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Cite as: [2009] BVC 2003, [2008] UKVAT V20698

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Prince Arachchige v Revenue & Customs [2008] UKVAT V20698 (04 June 2008)

20698

VAT – Sale of phone cards by retailer – Is the supply of a phone card an exempt supply of credit – Negotiation of credit

VAT – Sale of phone cards by retailer – Credit vouchers or retailer vouchers – Operation of Schedule 10A VATA – Estimation of sales – Assessment of VAT due

VAT – Sale of phone cards by retailer – Place of Supply – Pre 2006 version of SI 1992/3161 article 21(1) – Article 9 Sixth Directive

LONDON TRIBUNAL CENTRE

PRINCE KARUNARAINA SAMARAPPULI ARACHCHIGE Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

MOHAMMED M HOSSAIN FCA, FCIB

Sitting in public in London on 17 and 18 September 2007, and 10 December 2007

David Southern, counsel, for the Appellant

Jess Connors, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appellant appeals against an assessment for £43,289.00 in respect of the VAT periods 07/03 to 01/05. The assessment relates to the sales of phone cards in that period i.e. from 1 May 2003 to 31 January 2005.

The Respondents maintain that under the rather complex provisions of Schedule 10A VATA 1994 the majority of the phone cards sold by the Appellant's business constituted VATable supplies.

The Appellant maintained:-

(i) that the relevant phone cards were not supplied by him but by a limited company Poundworld Kandyan Ltd (PKL) and that therefore he is not assessable for any VAT on the sales. But this ground of appeal was renounced on the third day of the hearing: Mr Southern told us that the Appellant accepted that he was carrying on the relevant activities as a sole trader;

(ii) that the sale of the telephone vouchers was an exempt supply of credit within Article 13B(d)(1) of the Sixth Directive;

(iii) that the nature of the phone cards was such that pursuant to Schedule 10A their supply should be disregarded for VAT purposes;

(iv) that even if some phone card sales were VATable the assessment is unsupportable because it does not properly distinguish between VATable and non-VATable sales.

At the end of the second day of the hearing the tribunal indicated that it would consider (ii) above separately. We did so and provided our conclusion and reasoning in a direction given before the hearing recommenced in December. We decided that the supply of the cards was not an exempt supply of credit. Our reasoning is set out later in this decision.

We shall return later in this decision to the detail of Schedule 10A, but at this stage we should note the distinction in schedule 10A between two sorts of voucher (and it is accepted that the phone cards were vouchers for this purpose):-

(i) credit vouchers : these are vouchers issued by a person who is not someone who provides the services obtained by the use of the voucher (we call that person the "redeemer"). The consideration for the sale of such a voucher is disregarded for VAT purposes unless the person who actually provides the service fails to account for VAT (or to the extent that the voucher is sold for more than its face value); and

(ii) retailer vouchers : these are vouchers issued by a person from whom services may be obtained. The consideration for the issue of such a voucher is generally disregarded but any subsequent transfer of the voucher is VATable to the extent that the services obtainable by its use are VATable.

The business run by the Appellant acquired and sold telephone vouchers. The issue raised by the Appellant's grounds of appeal include therefore the questions of whether these were credit or retailer vouchers, whether the redeemer of a credit voucher paid VAT on their redemption, and whether the services to be acquired through the use of a retailer voucher were VATable.

During the course of the appeal an issue emerged as to the place of supply of the phone cards in view of the provisions of the VAT (Place of Supply of Services) Order 1992 SI 3121. In particular the tribunal noted that Article 21 of that Order had been amended in 2006 and was concerned about its compatibility with Article 9 of the Sixth Directive. The tribunal sought written submissions on these issues. The parties provided their submission in 2008 and they are considered in this decision.

In the remainder of this decision we deal with the issues under the following headings:

(1) Evidence and Findings of Fact

(2) Is the supply of phone cards an exempt supply of credit?

(3) The Law; Schedule 10A; place of supply

(4) The assessment by Miss Badminton

(5) The VAT status of particular phone cards

(6) Best of Judgment

(7) Summary Conclusions

(1) The Evidence and findings of fact

We had before us an agreed bundle of documents. Further documents were produced by the Appellant at the hearing. Both sides provided us with examples of phone cards. We heard oral evidence from Mr Arachchige, and from the following officers of the Respondents: Michael Shipley and Claire Badminton (who conducted the calculations leading to, and made, the assessments under appeal), all of whom provided witness statements.

We deal with the evidence and findings of fact under four headings: (i) the nature of the business at the shops: was it one business or two businesses; (ii) who was the supplier?' (iii) the phone card sales – how cards were purchased, sold and accounted for, and what information about VAT on the cards was available to the Appellant, and (iv) how the phone cards worked technically and contractually. Under each heading we first make findings of fact in relation to matters where the evidence before us was clear, we then consider the issues where the evidence was disputed or unclear and reach our conclusions on those issues, and then where appropriate draw inferences of fact from those conclusions. In sections (4) and (5) we make further findings of fact on the issues relevant to those sections. In view of the concession made by Mr Southern on the third day of the hearing much of the evidence and factual findings under headings (i), (ii) and (iii) is now redundant. It is included mainly as background.

(i) The nature of the business at the shops

The following facts were in our view clear from the evidence:

(i) Mr Arachchige came to the UK from Sri Lanka

(ii) From about 2001 until sometime in 2004 he lived with his family at 218 West Hendon Broadway. He moved to 190A West Hendon Broadway in 2004 and in 2006 to the flat above 192B West Hendon Broadway;

(iii) In the period under appeal Mr Arachchige ran the business activities of two shops which were next door to one another although separated by a small gap. That gap and the fact that the freeholders of the shops were different prevented Mr Arachchige from having any internal communicating door or opening between the two shops. There was however a CCTV system installed which enabled persons in one shop to see what was going on in the other.

(iv) One shop was 192B West Hendon Broadway. This had a board above it announcing that its name was "Poundworld". Everything on sale in this shop with the exception of phone cards was sold for £1. Phone cards were sold from this shop.

(v) The other shop was 194 West Hendon Broadway. The board above this shop announced its name as "Poundworld Discount Store". From this shop there were sold toys, toiletry and other fancy goods. The prices for those goods varied and were not restricted to £1. Phone cards were not sold from this shop.

(vi) The lease of 192B was taken in 2001. At that time 194 was occupied by a firm of solicitors. In 2004 the lease of 194 was taken. We were told that the leases were taken in the Appellant's name.

(vii) Mr Arachchige and his wife work in both shops. They also employ one or two assistants – the number varies from time to time. Generally Mr Arachchige works in 192B and his wife in 194. Mr Arachchige is thus more usually involved in the sale of the telephone cards. Any employee works in both shops according to need.

(viii) The shops are open from 9.00am to 9.00pm most days of the year.

(ix) Mr Arachchige organises the acquisition of stock for both shops. He will see representatives who come to the shops, and go out himself to make purchases. Correspondence relating to the shops' business generally goes to 192B.

(x) Each of the shops has a till. Mr Arachchige periodically banks cash from the tills. The cash is banked in the same bank account. Some expenses were paid from cash in hand, and some by cheque.

(xi) In 2001 the accountants KPMD prepared, and Mr Arachchige signed, a VAT Registration application form. This described Mr Arachchige as the proprietor of a business at 192B.

(xii) In 2004 KPMD prepared and Mr Arachchige signed a VAT Registration form for a Fancy Goods Retailing business at 194;

(xiii) There was no indication by signage or otherwise at 192B or 194 that the person who owned or ran either shop was PKL;

(xiv) Some suppliers' invoices were addressed to PKL some to Poundworld Ltd.

When Mr Arachchige set up his business he took advice from Mr Tuli, an accountant. He was advised to run the business through a limited company. PKL was set up for that purpose. Soon after commencement Mr Tuli moved away and Mr Arachchige migrated to the services of KPMD.

In September 2006 when he was assessed by HMRC for the additional VAT he went to see Mr Tuli who explained that things had been done wrongly. At that stage an application was made to cancel the VAT registration in Mr Arachchige's name.

