated as we have said, the cameras and camcorders did not leave the United Kingdom until, at the earliest, 10 January 2006. Mr Akram told us that he would not release the goods, by telling the freight forwarder in whose warehouse they were stored that they could be handed over to Talkount, until the Appellant had been paid for them. Full payment was received on 3 January 2006 and he released all the goods on 10 January – the week's delay was not fully explained. When precisely the goods were transported is not clear; the freight forwarder's invoice is dated 13 February 2005 (which we take to be an error) and does not disclose the date on which the transport was effected. We understand that the Respondents have accepted the invoice as sufficient evidence that the goods have left the UK, and have not asked for any additional supporting documentation. We should add that the Respondents have reserved, or have sought to reserve, the right to amend the return again if it should become clear that the supplies evidenced by the invoices dated 16 and 19 December were in fact made after 21 December. That was a possibility raised only by Richard Chapman, counsel for the Commissioners, in his skeleton argument, but it is necessary, because of the interval between the dates of the invoices and the despatch of the goods, for us to determine when the supply, within the meaning of section 1 of the Value Added Tax Act 1994, took place.

Supplies made by a VAT-registered trader in one member State of the European Union to a VAT-registered trader in another member State are, or were, zero-rated by the operation of article 28c of the Sixth VAT Directive (77/388/EEC) which was in these terms:

"Without prejudice to other Community provisions and subject to conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse, member States shall exempt:

(a) supplies of goods … dispatched or transported by or on behalf of the vendor or the person acquiring the goods [from that member State] but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a member State other than that of the departure of the dispatch or transport of the goods …"

That provision has now been replaced (and in rather clearer terms) by articles 131 and 138(1) of the VAT Directive 2006/112/EC, but it was the governing provision at the time with which we are concerned. Its implementation in UK domestic law is to be found in section 30 of the Value Added Tax Act 1994. The exemption referred to in article 28c – in its full form, exemption with refund (or, in the new directive, deductibility) of the tax paid at the preceding stage – is known as zero-rating in the United Kingdom. Only subsections (1) and (8) of section 30 are relevant here; they are as follows:

"(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section—

(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply;

and accordingly the rate at which VAT is treated as charged on the supply shall be nil."

"(8) Regulations may provide for the zero-rating of supplies of goods, or of such goods as may be specified in the regulations, in cases where—

(a) the Commissioners are satisfied that the goods have been or are to be exported to a place outside the member States or that the supply in question involves both –

(i) the removal of the goods from the United Kingdom; and

(ii) their acquisition in another member State by a person who is liable for VAT on the acquisition in accordance with provisions of the law of that member State … and

(b) such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled."

The regulations referred to are in regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518) which, with some repetition of section 30, provides that:

"Where the Commissioners are satisfied that—

(a) a supply of goods by a taxable person involves their removal from the United Kingdom,

(b) the supply is to a person taxable in another member State;

(c) the goods have been removed to another member State, and

(d) [immaterial]

the supply, subject to such conditions as they may impose, shall be zero-rated."

The concluding words of the regulation carry with them the implication that any conditions the Respondents impose have the force of the law. Their relevant Public Notice 725, as it was in effect at the relevant time, both gives general guidance and contains the legally enforceable conditions with which a trader must comply. There are three such conditions, of which only one is relevant here: that the invoice evidencing the sale, in addition to satisfying all the other requirements of a normal VAT invoice, must show on it the customer's VAT registration number, including the two-letter country code prefix. The Respondents contend that the invoices issued on and after 21 December 2005 did not comply with that condition since the VAT registration number, though in the correct format and with a two-letter country code (in fact, the Appellant used the letters SP rather than the correct ES, but the Respondents apparently take no issue on that error), was not a valid number: at the time, the customer did not have a registration number, and it therefore could not be shown.

The Public Notice went on, however, to state, at paragraph 3.7, that, where a customer's VAT number turns out, after the transaction has been completed, to be invalid, the trader concerned will not be required to account for output tax provided "You have taken all reasonable steps to ensure that your customer is registered for VAT in the EC".

