18779
VAT ZERO RATING–– Removal of Goods to a Member State – No satisfactory evidence produced to substantiate removal – Appellant did not adjust its VAT account within 3 months of the date of supply – Were the Respondents entitled to issue an assessment for VAT and a misdeclaration penalty – Yes – Appeal dismissed – With order for costs against the Appellant

LONDON TRIBUNAL CENTRE

MERCER ASSOCIATES LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: Michael Tildesley	 (Chairman)
					     Rachel Adams FCA AT11  (Member) 

Sitting in public in  London on 28 July 2004

Appellant did not appear

Mario Angiolini for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The Dispute

1.	The disputed decision concerns a VAT assessment for the supply of 15,072 CPUs by the Appellant to Fancygrove Ltd in the Republic of Ireland. The Appellant claimed that the supply was zero-rated because the goods had been exported to an EC member state. The Respondents rejected the claim on the ground that the Appellant had produced no satisfactory evidence that the goods had been removed from the UK. The Respondents, therefore, issued an assessment for unpaid VAT in the sum of £258,148.00 plus interest of £2,758.29 making a total of £260,906.29 for the accounting period 02/02, which was served on the Appellant on 13 June 2002.

2.	The Appellant served Notice of Appeal dated 4 March 2003 against the assessment raised for the period 02/02 on the ground that the Respondents had unreasonably refused proof of export of the said goods supplied by the Appellant.

3.	On 3 April 2003 the Respondents withdrew the assessment for unpaid VAT for the accounting period 02/02 and replaced it with an assessment for unpaid VAT in the same sum of £258,148.00 plus higher interest of  £12,688.15 making a total due of £270,836.15 for the accounting period 05/02. The reason for substituting the original assessment with a new assessment was that the Respondents had concluded after a local review that the supply of the CPUs should have been accounted for in the period ending 05/02.

4.	Sometime after 10 April 2003 the Respondents allowed the Appellant’s claim  for zero-rating the supply of 15,072 CPUs when they became aware of  satisfactory documentary evidence  that the CPUs had been removed from the UK. As a result the Appellant was allowed to credit its VAT account for the period when the documentary evidence became available with the amount assessed (£258,148.00) to extinguish VAT due.  The assessment for unpaid VAT for the period 05/02, however, remained in force. 

5.	The Respondents subsequently withdrew the assessment for interest (£12,688.15) but on 21 July 2003  issued a misdeclaration penalty in the sum of £38,722.

6.	On 21 June 2004 the Tribunal directed  that the Appeal should also deal with the misdeclaration penalty.

7.	Thus the disputed decisions in this Appeal are the assessment for unpaid VAT in the sum of £258,148.00 for the period 05/02 and the misdeclaration penalty in the sum of £38,722.  

The Legislation

8.	Section 30(8) of the Value Added Tax 1994 enables the making of regulations which may provide for the zero-rating of supplies of goods where the Commissioners are satisfied that the goods have been removed from the UK and acquired by a person in another member state. Regulation 134 of the VAT Regulations 1995 allows the zero-rating of goods removed from the UK to another member state provided the Commissioners are satisfied that the supply is made between taxable persons and that the goods are removed to another member state subject to such conditions as the Commissioners may impose.

9.	The conditions imposed by the Commissioners are set out in VAT Notice 703 “Exports and Removal of Goods from the United Kingdom”, which has the force of law.

10.	Paragraph 8.4 of  VAT Notice 703 requires the supplier of the goods to satisfy the following conditions before he may zero-rate the supply:

a)	The customer’s EC VAT registration number including the 2-letter country code prefix must be displayed on the VAT sales notice.
b)	The goods are sent out of the UK to a destination in another EC member state.
c)	Valid documentary evidence of the removal from the UK must be obtained and kept within three months of the date of supply.

Unless all the conditions are met the taxable person cannot zero-rate the supply instead he must account for VAT on the goods at the standard rate.

11.	Paragraph 8.7 of VAT Notice 703 sets out  what constitutes valid documentary evidence of removal. The taxable person may use a combination of the following provided that when taken together they provide clear evidence that the particular goods in question have been removed from the UK:

a)	commercial transport documents from the carrier responsible for removing the goods from the UK
b)	customer’s order
c)	inter-company correspondence
d)	copy sales invoice
e)	advice note
f)	packing list
g)	details of insurance or freight charges
h)	evidence of payment
i)	    evidence of receipt of goods abroad
j)	    any other documents relevant to the removal of goods in question which would normally be obtained in the course of intra-EC business.