The nature of the business carried on at each shop was different. The Respondents' officers gave evidence that Mr Arachchige had told them that 194 was a different business from 192B. They took that to mean that it was the business of a different (legal) person. Mr Archchige told us that he said it was a different business not a separate business. Having heard Mr Arachchige we consider that what he meant when he spoke to the officers was that the nature of the businesses were different but what he said could easily have been taken to mean that the businesses were separately owned.

Mr Arachchige's use of bank accounts in the relevant period was also somewhat unusual. His evidence on this issue was confusing and sometimes seemingly contradictory but we reach the following conclusions. He told us, and we accept, that after his arrival in the UK a friend of his in Sri Lanka had wanted to do business in the UK through the medium of a limited company. Mr Arachchige had procured the formation of Kandyan International Ltd ("Kandyan Int") for this purpose. Later his friend changed his mind and did not want to use the company. In 2001 Kandyan Int opened a bank account with HSBC. Mr Arachchige was a signatory on the account. When Mr Arachchige started his business at 192B he used the Kandyan Int bank account with HSBC for banking takings and paying bills. When he opened 194 he used this bank account for its takings too. Kandyan Int was struck off the register by the Registrar of Companies in 2002 but Mr Arachchige continued to use the bank account in its name until 2005 when it was closed.

In 2004 or 2005 a bank account with Barclays Bank was opened in the name of PKL. This account thereafter Mr Arachchige used for banking takings and paying suppliers. He told us that there was also a bank account with NatWest in the name of Poundworld on which cheques were drawn but this was in the nature of a loan account.

In relation to the question as to whether 192B and 194 were separate businesses we conclude that they were managed as a single enterprise and that that enterprise was owned by a single person. We shall return below to Mr Arachchige's approach to the niceties of commercial law but we do not regard his signature of the VAT Registration form for 194 in the name of PKL and that for 192B as sole proprietor as conclusive that these were separately owned businesses. The evidence that we have accepted points clearly for 192B and 194 being run as a single enterprise.

(ii) Who was the supplier?

Mr Archchige told us, and we accept, that on the advice of his then accountant Mr Tuli he set up PKL in 2001 to minimise his personal risk in relation to his business. He says that from 2001 he got invoices made out to Poundworld. It is his contention that thereafter the business at 192B and also the (later) business at 194 was owned by PKL and that PKL was the supplier of the telephone cards and the other sales from the shops.

We find the following facts:-

(i) VAT returns were made for the periods under appeal in the name of the Appellant not PKL;

(ii) the accounts of PKL for the years ending 2003, 2004 and 2005 were signed by Mr Arachchige and indicate that it was a dormant company for each of those years;

(iii) Mr Arachchige made income tax returns for 2002-03, 2003-04, 2004- 05 and 2005-06 in which he declared as personal income the profits of a business based on the activities at 192B and 194;

(iv) there was no signage at 192B or 194 indicating that the business was owned or run by PKL;

(v) some supplier invoices were made out to PKL others to Poundworld.

(vi) Mr Arachchige organised the purchase of stock for the business both by cash buying and from invoiced purchases.

Against this background we need to describe Mr Arachchige's evidence

Mr Arachchige told us that the advice he received from Mr Tuli in 2001 was to operate through the medium of a limited company and that PKL was set up for that purpose. Mr Tuli however moved shortly thereafter to Norfolk and Mr Arachchige transferred to the care of KPMD. Mr Arachchige indicated that he relied heavily on KPMD. He sent them his figures and paperwork and signed whatever they sent him assuming that it was correct. He signed the VAT Registration Documents, the VAT returns, the accounts for PKL and his income tax returns without question. He said that if he didn't understand something sent to him by his accountants he would sign it anyway. He says that KPMD did not discuss any of the documents with him. He did not know why his accountants had registered him as sole proprietor in 2001 and PKL in 2004, why they had shown PKL as a dormant company or why they had shown the business income as his income for the purposes of his income tax returns. Mr Arachchige told us that he had PKL letterhead on which letters were written.

We saw neither copies of bank statements nor any evidence of other correspondence in the name of PKL.

Mr Arachchige says that in the relevant period each phone card invoices as there were were made out to Poundworld at 192B

Discussion

Mr Arachchige's approach to his bank accounts indicated some degree of disregard of orthodox legal formality. We do not find he gave careful attention or thought to those issues.

That lack of care seems also to have affected his relationship with his accountants, KPMD. It seems to us likely that he did not make them aware of PKL's intended role or discuss with them the plan that PKL should conduct the business. We find the reported lack of communication with KPMD surprising. It seems likely that Mr Arachchige either did not understand or, if he did understand, give careful attention to how matters should be arranged if it was to be PKL rather than he who was the owner of the business.

As we have already noted at the recommencement of the hearing in December Mr Southern told us that Mr Arachchige accepted that he was dealing in the phone cards as a sole trader. That conclusion is not inconsistent with the evidence we heard.

(iii) Phone card sales

There are fewer matters under this heading where the evidence did not call for some comment before making a finding of fact. But the following facts were clear:-

(i) phone cards were sold from 192B only in the relevant period;

(ii) a variety of phone cards were sold : some provided cheaper calls to European destinations, others to Asian destinations and others to African destinations. They were bought by people who had relatives or contacts in those areas;

(iii) Mr Arachchige viewed the sale of phone cards as a way of attracting customers to the shop who might then buy other items;

(iv) the phone cards were generally for face values of £3 or £5. They were sold for their face value or a slightly lesser amount;

(v) each phone card was bought for about 10p or 20p less than the amount for which it was sold.

There was no evidence that the purchasers of phone cards bought them for use in a business. In our view it is likely that the cards were bought for non-business use.

It appears that Mr Arachchige normally arranged the acquisition of the phone cards with vendors who generally came to his shop every day. He would accept a batch of cards and the vendor would return at the end of the day to collect monies equal to the agreed purchase price of the cards which had been sold. The card vendors did not generally supply sales invoices although there were brands of cards, such as `Cheers' and First National, whose suppliers did supply sales invoices.

Recording phone card sales

Mr Arachchige's evidence, which was consistent with what the Respondents' officers recorded him as saying to them in the course of a meeting, was that phone card sales were recorded on the till. But Mr Arachchige kept a separate record of the sales for two purposes. The first was to pay the vendors when they came for payment in the evening. The second was to adjust the gross sales figures which were sent to his accountants.

Mr Arachchige provided KPMD with figures for the gross sales from the shops and for purchases. When he had purchase invoices these were sent to KPMD. The sales figure he sent to KPMD was, he told us (and we accept), the gross till roll total less the amount of the phone card sales. He told us that because he made so little profit on the phone card sales they were immaterial to the information the accountant needed. We thought that approach exhibited a lack of serious attention to such matters.

Value of phone card sales

Mr Arachchige's evidence on the volume of phone card sales was vague and not wholly consistent with his other oral evidence or with the evidence of what he had said to the Respondents' officers. In his early evidence he told us that in the relevant period phone card sales could be very variable; one day he might take £500 but on other days £50 or £100. Generally he said sales were higher around the time of religious festivals when people in this country with family abroad would want to phone home. He said that the higher sales would be over a period of about 10 days including the festival day. There were about five relevant festivals a year. He suggested that outside the times of festivals sales were generally at a lower level.

Mr Arachchige provided the Respondents with a listing of cards sold in a sample period Thursday 14 April 2005 to Monday 25 April 2005. These figures together with figures for the selling prices of the cards were used by Miss Badminton to compute average daily sales over the period. In this exercise, as we shall explain later, she treated certain cards as VATable and others as not attracting VAT on sale. Her computations produced average daily VATable sales of £481. The schedule indicate a non VATable daily average of £40. In other words average daily total phone card sales of £501.

Giving evidence before us Mr Arachchige suggested that the figure he had given to the Respondents' officers related to a Muslim festival time (he recalled queues at the mosque) and that that festival had increased the average sales in the sample period because the festival had been on or around Thursday 14 April 2005. There had, he said, been queues outside the mosque on that day. Sales, at £497, had been higher than normal.