The Appellant's case, as it was advanced by Jessica Teerovengadum of counsel, was that it had done precisely that. On 30 December 2005, after the last of the sales invoices had been prepared but before any of the goods had been released and despatched, its solicitors telephoned the Respondents' national advice line to verify Talkount's VAT registration number. It is common ground that such a call was made on that date, and that the solicitors were told that the number was valid but that the address given by the solicitors did not match that within the records to which the Respondents had access. Plainly the record was not up to date, as the fact that Talkount's registration had been cancelled nine days earlier had not been entered on it. Mr Akram's evidence was that the solicitors reported the discrepancy regarding the address to him, and he immediately contacted Talkount, to be given the explanation that it had two addresses, its registered office, which was the address used for VAT registration purposes, and its trading address, which was the one Mr Akram had used. He received a confirmatory fax on the same day.

Mr Akram's evidence on this point was vague, and not entirely consistent with the documentation which was produced. He told us that he had some previous acquaintance with Talkount's manager, a Mr Ali, but he did not explain how that acquaintance arose. He had some telephone conversations in mid-December with Mr Ali, at which the transactions were discussed; Mr Akram said he knew of a supplier of the goods within the UK, who had them in stock, and from whom they could be readily obtained. Talkount sent various documents, by fax, to Mr Akram. They included a letter of introduction, details of Talkount's bank and confirmation of its Spanish VAT registration. It is conspicuous that, although the letter of introduction is dated 21 December 2005, it and other documents sent with it all bear fax headers clearly dated 30 December, and none of 21 December. It is also conspicuous that the letter confirming that Talkount had two addresses – a fact which is in any event apparent from its letterhead – although purportedly the consequence of a telephone conversation on 30 December, is dated 21 December. It, too, bears a fax header of 30 December.

His evidence about what he had done after his conversation with Talkount on 30 December, and his receipt of the resulting fax, was also vague. In Ms Teerovengadum's skeleton argument it was asserted that one of the two addresses Talkount provided did match the Commissioners' records, implying that a second call had been made by the solicitors to the national advice line. In his statement, served in advance of the hearing, Mr Akram made no mention of any second check – on the contrary, the inference to be drawn from what he says is that the conversation with Talkount and the confirmatory fax were, alone, enough to satisfy him. He said in his oral evidence that he had given both addresses to the solicitors. If he had done so before they made the check which the Commissioners recorded, it is difficult to understand why (assuming at least one of the addresses was correct) the solicitors reported back to him that the address given did not match the Commissioners' records. Although there was a suggestion – itself somewhat vague – that the Commissioners themselves had given out the recorded address (a practice which, Mrs Pearson said, was not adopted and which we should think most unlikely) it is difficult to understand why Mr Akram made further enquiries of Talkount, only to receive two addresses which (according to his own evidence) he already had. He accepted that he did not know whether the solicitors had made a second enquiry; it is perfectly clear that, if they did, they did not report its outcome to Mr Akram. All that can be said with certainty – and that only because the Commissioners' own records support it, since there was nothing before us from the solicitors – is that the solicitors were told on 30 December that Talkount was registered for VAT in Spain.

The test in paragraph 3.7 of the Public Notice is not, however, limited to a check on the validity of a VAT registration number by a telephone call to the national advice line; it requires the trader seeking to take advantage of what is, in substance, a concession to take "all reasonable steps" to ensure that his customer is VAT-registered. Nevertheless, at first sight, it seems difficult to argue that a trader who checks with the Respondents on the validity of the number, and who is told incorrectly that it is valid, should be treated as if he had been given the correct information. He might well ask, what more could reasonably be expected of him?

For the Respondents, Mr Chapman referred to paragraph 3.8 of the Public Notice, which was in these terms:

"We will not regard you as having taken reasonable steps to ensure your customer is VAT registered in the EC if, for example:

the VAT number you quote does not conform to the published format for your customer's Member State;

you use a VAT number which we have informed you is invalid; or

you use a VAT number which you know does not belong to your customer."