12.	Paragraph 9.4 of VAT Notice 703 provides that where the taxable person has not met the conditions for zero-rating within three months of the date of supply he must account for the VAT owing on the supply. If the tax payer subsequently meets the conditions he can zero-rate the supply and adjust the VAT account for the period in which the conditions were met.

13.	Section 73(1) of the VAT Act 1994 provides that

	“Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgement and notify it to him”.

14.	Lightman J in  Customs and Excise Commissioners v Musashi Autoparts Europe Ltd [2003] STC 449 explained the legal effect of the legislative provisions dealing with  the zero-rating of the supplies of goods removed from the UK and acquired by another person in a member state.

“…. when it is open to the taxable person to establish that his supply is zero-rated but he fails to do so, the taxable person and the Commissioners are to treat the supply as standard rated  and the Commissioners are empowered to make an assessment imposing an obligation to pay VAT and interest on this basis” (paragraph 21).

“ The later satisfaction of the conditions does not have a retrospective effect ……It does not in law discharge……an earlier assessment made on the basis that the supply in question was standard rated in the sense of either of vitiating or of withdrawing or reducing to nil the prior assessments and liabilities thereunder.  According to the scheme of legislation satisfaction of the conditions merely entitles the taxable person as at the date of such satisfaction to a credit for the VAT liability previously acknowledged or assessed. The liability and previous assessment stand, but the credit can be offset against and satisfy the liability for VAT so far as it remains undischarged…” (paragraph 22).

15.	Section 63 (1) of the VAT Act 1994 provides that where a person makes a return  which understates his liability to pay VAT  he will be liable to a penalty equal to 15% of the VAT which would have been lost if the inaccuracy had not been discovered (a misdeclaration penalty).

16.	 Under section 63 (10) of the 1994 Act  a person escapes liability to pay a misdeclaration penalty if he can satisfy the Tribunal that he has a reasonable excuse for the misdeclaration. Under section 70 the Commissioners or the Tribunal on appeal may mitigate the penalty.

The Issues

17.	The issues to be determined by the Tribunal are as follows:

i.	Did the Appellant meet the conditions for zero-rating the supply of the CPUs within three months from the date of the supply?
ii.	Were the Respondents entitled to raise an assessment for unpaid VAT in respect of the supply?
iii.	Was the Assessment made to best judgement?
iv.	Was the Appellant liable to pay a misdeclaration penalty?

The Hearing

18.	The Appellant did not attend the hearing. According to the Respondents he had gone missing. The Respondents tried to make contact by phone with the Appellant’s representative, David Watts & Company, Accountants & Auditor, but they did not return their calls.

19.	The Respondents’ Counsel applied to the Tribunal to strike out the Appeal under rule 26(1) of the Tribunal Rules 1986 but we were not satisfied that we had the power to do so because one of the parties had appeared.  

20.	 We were satisfied that the Notice of the Hearing had been served in accordance with rules. We, therefore decided to hear the Appeal in the absence of the Appellant under rule 26(2).

The Evidence

21	The Tribunal heard evidence from Mr D Lewis, an Officer of the Respondents. A bundle of documents was presented to the Tribunal. 

22.	The Appellant was incorporated on 27 August 1999. The registered office of the Appellant was 13 Castle Street, Dover. Mr Henri Vesters, a Dutch national resident in the Netherlands was the sole director. The Appellant was registered for VAT under registration number 715 7976 94 with effect from 3 February 2001. The Appellant’s main business was the importation of petroleum products.

23.	On the 9 April 2002 Mr Lewis together with an Officer visited the Appellant to ascertain its trading status. During the visit Mr Lewis queried with Mr Watts the zero-rating of a supply of 15,072 computer chips (Intel Pentium4 CPU 1.7 GIG) to Fancygrove Limited, Alexandra House, Sweepstakes, Ireland.  The invoice was dated 28 February 2002. The value of the supply was £1,733,280.  Mr Lewis informed Mr Watts that he required satisfactory evidence that the goods had been removed from the UK.