Later, pressed by the Tribunal, Mr Arachchige said that sales varied substantially, sometimes they were nil, sometimes £100 or more but with a maximum of £400. He thought that the arithmetic mean daily sales over a year would be £200-£300.

The tribunal is aware that there are two main Muslim festivals each year on which days Muslims do specially attend mosques for prayer. However the tribunal is also aware that neither of these festivals fell on or around 14 April 2005.

We reach our conclusions on this evidence in the section of this decision dealing with Miss Badminton's assessment.

VAT information available to Mr Arachchige

Some phone cards bear a small (1p size) disc on their face which reads "VAT paid". In 2005 few cards bore this symbol. India Tel cards were an example of those which did. More recently (and outside the period relevant to the assessment) more cards, perhaps 90% of those passing through Mr Arachchige's hands, have borne that symbol.

Some cards carried on the reverse in small print a legend such as "VAT paid at source by the service provider under para 3(3) Sch 10A". Mr Arachchige told us that he understood this to mean that he did not need to account for VAT on their sale.

In answer to a question from Miss Connors as to whether he was aware that some card sales were VATable and some not, he replied that he was not - as far as he was aware all cards were the same.

We do not consider it likely that Mr Arachchige gave the issue of the logo "VAT paid" or the legend on the back of the cards any serious thought in the relevant period. If he had, he might well have wondered whether VAT should be due on the sales of cards which did not bear these statements. We do not believe that he was led by the statement to the conclusion that all his card sales were not VATable.

Some of the invoices for the purchase of the telephone vouchers (where invoices were received) showed VAT as having been charged; other showed no VAT. (The first category would suggest that the relevant vouchers were credit vouchers; the second that they were retailer vouchers.) Some of them indicated that no VAT was due on a subsequent sale of the cards. He said that he had been told by KPMD that he did not have to account for VAT on sales of the vouchers reflected in the second type of invoice. Some of the first, VATable, types of invoice had been sent to KPMD who had included in the VAT return a claim for the input VAT in respect of them.

In our view it is likely that Mr Arachchige closed his mind to the question of the VAT on his telephone card sales. Although what he had heard and seen would in the mind of a careful businessman have raised at the least a concern that some of his card sales would be VATable, he either decided to ignore that concern and hope for the best, or possibly was not astute enough to appreciate the possible danger. His oral evidence that he had been told by KPMD that he did not have to account for VAT on sales of cards for which he held a supply invoice saying that "you are not regarded to account for VAT on the onward sale" suggests to us that he would have appreciated the possibility that VAT might be due on other cards but had decided to ignore the issue.

(iv) How the phone cards worked

The Appellant was unaware of the technical and contractual framework supporting the phone cards. The only evidence before us on that subject, other than samples of the phone cards, was from the Respondents' officer Mr Shipley.

Mr Shipley had been involved with the VAT aspects of phone cards since 2001. We found him a fair witness who was knowledgeable about the matters on which he gave evidence. We find the following facts:

(i) In order to use a phone card he or she has purchased, the holder must scrape off the covering of a PIN on the reverse of the card. The card also bears a phone number.

(ii) The holder dials that phone number followed by the PIN, and then the full number of the destination he or she wishes to call.

(iii) The call arrives at the receiver of the card phone number. At that location there will be a piece of equipment called a `Switch'. The switch records the use of the card and redirects the call. The call will be directed so that for the period of the call use will be made of telephone line capacity acquired or paid for by a person involved in the operation of the cards.

(iv) The switch device will either be owned by the issuer of the card (or rented by the issuer on a long term basis) or be owned (or rented) by a sister company of the issuer.

(v) The issuer of the card will not own the line over which the call reaches the switch (that will generally be a BT line) or the line along which the call travels to its final destination but will have acquired the right to use time on the lines on which the onward travel takes place

(vi) In Mr Shipley's experience all the switch devices for cards sold in the UK were located in the UK.

(vii) The nature of the card issuers' operations changed over time. Prior to the 2004 High Court decision in IDT case (see below) many had structured their cards as retailer vouchers; after that decision many had restructured this operation so that they would be classified by HMRC as credit vouchers. After the Court of Appeal decision in IDT, in 2005, many had reverted to retailer voucher structures.

(viii) Generally cards sold in the UK were for use by someone using a telephone in the UK and could not be used from outside the UK.

(ix) Some information about the status of some cards issued by some issuers was available from their Customer Service helplines, internet sites, or posters.

(x) On the basis of HMRC's investigations of the operations of card issuers (and on the basis of some assumptions as to the meaning and application of certain parts of Schedule 10A) the Respondents produced a schedule indicating which cards were in their view credit vouchers, which were credit vouchers where the provider failed to account for VAT, and which were retailer vouchers. This schedule also included a number of cards for which HMRC did not have sufficient information to decide into which category they should fall; these latter the schedule suggested should be treated in a similar way to retailer vouchers. The schedule evolved and was refined over time.

Miss Badminton used the then current version of that schedule to make the assessments under appeal.

Mr Shipley produced a new schedule for the hearing (which we refer to as 'MS3') which reflected the information available to HMRC a few weeks before the hearing.

We deal in section (5) of the decision with our conclusions as to the reliability of these schedules. But we accept Mr Shipley's evidence that these schedules were compiled on the basis of the information available to HMRC of the relevant time, and find it more likely than not that this information was accurate.

(2) An Exempt Supply Credit : Discussion

In his skeleton argument for the hearing Mr Southern raised the argument that the sale of the telephone vouchers was an exempt supply within Article 13B(d)(1) of the Sixth Directive (or Article 135(1)(b) of the new VAT Directive 2006/112/EC). Article 13B(d)(1) exempts:

"the granting and the negotiations of credit and the management of credit by the person granting it;"

Mr Southern kindly produced a written submission expanding this argument.

We concluded that the supply of the telephone cards was not an exempt supply.

Mr Southern's submissions

Mr Southern says that a credit simply means placing funds at someone's disposal. He says it does not matter whether the person with the benefit of the credit pays for it in advance or whether they repay the credit later : either way there is credit. A phone card he says can be a "credit voucher": the words speak for themselves. The person supplying the credit voucher is supplying the credit which is drawn when the voucher is used

And Mr Southern says that what Poundworld does is to negotiate the credit. He says that: 'negotiation' is an independent concept of community law (see para 19 of the Advocate General's opinion in CSC Financial Services v C&E Commissioners (2002) STC 57); the inclusion of 'negotiation of credit' constitutes an extension of the exemption in Article 13B(d) (CSC judgement of the court para 38); although the Court of Justice in CSC did not provide a precise and exhaustive definition of 'negotiation' in relation to all the indents of Article 13B(d), what it says in paragraph 39 of its judgment goes a long way to providing a precise and exhaustive test yet leaving room thereafter to exclude the unforeseen (Sir Andrew Merritt VC at paragraph 32 of C&E Comrs v BAA (2003) STC 35). In the context of Article 13B(d)(2) the Court of Justice said that:

"it refers to the activity of an intermediary who does not occupy the position of any party to a contract relating to a financial product and whose activity amounts to something other than the provision of contractual services typically undertaken by the parties to such contents. Negotiation is a service rendered to, and remunerated by a contractual party as a distinct act of mediation. It may consist, amongst other things, in pointing out suitable opportunities for the conclusion of such a contract, making contact with another party, or negotiating, in the name of and on behalf of a client, the detail of the payments to be made by either side."

Mr Southern says that Poundworld provided negotiation in this sense. It:-

(a) provided facilitation for the stocking and sale of phone cards;

(b) brought suppliers and purchasers of vouchers together;

(c) maintained a wide stock of vouchers to enable customers to choose suitable cards;

(d) in some cases advised customers which card to buy;

(e) provided refunds where the issuer ceased to provide a service; and

(f) was separately remunerated for its service in the mark-ups

Discussion

Despite the fact that the holder of a voucher might describe himself as holding credit with the provider and the legislative description "credit voucher" it does not seem to us that the nature of such a voucher is such as to relate to 'credit' as that word is used in Article 13B(d)(1). In our view that word as there used connotes, as the tribunal held in A1 Rushmoor Radio Taxis Ltd VTD 17634 (para. 70), 'a sum of money being given to a person which must be repaid." (our emphasis).