Mr Chapman relied on several factors. First, by including them in its return for period 12/05, the Appellant had treated the supplies as having been made on the dates of the invoices, all of which pre-dated 30 December 2005, and not in January 2006. There was no reliable, or indeed any, evidence that more than one call to the national advice line had been made; thus, when the invoices were raised, and the relevant tax points arose – on the same dates, as section 6(4) of the 1994 Act provides – no verification of Talkount's VAT registration had been made, and the Appellant, by not taking reasonable steps, had not complied with paragraph 3.7 of the Public Notice. Mr Akram told us that he had made, or caused his solicitors to make, the enquiry on 30 December in anticipation of his releasing the goods; had they received a negative answer, he said, he would not have released them. He accepted that no check had been made, either by an approach to the Commissioners or otherwise, before that date.

It is certainly possible to criticise the quality of Mr Akram's checks on Talkount. It is, indeed, difficult to understand how any trader could embark on an entirely new type of business and sell goods to such a high value, over a very short period of time, without making strenuous efforts to protect itself from risk. We do not know quite how serious the risk was since we had very little documentation. We know, because Mr Akram told us so, that the Appellant paid for the goods using the money it received from Talkount – thus it could not release the goods to Talkount before they had been released to it, following payment, by its own supplier – but there must at least have been some risk that Talkount would not pay, with the consequence that the Appellant would be left with no customer for the goods it was committed to buy; or that its supplier would pocket the money paid over by the Appellant, but fail to release the goods. There is much which gives rise to concern about the legitimacy of the transactions, and ample reason for Mr Akram to make diligent and timely enquiries. What he in fact did can, at best, be described as casual and superficial.

So far as the transactions in respect of which invoices were raised on 16 and 19 December are concerned, however, the quality of the enquiries, or their absence, is irrelevant. Talkount was in fact registered on those dates, and that is sufficient. The failure to make any enquiry cannot change the character of the supplies in those circumstances. Section 6(4) of the 1994 Act is in clear terms, making the time of supply the date of the invoice raised in respect of it if that date, as in this case, precedes the time of physical supply, in subsection (2) defined as the time of removal of the goods or of their being made available to the purchaser – here, 10 January 2006.

We have come to the conclusion, though not without some hesitation, that the Appellant's position in respect of the two transactions for which invoices were raised on 21 December is different. It is for the Appellant to demonstrate either that Talkount was in fact registered or, having made appropriate enquiries, that it reasonably believed it to be registered. It is, of course, impossible to say – certainly so on the material produced to us – whether the invoices were raised before or after the registration was cancelled. But the burden of proof before this tribunal lies on the Appellant and it has not discharged that burden. We are bound to find as a fact, on the balance of probabilities, that Talkount was not registered when the invoices were raised. Since no enquiries at all were made on or before 21 December – by enquiries we mean enquiries of a reliable third party, not the intended counterparty – it follows that the Appellant cannot demonstrate that it is entitled to the benefit of the concession in paragraph 3.7 of the Public Notice.

Similarly, it can show neither that Talkount was registered or that it took reasonable steps to satisfy itself that it was in relation to the remaining transaction for which the invoice was raised on 28 December. Nor is it open to the Appellant to argue, even if, contrary to our earlier conclusion, it is relevant, that it had carried out an adequate enquiry before the goods were released. It is certainly true that an enquiry was made, but it was made some 11 days before the goods were released – in our view such a check should be made no more than one day in advance – and, as we have already indicated, the enquiry which was made was not fully carried through. Mr Akram was, by his own account, far too easily satisfied.

We are, therefore, satisfied that the return was correctly adjusted and that the appeal must fail. We make no direction in respect of costs.

COLIN BISHOPP

CHAIRMAN
Release Date: 11 July 2007

MAN/06/0436