24.	On the 11 April 2002 Mr Lewis received by fax from Mr Watts a copy of the dispatch note of LCA International Ltd for the computer chips. On the 19 April 2002 Mr Lewis phoned Ben Lyng at the Appellant’s registered office and explained that the copy of the dispatch note did not amount to satisfactory evidence that the goods had been removed from the UK. Ben Lyng promised to speak to Mr Vesters about providing satisfactory evidence. Mr Lewis heard nothing further from the Appellant. On the 3 May 2002 he wrote a letter to Mr Vesters at 13 Castle Street stating that

“I write concerning the export evidence recently produced by your accountant Mr Watts for the supply of 15,072 CPU’s to Fancygrove Limited Ireland your invoice reference 200101-05316 refers.

In order that zero rating may be allowed I require the original export evidence in the form of an authenticated air or sea way bill. This is likely to be held by LCA International Limited”.

25.	Mr Lewis received no response to his letter of 3 May 2002. He sent a reminder letter dated 15 May 2002 advising that if the original export evidence was not produced within seven days an assessment for VAT in respect of the supply of CPUs would be raised.  Mr Lewis followed up the reminder letter with three phone calls to the Appellant on 29 May 2002 and twice on 31 May 2002. 

26.	As at 31 May 2002 the only evidence provided by the Appellant to show that the computer chips had been removed from the UK was the copy dispatch note. Mr Lewis did not consider that the copy dispatch note constituted satisfactory evidence of removal of the goods. He, therefore, issued an assessment dated 13 June 2002 for unpaid VAT, in respect of the computer chips to the value of  £258,148. The assessment was based upon the price paid for the supply as set out in the invoice. The Appellants had not uplifted their VAT returns for the periods 02/02 and 05/02 to reflect the VAT standard rating of the supply of CPUs to Fancygrove made on 28 February 2002.

27.	Following the issue of the assessment David Watts on behalf of the Appellant exchanged correspondence with the Respondents about the documentation required to satisfy the Respondents about the removal of the goods.  On 20 February 2003 Mr Watts complained to the Regional Complaints Authority about the treatment of his client by the Respondents. Mr Watts pointed out that the Respondents had rejected a letter from Fancygrove Limited confirming receipt of the goods as satisfactory evidence of removal. Mr Watts contacted LCA for the original airway bill as requested by Mr Lewis but LCA was unable to supply the bill because the Respondents had seized all their documents.

28.	On 3 April 2003 the Respondents withdrew the assessment for 02/02 and replaced it with an assessment in the same amount of £258,148 for the period 05/02. The reason for the alteration was that the Appellant had three months from the date of the supply in which to provide satisfactory evidence to support the zero-rating of the computer chips. As no satisfactory evidence in the opinion of Mr Lewis had been produced the assessment for unpaid VAT should have been raised for the period ending with the three months after the date of the supply, that is 05/02 not the period 02/02 in which the supply occurred. The Respondents informed Mr Watts that the Notice of  Assessment issued on 3 April 2003 had the effect of correcting the return for the period 05/02. He was also advised that if Mr Lewis was satisfied that there was valid documentary evidence that the goods in question have been removed from the UK, the earliest period in which the VAT account could be adjusted was 05/03.  

29.	In the early part of 2003 Mr Lewis received a letter from solicitors acting for the Appellant informing him that the original airway bill for the supply may already be in the possession of the Respondents. Following contact with the Officers who  seized the documents from LCA Transport Company Mr Lewis was satisfied  there was valid evidence to allow the Appellants to credit  their next VAT return with the amount of VAT raised by the assessment.  The Appellant adjusted a subsequent period of  its VAT account to reflect the credit of  £258,148. The Respondents withdrew the assessment for interest associated with the supply of the CPUs. 

30.	Mr Lewis took into account the nature of the supply when assessing whether the evidence about removal from the UK produced by the Appellant was satisfactory. Computer chips (CPUs) were small in size, high in value and were associated with “carousel and missing trader” fraud. Also the transaction in question involved a consignment of goods to Eire, which was a common route used by traders committing carousel fraud. The Respondents emphasised to the Tribunal that the Appellant was not involved in fraud. However, in their view it was valid to consider the potential risks to the revenue from supplies of computer chips in their decisions about the satisfactory nature of the evidence supplied about zero-rating.