The transactions described in the other indents of Article 13B(d) all involve something which represents the obligation of another person to pay money or money itself. That obligation may be a loan, a debenture or the some of the rights attaching to a share. But none of them relate to an obligation to provide goods or services. The separation in Article 13B(e) of postage stamps – which carry a right to a service – serves in our view to emphasise the focus of Article 13B(d) on transactions involving something under which money falls to be repaid.

Paragraph (1) refers to the "granting and the negotiation of credit". The 'credit' which is granted must be the same as that which is negotiated. It seems to us that credit which is 'granted' is in the nature of a loan to be repaid or a facility to borrow for later repayment. Thus the credit which is negotiated must also be something which is to be repaid.

In Mays' en Winter's v Staatssecretaris [1997] STC 665 the ECJ considered whether the deferral of payment of a price was the grant of credit within Article 13B(d)(1). The Court held that it could be: "the expression 'the granting and the negotiation of credit [was] in principle sufficiently broad to include credit granted by a supplier of goods in the form of deferral of payment". The language of the Court's judgement in our view is consistent with the concept that 'credit' is a borrowing to be repaid at a later date or a right to borrow.

In C & E Comrs v Civil Service Motoring Association Ltd [1998] STC 111, the Court of Appeal considered the VAT treatment of commission paid to the association in connection with a credit card scheme operated by a bank. Mummery LJ said (at p118 g-h):

"The critical question is whether the expressions "negotiation of credit" and "making arrangements for any transaction for granting any credit [reflecting the domestic legislative provisions] are to be construed as implicitly restricted to activities in relation to particular transactions for the specific grant of credit. Neither the purpose nor the context of the exemption justify placing a restricted meaning on the wide general language of the directive and of the 1983 Act. Both … refer to the doing if things antecedent to, and directly leading to the … 'granting of any credit'…"

It is in our view implicit in this judgment that the exemptions were directed at obtaining a loan rather than a transaction which did not involve the ultimate repayment of money.

These considerations reinforce us in our view that Article 13B(1) is concerned with repayable credit – credit granted which is repayable in money rather than any other form or description of credit

Our understanding of the benefits acquired by virtue of the holding of a telephone card is that they do not encompass the repayment of any money. Whilst it was not clear to us that the holder of a card had any right in English law against its issuer, it was clear that the benefit that the holder expects to obtain, and in the vast majority of cases will obtain, is the provision of a telephone service. The holder of the card will receive, as a result of his holding of the card and of using it as directed, a cheap telephone call. What he gets is a service, not a payment. The expectation of, (or possibly right to), that service may be measured in monetary terms (as a credit) but it is not an expectation, right or quid pro quo which is to a monetary repayment. As such it is not in our view something which has been capable of being "granted as credit" within Article 13B(1)(d) and the dealing in it is not capable of being described as the negotiation of credit.

Neither do we consider that the sale of the cards is properly to be described as the "negotiation" of anything within the meaning of Article 13B(d)(1)

Indents (3) to (5) encompass "transactions, including negotiation" Indent (1) by contrast refers only to 'negotiation'. Whilst a transaction in credit might include the assignment of the benefit of a credit position (eg the sale of a debenture), because that is a 'transaction' in a credit instrument, 'negotiation' is implicitly a lesser transaction. The guidance given in CSC by the ECJ on the meaning of negotiation in indent (5) indicates a meaning of negotiation which is different from an assignment. We see no warrant for a meaning of negotiation in indent (1) which would include assignment.

The cards are sold by Poundworld. Poundworld acts as principal, not as agent. Poundworld is not bringing together a prospective purchase of a card with a prospective seller: it is not mediating between two parties; on the contrary, it is a party to the contract relating to the telephone card. That in our view is not negotiation in the sense described in CSC.

Neither do we see Poundworld's activity as amounting to "transactions … concerning debts … and other negotiable instruments" within Article 13B(d)(5). Whilst the sale of a phone card may be a transaction, even if it is not negotiation, the phone card is not in our view a 'debt' or a negotiable instrument. It is not a debt because, as we understand it, it confers no right to a payment of money. It is not a negotiable instrument because, even if its acquisition were to confer a right upon the holder (so that it would be negotiable), the term "instrument" as it appears in indent (5) refers in our view to an instrument conferring a right to a payment of money, not to the receipt of a service.

(3) The Law : Schedule 10A; place of supply

(a) Credit Vouchers and Retailer Vouchers

Schedule 10A VATA 94 provides a special regime for the taxation of face value vouchers – vouchers which represent a right to receive goods or services to the value of an amount stated on the voucher. It was common ground before us that the telephone cards were face value vouchers – presumably because it was accepted that the 'right' referred to in the legislation encompassed the expectation that the issuer of a card would honour it despite the lack of privity of contract between the issuer and the holder.

Paragraph 2 of Schedule 10A deems the supply of such a voucher to be a supply of services.

Paragraph 3 of Schedule 10A deals with 'credit vouchers' – broadly vouchers issued by someone other than the supplier of the services; and paragraph 4 with 'retailer vouchers' – broadly vouchers issued by the supplier of the services. Very broadly there is no VAT on the supply of a credit voucher: so had all Mr Arachchige's vouchers been credit vouchers no VAT would be assessable; but there may be VAT on the supply of a second hand retailer voucher although not on its issue: so to the extent that Mr Arachchige's vouchers were retailer vouchers VAT may be exigible.

Credit Vouchers

Paragraph 3 provides:-

Treatment of credit vouchers

(1) This paragraph applies to a face value voucher issued by a person who –

(a) is not a person from whom goods or services may be obtained by the use of the voucher, and

(b) undertakes to give complete or partial reimbursement to any such person from whom goods or services are so obtained.

Such a voucher is referred to in this Schedule as a "credit voucher".

(2) The consideration for any supply of a credit voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher.

(3) Sub-paragraph (2) above does not apply if any of the persons from whom goods or services are obtained by the use of the voucher fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them.

Subparagraph (2) had no application in this appeal: Mr Arachchige sold all his vouchers for less than their face amount.

But subparagraph (3) could be relevant if the provider of the telephone calls obtained by the use of the voucher failed to account for VAT on his supply. This provision gives rise to some considerable difficulty: since the supply of the voucher takes place before the supply of the telephone call service it will be hard to know whether the telephone call supplier will account. In Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252, Arden LJ noted the submission that this subparagraph acted in a draconian way and that there had been no argument as to whether it went further than required by the Sixth Directive principle of avoidance of non-taxation. She said at paragraph 115:

"It seems to me that, in practice, where the ultimate supplier has a liability to VAT, United Kingdom traders will in a number of cases be able to minimise any risk to themselves from the non-payment of VAT by the ultimate supplier (for example) by taking covenants from the ultimate supplier or some other person that it will account for VAT and accordingly this is not as a commercial matter as unfair to such traders as it may seem."

Mr Arachchige was assessed in 2005, before Arden LJ's judgment and operated without the benefit of their advice. He took no covenants from those who came to sell him cards, and it seem to us unlikely that it would have been practicable for him to obtain any useful assurance that the VAT would be paid. Mr Shipley told us that he knew of one credit telephone card issuer who had provided indemnities to its distributor customers; but that was one out of many and it was not clear to us that such indemnities were available before the decision in IDT.

Finally we note that the language of paragraph 3 does not dictate the place of supply of the service of supplying the phone cards. We address that issue below.

Retailer Vouchers

Paragraph 4 provides:-

Treatment of retailer vouchers

4-(1) This paragraph applies to a face value voucher issued by a person who –

(a) is a person from whom goods or services may be obtained by the use of the voucher, and

(b) if there are other such persons, undertakes to give complete or partial reimbursement to those from whom goods or services are so obtained.

Such a voucher is referred to in this Schedule as a "retailer voucher".

(2) The consideration for the issue of a retailer voucher shall be disregarded for the purpose of this Act except to the extent (if any) that it exceeds the face value of the voucher.

(3) Subparagraph (2) above does not apply if –

(a) the voucher is used to obtain goods or services from a person other than the issuer, and

(b) that person fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them.

(4) Any supply of a retailer voucher subsequent to the issue of it shall be treated in the same way as the supply of a voucher to which paragraph 6 applies.

It will be seen that subparagraphs (2) and (3) are of no relevance to this appeal: if Mr Arachchige did not issue cards and did not acquire his cards from their issuers. Subparagraph (4) required further reference to paragraphs 6 and 8.

Treatment of other kinds of face value voucher

6-(1) This paragraph applies to a face value voucher that is not a credit voucher, a retailer voucher or a postage stamp.

(2) A supply of such a voucher is chargeable at the rate in force under section 2(1) (standard rate) except where subparagraph (3), (4) or (5) below applies.

(3) Where the voucher is one that can only be used to obtain goods or services in one particular non-standard rate category, the supply of the voucher falls in that category.

(4) Where the voucher is used to obtain goods or services all of which fall in one particular non-standard rate category, the supply of the voucher falls in that category.

(5) Where the voucher is used to obtain goods or services in a number of different rate categories –

(a) the supply of the voucher shall be treated as that many different supplies, each falling in the category in question, and

(b) the value of each of those supplies shall be determined on a just and reasonable basis.

Interpretation

8-(1) In this Schedule –

"credit voucher" has the meaning given by paragraph 3(1) above,

"face value" has the meaning given by paragraph 1(2) above;

"face value voucher" has the meaning given by paragraph 1(1) above;

"retailer voucher" has the meaning given by paragraph 4(1) above.

(2) For the purposes of this Schedule –

(a) the "rate categories" of supplies are –

(i) supplies chargeable at the rate in force under section 2(1) (standard rate);

(ii) supplies chargeable at the rate in force under section 29A (reduced rate);

(iii) zero-rated supplies, and

(iv) exempt supplies;

(b) the "non-standard rate categories" of supplies are those in subparagraph (ii), (iii) and (iv) of paragraph (a) above;

(c) goods or services are in a particular rate category if a supply of those goods or services falls in that category.

(3) A reference in this Schedule to a voucher being used to obtain goods or services includes a reference to the case where it is used as part-payment for those goods or services.

The combined effect of these provisions, given that the only services which can be obtained by using the vouchers are telecommunications services which are standard rated, is that the rate of VAT applicable is the standard rate.

Schedule 10A makes no provision about the place of supply of the services which, by virtue of paragraph 2, are comprised in the supply of a face value voucher. It might be possible to read the combined effect of paragraphs 4(4) and 6(2) as imposing the standard rate wherever the place of supply of the voucher but the language of paragraph 6(2) "is chargeable at the rate in force under section 2(1)", by referring to section 2(1), indicates that the standard rate is the rate to be applied if the supply is taxable: section 2(1) only sets out the rates of tax applicable, whereas the scope of the charge is determined by section 4: "VAT shall be charged on the supply of … services made in the United Kingdom". Thus the question remains as to the place of supply of the services constituted by the supply of the voucher.

Place of supply of the service of supplying the phone cards

The following discussion relates to the supply both of credit voucher cards and retailer voucher cards.

Section 7(10) provides that a supply of services shall be treated as made:

(a) in the UK if the supplier belongs in the UK; and

(b) in another country (and not in the UK) if the supplier belongs in that other country.

But that this rule may be varied by Treasury order.

The Value Added Tax (Place of Supply of Services) Order 1992 SI 1992/3121 was amended a number of times. For services performed on or after 1 July 1997 and before 1 August 2006, Article 21(1) of the order read:

"21(1) The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not the right is exercised)".

By the Value Added Tax (Place of Supply of Services) Amendment) Order 2006 that Article was amended to read:

"21(1) The place of supply of a right to services shall be the same as the place in which the supply of services to which the right relates would be treated as made if made by the supplier of the right to the recipient of the right (whether or not the right is exercised)."

The underlining exhibits the amendment.

Both versions of this Article cause the place of supply of a right to services to be potentially different from the place at which the right would otherwise be supplied. But the earlier version makes that new place "the place of the supply of the services to which the right relates", and the second the place at which the supplier of the right would have made the supply of the service from if he had been supplying the service.

It seems clear to us that the earlier version did not intend an additional assumption to be made that the supplier of the right was also making the supply of the service. There will be many cases where the supplier of the right does not or cannot make the supply of the services. The plain intention of the old version is that one looks to the provision of the services and asks whence will that take place. The rule is specific and clear: it does not affect the nature of the supply of the right but merely the place of supply and aligns that place with the place of supply of the services to be obtained.

Miss Connors later written submissions were based upon the provisions of Article 21 after the 2006 amendment. But the phone cards supplied by Mr Arachchige to which the appointed assessment relates were supplied before 1 August 2006. As a result it is the first version of Article 21(1) which is relevant to this appeal, not the second.

We have noted the tacit assumption that the phone cards represented a 'right' to a supply of phone services. As a result the place of supply of the phone cards is determined by Article 21. The place of supply of Mr Arachchige's services in providing the phone card was not therefore the place which these services would have been provided if they had been provided by Mr Arachchige to the buyer of the phone card, but instead the place of supply of the telecommunications services obtained by the buyer – or obtainable by the buyer from the use of the card.

Thus, subject to other provisions of SI 1992/3121, if the telecommunication service supplier belonged in the UK the place of supply of the telecoms service (and therefore of the phone card) would (by section 7(10) VATA) be treated as being in the UK and otherwise would be treated as supplied outside the UK.

Article 16 of that Order may vary the place of supply where telecommunication services are supplied to a person outside the EU or a person who receives the supply for the purposes of a business. The evidence before us was that the buyers of the cards (who we believe would be the recipients of the supply of the telephone service) did not belong outside the EU and were not business users. We therefore see no application for Article 16.

Article 17, as it applied for supplies made on or after 18 March 1998, provided that if telecommunications would otherwise be treated as supplied in the UK they were not to be treated as supplied in the UK if their "effective use and enjoyment takes place outside the Member States".

It seems to us that the supply of the telecommunications service obtained by the use of the voucher is obtained by the placing of the call rather than by the receipt of the call, and thus that it is at the place at which the card user would make the call that the service is used and enjoyed – no matter how delighted the recipient of the call may be to hear the caller. On the evidence before us it seemed likely that the cards would be used in the UK by the buyers, and accordingly likely that the use and enjoyment of the telephone services would be in the UK. As a result Article 17 would not make what would otherwise be a UK supply of telecommunication services into a non-UK supply.

Article 18 provides that where a supply of telecommunications services would be treated as supplied outside the Member States they shall be treated as supplied in the UK if their effective use and enjoyment takes place in the UK. In the previous paragraph we found it likely that use and enjoyment of the telephone services took place or would take place in the UK. Therefore if by virtue of section 7(10)(b) or otherwise the supply of the call would be treated as taking place outside the EU, Article 18 will cause it to be treated as taking place in the UK.

There is no provision in SI 1992/3121 which removes what would otherwise be a telecoms supply to a non-business customer which takes place in the EU to the UK.

Therefore the position appears to be the following:

(i) if the supplier of the telecoms service belongs in the UK, the supply of the card is made in the UK (section 7(10) and no application of Article 17);

(ii) if the supplier of the telecoms service belongs in the EU but not in the UK, the supply of the phone card takes place outside the EU and not in the UK (section 7(10) and no contrary provision in SI 1992/3121);

(iii) if the supplier of the telecoms service belongs outside the EU, the supply of the phone card takes place in the UK (section 7(10) overridden by article 18).