31.	On 21 July 2003 Mr Lewis issued a “Notice of Assessment of Misdeclaration Penalty” in the sum of £38,722. The penalty related to the Appellant’s failure to record the supply of the computer chips as standard rated in its return for 05/02. The amount was calculated at 15% of the VAT due, £258,148. Mr Lewis did not mitigate the penalty because the Appellant failed to respond to the numerous opportunities to put matters right in the three month period subsequent to the date of supply given by Mr Lewis.
 
Reasons for Our Decision

32	In paragraph 17 we identified the issues to be determined in this Appeal:

Did the Appellant meet the conditions for zero-rating the supply of the CPUs within three months from the date of the supply?

33.	The legislative framework in particular VAT Notice 703 places the obligation upon the Appellant to obtain and keep valid commercial documentary evidence that the goods have been removed from the UK. The  evidence obtained by the Appellant within three months of  the supply of the CPUs to Fancygrove Ltd  was the Appellant’s invoice and a copy of the dispatch note from LCA International. Neither of those documents demonstrate that Fancygrove Ltd received the CPUs at its base in Eire. We find that the Appellant in the three months following the date of supply held no clear documentary evidence that the goods had been removed from the UK. We, therefore, conclude that the Appellant did not meet the conditions for zero-rating the supply.

Were the Respondents entitled to raise an assessment for unpaid VAT in respect of the supply?

34.	Section 73 of the 1994 enables the Respondents to raise assessments for VAT where a person has failed to keep any documents and afford the facilities necessary to verify such returns or where it appears to them that such returns are incomplete or incorrect.  In this Appeal the Appellant failed to obtain valid documentary evidence to justify the zero-rating of the supply of the CPUs and did not adjust the VAT account for the period 05/02 to reflect that the supply was standard rated for VAT purposes in the absence of the documentary evidence. We find, therefore, that the Respondents were entitled to raise an assessment for the VAT due on the supply. The fact that  clear documentary  evidence to support the zero-rating eventually came to light after the relevant three month period did not invalidate the assessment for VAT due. Instead the Appellant was able to credit a subsequent VAT period with the Vat due under the assessment.

Was the Assessment made to best judgement?

35.	The Respondents calculated the VAT due using the sales price in the Appellant’s invoice to Fancygrove Ltd.  The Respondents relied upon documentary evidence to support the assessment. Thus we are satisfied that the Assessment was to best judgement.

Was the Appellant liable to pay a misdeclaration penalty?

36.	  Mr Lewis told the Appellant  on at least four occasions before the end of May 2002 that it had not obtained satisfactory evidence to substantiate the zero-rating of the supply of CPUs. The Appellant should, therefore, have recorded the supply as standard rated for VAT  in the 05/02 return, which it did not.  The Appellant has put forward no reasonable excuse for its failure to submit a correct 05/02 return. In those circumstances we are satisfied that the Appellant has understated its liability for VAT in the 05/02 return and is liable to a misdeclaration penalty amounting to 15% of  the VAT due. We found no grounds to mitigate the penalty, particularly in view of the number of opportunities given by Mr Lewis to the Appellant to put the matter right. 

Our Decision

37.	For the reasons set out above we have decided to uphold the Assessment  in the sum of £258,148 for the period 05/02 and the misdeclaration penalty in the sum of £38,722.  We, therefore, dismiss the Appeal. 

38.	The Respondents applied for their costs relating to the Appeal. The current policy of the Respondents is not to seek costs against unsuccessful Appellants except in certain narrowly defined cases. One of those cases is where the Appellant fails to appear before the Tribunal. The Appellant or its representative gave no reasons for failing to attend the hearing. The Respondents’ Counsel had tried to contact the Appellant’s representative on several occasions. In the circumstances we consider that the Respondents have made out an exception to their current policy and order the Appellant to pay the Respondents its costs to be agreed between the parties within 21 days of release of this decision. If there is no agreement either party is at liberty to apply to the Tribunal for further directions in respect of costs.

39.	 The Appellant or any other person interested in this matter can apply to the Tribunal within 14 days after the date of release of this decision to set aside the decision in accordance with rule 26 (3) of the 1986 Tribunal Rules.

	

MICHAEL TILDESLEY
CHAIRMAN

RELEASED: 1 October 2004

LON/03/217