Summary

On this basis, Mr Arachchige's supply of phone cards will be a VATable supply in the UK:

(i) to the extent the cards are credit vouchers if:-

(a) the supplier fails to account for VAT (here or elsewhere in the EU); and

(b) the supplier of the telecoms service belongs in the UK or outside the EU;

(ii) to the extent the cards are retail vouchers, if the supplier of the telecoms service belongs in the UK or outside the EU.

In either case a non-UK but EU supplier of the telecoms service will mean that the supply of the card is not VATable because it will not be a supply made in the UK.

IDT and Article 9

In IDT the Court of Appeal considered the proper construction of paragraph 3(3) Schedule 10A. There is no reference in the judgments of the Court to SI 1992/3121, although there are some statements as to the effect of Article 9 of the Sixth Directive which are echoed in some of the provisions of SI 1992/3121.

The tax at issue in IDT was the VAT which HMRC argued was payable by a UK distributor of phone cards who bought the cards from their Irish issuer and received them for the purposes of a business carried out by it in the UK. That tax potentially arose under the reverse charge provisions of section 8 VATA.

The application of SI 1992/3121 to the supply of cards to a distributor who belongs in the UK for the purpose of his business is potentially different from its application in the case of the purchase of cards by an individual who belongs in the UK and purchases the cards for a non-business purpose.

Whereas in both cases the supply of the cards is to be treated by virtue of paragraph 2 Schedule 10A as a supply of services, and by virtue of paragraph 21 of SI 1992/3121 (as it applied before 1 August 2006) as a supply made in the same place as the place of supply of telecoms services to which the right given by the card relates, the effect of section 8 VATA (where the supplier belongs outside the UK) is that a business recipient is to be treated as having "himself supplied the services in the United Kingdom".

In IDT the Court of Appeal considered the proper construction of paragraph 3(3) Schedule 10A in the context of the receipt of phone cards by a distributor who belonged in the UK and received them for the purposes of its business from an Irish issuer. Broadly the question was whether, if the Irish company which provided the telecoms service on the redemption of the card did not pay Irish (or UK) VAT on its supply of telecoms services, that was a failure to account for VAT within paragraph 3(3). At paragraph 27 Arden LJ set out the issues which arose on the appeal. They were:-

(i) whether avoidance of non-taxation and double taxation were principles of the Sixth Directive? The answer was: yes (paragraph 95);

(ii) if so and leaving on one side the place of supply rules are those principles violated by the conclusion that "supplies to the UK distributors of phone cards" are not subject to VAT? The answer again was yes (paragraph 100 and 101);

(iii) if the answer was yes are those principles excluded by the place of supply rules? The answer was no. See below;

(iv) if the answer to (iii) is no should national legislation be construed in accordance with those principles? The answer again was yes;

(v) and if so how? The answer was to treat paragraph 3(3) as applying when the service provider was not obliged to account for Irish or UK VAT.

In relation to the third question, the place of supply question Arden LJ considered the provision of Article 9 of the Sixth Directive. The relevant provisions in that case, as in the case of Mr Arachchige, were these:-

"1. The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.

"2. However –

…

(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:

Telecommunications. Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals … by wire, radio or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception …

[Deals with non-distortion measures and includes provisions on which Articles 17 and 18 of SI 1992/3121 are based.]

Arden LJ deals with these provisions at paragraphs 102 to 107. She concludes (at paragraph 106) that these rules are exclusive and at 107 says:-

"Accordingly, the place of supply rules in Article 9(2) take precedence over the general rule in Article 9(1). Article 9(1) is the residual category. In this case, the issue of a phone card (to the extent subsequently used for telecommunications services) is no more than a promise to make such services available or to provide that such services are made available and therefore constitutes a supply of telecommunications services within Article 9(2)(e). Therefore the issue of phone cards to UK traders is subject to VAT …"

Arden LJ's conclusion that the supply of the right to the telecoms services is a supply of telecoms services echoes both the words in the Telecommunication indent of Article 9(2)(e): "including the transfer or assignment of the right to use capacity", and the provisions of Article 21(1) SI 1992/3121 (in its pre 2006 form) that the place of supply of the right is the place of supply of the services.

But, whereas in IDT the conclusion was that the place of supply was in the UK because the supply was to a UK trader, in the case of Mr Arachchige's customers (who we believe not to acquire the cards for the purposes of a business), the implication of Arden LJ's reasoning to Mr Arachchige's case is that Article 9(1) alone applies, and the national consequence would appear to be that the place of supply is the place in which the supplier of the telecoms services is established or has a fixed establishment from which the service is supplied (but subject to any provision made under Article 9(3)(b) which enables the UK to enact Article 18 under which the place of supply by a non-EU supplier would be in the UK – see paragraph 83 above).

We note that Pill LJ at paragraph 129 of IDT concludes that the supply of the phone card is made in the UK and the supply of the telecoms service in Ireland. But he reaches that conclusion in the context of a supply to a UK trader and therefore without regard to Article 9(3)(b).

As we note above, the Respondents' written submissions in relation to the place of supply of the phone cards are based on the provisions of Article 21(1) after its amendment in 2006. In its new form it deems the right to the service to be supplied in the place in which the services would have been supplied if supplied "by the supplier of the right to the recipient of the right". The Respondents in their written submissions approached the EU vires for this (new) provision thus:

(i) the Sixth Directive makes no express provision for the place of supply of a right to services, therefore the general rules apply;

(ii) the supply of a right to services must be a supply of services (Article 6(1));

(iii) so the Sixth Directive place of supply of services rules apply;

(iv) the type of services must (on any logical policy or legal basis) be the same as the services to be obtained on exercising the right in telecoms services;

(v) "HMRC considers that if the supply of the right by A to B were subject to different place of supply rules from the notional supply of the underlying services by A to B this would generate cases of non- taxation or double taxation".

And they say this analysis is consistent with Arden LJ's approach I paragraphs 102-107 of IDT. They say nothing however about the EU law compatibility of the pre-2006 form but do not indicate that they consider it to be at variance with Article 9.

We set this out, not because the provisions of the new words in Article 21(1) SI 1992/3121 are directly relevant to Mr Arachchige, but because it raises the question as to whether it is the case that both the pre-2006 version and the post-2006 version of Article 21(1) are consistent the Directive if they result in different places of supply for the phone cards.

As a result we must address two further questions:

(i) where, under the Directive, is the place of supply of a right to services? and

(ii) if that place is other than that which appears to be the place of supply on the plain words of Article 21(1) SI 1992/3121 in its pre-2006 form, is it necessary (and possible) to construe those words so that they give the same result as the Directive?

If the Directive gives a place of supply different from that given by the plain words of Article 21(1) and it is not possible to construe Article 21(1) in conformity with the Directive then the taxpayer may rely upon Article 21(1) to avoid a charge to tax which would otherwise have arisen under the provision of the Directive (since the Directive cannot, absent domestic implementation, impose obligations on an individual).

We noted at paragraph 94 above that it appeared to be a natural consequence of the conclusion that the supply of a right to services constitute a supply of telecoms services, that the place of supply of the right for the purposes of the Directive would be the place of supply of the telecoms services but that there were possible contrary indications in Pill LJ's judgment. Mr Southern in his written submissions also gives examples of inconsistencies which would occur if the places of supply of the right and the underlying service were to be treated as the same.

It seems to us that to treat the place of supply of the right to services as being, for the purposes of the Directive, the same as the place of supply of the services is carrying Arden LJ's reasoning too far. Whilst such a conclusion may determine the nature of the supply services, the specific provision in the Directive for the place of supply must be applied separately to the supply of the right. For that reason we find that, for the purposes of the Directive, the vouchers supplied by Mr Arachchige are to be treated as supplied in the UK by him in conformity with Article 9(1).

If that is right then old Article 21(1) appears to conflict with the Directive. We must interpret domestic legislation so far as possible in the light of the wording and purpose of the directive in order to achieve the result pursued by the Directive (Arden LJ in IDT paragraph 79). That might require departing from the unambiguous meaning of Article 21(1) (paragraph 86 IDT) but not so as to produce a meaning which departs substantially from a fundamental feature or cardinal principle of the legislation or where there would be important practical repercussions which the courts are not equipped to evaluate (paragraph 87). The interpretation chosen must go with the grain of the domestic legislation.

We do not find this an easy task. We see nothing in the setting of Article 21 or of the place of supply provisions generally in the UK domestic legislation which indicates any general policy. Article 21 appears to stand on its own. Thus any grain or cardinal features must be derived from its provisions. Those words are clear: the place of supply of the right is the place of supply of the services to which the right relates. Given that clarity of expression it does not seem proper or possible to read into those words additional words which would give a different place.

As a result it seems to us that even if our interpretation of the directive is correct we cannot construe Article 2191) inconformity with it. Our conclusion at paragraph 85 above therefore remains unaffected by our consideration of the Directive.

(4) The assessment by Miss Badminton

Miss Badminton made an assessment of £43,289 on 27 July 2005 which was notified to the Appellant on 30 July 2005. The assessments were for the 7 periods 07/03 to 01/05. She computed the assessments in the following way:-

(i) she took the phone card sales information provided by the Appellant for the period of 12 days from 14 April 2005 to 24 April 2005;

(ii) by reference to the then current departmental summary schedule (described above in relation to Mr Shipley's evidence), she determined which of the Appellant's card sales should be standard rated and which should not be VATable, and thus by reference to the Appellant's stated selling prices calculated the VATable sales;

(iii) from the VATable sales for the 12 day period she calculated average daily VATable sales;

(iv) she then multiplied the daily average VATable sales so calculated by the total number of days in each period (i.e. including weekend days) to determine the VATable phone card sales for the period;

(v) from that figure she calculated the output VAT attributable to each period on those sales;

(vi) she noted that the Appellant had claimed input tax recovery in relation to phone card purchases in the five later periods but not in the first two periods. She calculated the average monthly input tax phone card claim for the five periods and made an allowance in the first two periods for input tax of that average amount;

(vii) each period's assessment was thus for the output VAT so calculated less in the case of the first two periods the notional input tax element.

There was no real challenge to the method of calculation adopted by Miss Badminton, and indeed it seems to us to be reasonable and proper. But there were two challenges to the underlying assumptions:-

(i) first that the telephone card sales for the 14 day period were unrepresentative of the year as a whole; and

(ii) second, that the departmental schedule of phone card VAT rates was defective.

The 14 day period

On this issue Miss Connors accepted that sales might vary, but they could just as well go up as down. She says that in the context of the Appellant's lamentable record keeping this sample was the best there was to be had. And she says 14 April 2005 was not a Muslim holiday.

We have said that we found Mr Arachchige's evidence of his average phone card daily sales lacking in precision. The only firm evidence before us was that of the 12 day period. We find that there was not a significant Muslim festival in that period. There was no evidence before us which persuaded us that the average daily sales figure for this period was significantly different from the average for a whole year or the relevant averages for each VAT period. We therefore accept the use of these average daily figures.

(5) The liability of particular phone cards to VAT

Miss Badminton used the departmental schedule to allocate cards between those which were VATable and non-VATable. In her evidence she says of the exercise comprising the use of this schedule:

"Where it was not clear how to attribute the liability we used best judgment and applied standard rating due to the lack of evidence to the contrary".

This process lead to 63 out of 66 types of Mr Arachchige's phone cards being treated as VATable at the standard rate.

The departmental schedule used in the assessment was exhibited by Mr Shipley. It listed 29 card operators and the names of their cards. It had a column for the VAT treatment. In the case of 7 operators the column indicated "VAT Due"; in the case of 2 operators "credit vouchers" (and for one of those "no VAT"), for one operator "under review", and for the other 19 operators "N/K" meaning not known. For 50 out of the 76 cards listed the VAT treatment was "N/K". In each of those cases Mr Arachchige's supplies were treated as standard rated.

We have accepted Mr Shipley's evidence that the table was computed on the basis of information available to HMRC at the relevant time. We accept that it is likely that the factual information on which it was based was correct.

In preparation for the hearing Mr Shipley prepared a new schedule ("MS3") which showed the classification of Mr Arachchige's phone card sales on the basis of information available to Mr Shipley shortly before the hearing and his conclusion as to the VAT rate applicable to those sales. This schedule showed a number of phone cards thitherto classed as N/K (and thus assessed as standard rated) as not being liable to VAT, and others as being VATable.

Mr Southern made a number of criticisms of these schedules which we address in the next section of this decision. For present purposes it is enough to say that we accept that the factual information contained in MS3 is likely to be correct, and that Mr Shipley's classification in that table of cards as "credit vouchers" or "retailer vouchers" is likely to be correct.

MS3 has 11 cards classified as "not known" for which Mr Shipley recommends a standard rate.

At paragraph 85 above we concluded that in the relevant period (before the 2006 amendments to SI 1992/3121) cards which resulted in the supply of telecoms services by a supplier who belonged in the EU but not in the UK were to be treated as supplied outside the UK. That means that no UK VAT would be due on their sale by the Appellant to a non-business customer. There are a number of phone card issuer/redeemers on MS3 which appear to be companies established in the EU and outside the UK. A supplier who is established outside the UK will belong in the UK only if it has a fixed establishment here which is most directly concerned with the supply (section 9(2) VATA). Whilst we accept Mr Shipley's evidence that the "switch" used by a supplier is most likely to be in the UK, it seems to us unlikely that the presence of a "switch" here is a sufficient technical and personal presence in the UK to constitute a fixed establishment of a company incorporated outside the UK. We therefore find that these companies belonged outside the UK in relation to their supplies of telecoms services and thus that the related cards were supplied outside the UK and were not liable to VAT when sold by the Appellant to non-business customers.

On the evidence before us it therefore seemed that the cards listed on MS3 against numbers 4, 5, 6, 8, 8a, 11, 13, 16-19, 21-24, 25, 27. 29, 37, 41, 49, 50, 52, 58, 62 and 63 were such that their sale was not a supply in the UK in the period to 1 June 2004, and thereafter the same was true with the exception of 11, and 21 to 24 which after their dates appear to have been redeemed by a telecoms supplier belonging in the UK.

Accordingly we find that the calculation of the assessment falls to be revised by making the following adjustments:-

(i) treating as not liable to VAT sales of those additional cards so described in Mr Shipley's MS3;

(ii) treating as not liable to VAT, sales of those cards identified in paragraph 116 above; and

(iii) making an appropriate adjustment for the "not known" cards. We discuss this below.

It is our task to determine on the basis of the evidence available to us, and as best we can, the amount of the proper assessment. In the absence of any evidence to the contrary we would dismiss an appeal. We have no direct evidence relating to the "not known" category, but we know that, of the number "not known" when Miss Badminton made her assessment, some are now known to be VATable and some not VATable. It seems to us more likely than not on the basis of this evidence that a similar proportion of those currently "not known" will be VATable as the proportion of those originally not known turned out to be VATable. Therefore the best assessment will be determined by treating only that proportion of the currently "not known" cards as VATable.

Mr Southern's criticism

Mr Southern makes a number of points about the scheme of Schedule 10A and the relevant evidence. Some of those points have given us cause for concern about the procedural fairness of the regime for small traders in Mr Arachchige's position.

Most tellingly Mr Southern points to the schedule used by Miss Badminton to make the assessments. That schedule, prepared with all the available resources of HMRC indicated that at that time the proper treatment of 65% of the cards was not known. If HMRC, who understood the legislation, did not know how could a small retailer know? Miss Badminton suggests that issuer's websites and posters could provide relevant information. That of course assumes that the issuer's information is accurate.

This, it seems to us, is a serious concern about the operation of the system, but it is not one which we have any power to address. It does not affect the question of whether or not a supply is VATable. Whereas if a credit voucher card were redeemable by a UK company it might be reasonable to conclude as a finding of fact that VAT would be paid by it (so that paragraph 3(3) Schedule 10A did not bite), in the absence of information to the contrary, we could not, in the teeth of believable evidence as to the issuers and redeemers of the cards, conclude that the uncertainty from the retailer's perspective meant that the cards should all be treated as credit vouchers and all within paragraph 3(2) and outside paragraph 3(3).

Mr Southern says that the principle of legal certainty requires the taxpayer to be able to be aware of the tax treatment of his transaction at the time of the transaction. It was clear that this was not possible: even the Commissioners did not know a year or so later in 65% of the cases. Miss Connors says by contrast that it is a principle that a person is liable to VAT unless he can demonstrate an exemption applies (she refers us to paragraph 63 of the Advocate General's opinion in Teleos plc &Others v HMRC of 11 January 2007).

It seems to us that neither proposition is correct: both legal certainty and the proof that one falls within an exemption relate to the interpretation of the law not to the determination of the facts relevant to its application. Mr Arachchige's ignorance of the facts does not impinge on the certainty of the application of the law to those facts; and the requirement to apply a narrow construction of an exemption is not a presumption that the facts are such that it is not available. And in any event we must find what facts we can on the evidence available to us to determine the appeal.

Mr Southern says all we have before us is Mr Shipley's oral evidence. Subject to a point which follows that is true. But we believed Mr Shipley and believe that he had done his best to find out and record accurately the underlying facts.

The only other evidence was the logo printed on some cards "VAT paid", and two invoices provided by the Appellant which bore a legend indicating that VAT would be accounted for under the provision of Schedule 10A, and in one case that no VAT would be required to be paid on the onward sale. However, one invoice fell outside the period of assessment, and the other was reflected in a similar conclusion in MS3. So far as concerned the "VAT paid" logo on the cards, we concluded that in relation to the cards in the period of assessment there was no conflict with MS3.

Lastly Mr Southern notes that MS3 was computed a few weeks before the hearing. But it is the best evidence available to us.

(6) Best of Judgment

Where the Commissioners conclude that a taxpayer's returns are incomplete or incorrect section 73 VATA permits them to assess the VAT due to the best of their judgment. Section 83(p) permits an appeal against such an assessment or the amount of the assessment. That an assessment had not been made to the best of the Commissioners' judgment may therefore be grounds to allow an appeal against the assessment.

Mr Southern submits that the assessments were not made to the best of the Commissioners' judgment.

In Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 Carnwath LJ gave guidance on the approach the tribunal should adopt to "best of their judgment" arguments at paragraph 38. We note in particular that he said "The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material available to it, the burden resting on the taxpayer. In all but exceptional cases, that should be the focus of the hearing, and the tribunal should not allow it to be directed into an attack on the Commissioners' exercise of judgment at the time of the assessment". Earlier on (at paragraph 21) he noted that in cases where there was some error in the calculation of the assessment the relevant question was "whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels a conclusion that no officer seeking to exercise best judgment could have made it." A capricious or vindictive assessment might fall into the latter category.

Mr Southern makes the following points:-

(i) in treating cards for which the Commissioners Schedule recorded "N/K" as VATable, Miss Badminton was not exercising any judgment at all, but simply applying a heavy handed rule of thumb;

(ii) the information on which the Commissioners based their assessment was sketchy – 65% of the cards were in the "N/K" category: if the Commissioners did not know the right treatment, how could a person in Mr Arachchige's position know?

(iii) very little, if any, evidence had been adduced to support the Commissioners' clarification of those cards they could classify at the relevant time;

(iv) extrapolating from a 12 day sample to 21 months without any consideration of whether Mr Arachchige's turnover might vary was wholly unreasonable;

(v) the result of the assessment was that the vast majority of the Appellant's phone card turnover was assessed at 17½%, without any credit for input tax;

(vi) Miss Badminton was relatively inexperienced.

In relation to point (v) Miss Connors indicated that if Mr Arachchige could provide evidence of who his suppliers were (other than those who had provided invoices and for which the assessment gave a measure of input tax credit) which would enable the Commissioners to determine whether they were registered or registrable, they would consider giving input tax credit in respect of any period for which there was no time bar.

We do not consider that the assessment should be set aside on the grounds that it was not made to the best of the Commissioners' judgment. In our view Miss Badminton did her honest best to determine a reasonable assessment on the basis of the information available to her.

We do not find Miss Badminton's relative inexperience relevant: she was competent and had access to and used relevant materials. We did not find the lack of information available to the Commissioners relevant: they must do the best with what they have. The assessment made allowance for input tax only by reference to an estimate computed by reference to supplies for which invoices had been received, but there was no evidence that other suppliers had been taxable supplier or that there was an invoice or other material which would justify a credit: the basis adopted was fair.

The extrapolation of 12 days' supplies to 21 months without asking to what extent the 12 days were representative of normal turnover was a mistake but not of such a quality as to compel a conclusion that no officer seeking to exercise best judgment could have made the assessment on that basis.

The application of standard rate VAT to all those categories of card where the Commissioners did not then know the proper treatment (the "N/K" cards) was a more serious fault. It seems to us that if some of the cards whose treatment was known were non-taxable, then there must have been a reasonable probability that some of the N/K cards were also not taxable. We accept that the approach adopted was heavy handed. However, that seems to us to be the kind of error which is properly subject to rectification in the exercise of the tribunal's duty to determine the amount of the assessment: it does not reflect vindictiveness or dishonesty by the officer, merely an undue and, in the circumstances of the cards' genesis, slightly less than fair, reliance on the principle that the burden of proof lies on the taxpayer.

In our view the proper course is to make the necessary adjustments to the assessment rather than to set it aside.

(7) 136. Summary : Conclusions

(1) It was conceded by Mr Southern that the supplier of the phone cards and the person therefore assessable in respect of the VAT if any on their supply was the Appellant. That concession was not in conflict with the evidence we heard, and in our view was rightly made.

(2) Although there are faults in the assessments made they should not be set aside as not having been made to the best of the Commissioners' judgment.

(3) The supply of phone cards is not an exempt supply of credit.

(4) The information reflected in the schedule MS3 produced for the hearing by Mr Shipley was likely to be correct, and to the extent of that information the assessment should be determined on the basis of it.

(5) To that extent and for that purpose the classification in that schedule of a card as a credit voucher or a retailer voucher should be accepted.

(6) To the extent that that schedule indicated that the card was a credit voucher and the supplier of the telecoms service was based in Ireland, the provisions of paragraph 3(3) applied and the consideration for the supply of the card by Mr Arachchige should not be disregarded pursuant to paragraph 3(2) Schedule 10A.

(7) The effect of paragraph 21(1) SI 1992/3121 as it applied before 1 August 2006 (and therefore as it applied to the periods under appeal) was that the supply of the card should be treated as taking place where the supply of the telecoms services obtainable by the use of the card took place. Because the purchasers of the cards belonged in the UK, but were not acquiring the cards for the purposes of a business carried on by them, the supply of the card is to be treated as having taken place in the UK unless the supplier of the telecoms service belonged in the EU, when it would have taken place in the supplier's Member State.

(8) It was likely that those telecoms suppliers incorporated outside the UK belonged outside the UK in relation to their supply of telecoms services, and thus that those incorporated in the EU belonged in the EU, and those incorporated outside the EU belonged outside the EU.

(9) The 12 day sample of Mr Arachchige's card sales gave rise to a daily average which is to be taken as representative of daily sales in the periods assessed.

(10) Where schedule MS3 indicated that the nature and VAT treatment of a card was not known it was likely that the taxability of those cards would divide up in the same proportions as the cards for which information was known.

(11) The output tax relevant to the assessment should therefore be computed on the basis of paragraphs (4) to (10) above.

(12) The allowance made for input tax in the assessments should not be adjusted unless Mr Arachchige provides invoices from or evidence within regulation 29(1) VAT Regulations 1995 evidencing further taxable supplies to him.

To the extent of any reduction the appeal is allowed.

We therefore adjourn the appeal for the parties to agree the precise figures on this basis, and if not agreed to return to the Tribunal.

We did not consider it appropriate in the circumstances to award costs.

Our decision was unanimous.

CHARLES HELLIER

CHAIRMAN

RELEASED: 4 June 2008

LON 2006/1211