18858
ZERO-RATING –removal of goods to member States/ export of goods to non-member States – documentary evidence failed  to demonstrate that the goods had left the UK in accordance with the requirements of Customs Notice 703 – the goods  assessed to VAT at standard rate – Appeal dismissed

DEFAULT INTEREST – the production of documentary evidence to justify zero-rating outside the three month time limit did not vitiate the assessment for default interest – Musashi decision applied – no other evidence to challenge the appropriateness of the amount of interest – Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 	
	LUIGI DI TONDO T/A PARTNERS ASSOCIATES	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr Michael Tildesley (Chairman)

Sitting in public in Manchester on 18 June 2004

The Appellant appeared in person

Nigel Poole, counsel, instructed by the Solicitor’s Office for HM Customs and Excise for the Respondents 

	© CROWN COPYRIGHT 2004

DECISION

The Dispute

1.	The disputed decision concerned a VAT assessment in the sum of  £42,472 plus interest of £7,019.23 issued on 17 August 1998. The assessment covered the accounting periods from 7/95 to 1/98.  The assessment of £42,472 comprised of £29,629.69 which related to supplies where there was insufficient evidence to support zero rating as exports or removals from the UK. The remaining £12,842 related to either input tax errors or output tax which had been under declared on sales.

2.	On 6 March 2003 the Appellant submitted a Notice of Appeal against the assessment of 17 August 1998. The amount in dispute identified in the Notice was £16,643. The grounds of appeal were as follows:

•	That all invoices to Israel were classed as “vatable”
•	Interest charge following the case of Musashi Autoparts Europe Ltd v HM Customs and Excise

3.	The Appellant was granted an extension of time to make the Appeal. His Notice stated that on 18 March 2002 he sent a letter to Mr Fraser requesting a local reconsideration, which was never acted upon. The Appellant phoned and was told that the matter was being dealt with. The next thing he knew was that he received a summons for non payment. In his view his letter had been filed and forgotten about.

4.	The Respondents’ statement of case issued on 1 March 2004 indicated that the assessment for unpaid VAT had been reduced to £34,558 which subsequently had  been reclaimed as input tax on the production of evidence to support the claim. This  left  an amount of interest due in the sum of £7,019.23.

5.	The Appeal was listed for hearing on 18 June 2004 at Manchester. On 3 June 2004 the Appellant requested an adjournment of the hearing which was refused but without prejudice to making a further application  on the day of the hearing. 

6.	On the 18 June both parties attended the hearing. The parties disagreed about whether there was a substantive appeal. The Respondents produced a letter dated 12 January 2004 from Mrs Hanrahan of Customs and Excise to the Appellant confirming an agreement between the parties, which stated that:

	“Further to our telephone conversation on the 12 January 2004. I can confirm our agreement as follows: the outstanding tax assigned to the Israeli invoices can be amended on a current return. This would mean all outstanding amendments required are now complete. The interest currently stands at £7,019.23 default interest and £1,250.57 further interest. I intend to reduce the further interest to nil. I would now ask you to contact the Tribunal centre and withdraw the Appeal”.

As the Appellant had not withdrawn his appeal I decided to proceed to hear the evidence.

7.	It became apparent to me during the course of the hearing that Respondents’ Counsel had not received full instructions about the events leading to the settlement of the VAT owed and the derivation of the interest still due. The attending Officer from Customs and Excise, Mrs Kay Akpinarlioglu, was also unable to help because she had limited conduct of the case since the original assessment. In those circumstances I decided at the end of the hearing to issue directions requesting clarification of the Respondents’ case and additional documentary evidence by 16 July 2004.  Further I would decide by 30 July 2004 whether to reconvene the hearing or request written submissions on the additional evidence and deal with the Appeal without another hearing.

8.	The Respondents sent the additional information to the Tribunal and the Appellant on 28 July 2004. In the meantime Sinclair Accounting acting on behalf of the Appellant wrote to the Tribunal Office objecting to the Respondents having an extension of time in which to comply with the directions made on 18 June 2004. The Tribunal has sent three letters dated 27 September, 13 October and 8 November to the parties asking whether they wish a further hearing in this matter or  are they content for me to proceed to my decision which would include the further evidence provided by the Respondents. The Respondents have indicated that they agree to me making my decision without need for another hearing. There has been no response from the Appellant’s representatives. 

9.	I consider that the Appellant’s representatives have been given ample opportunity to make representations about how the case should proceed. I am conscious that this dispute has been ongoing for six years. I have, therefore, resolved to make my decision on the Appeal without the need for a further hearing. My decision is based upon the evidence given at the hearing on the 18 June when oral testimony was received from the Appellant and Mrs Akpinarlioglu for the Respondents, and the various documents submitted by both parties.

10.	 The additional evidence sent by the Respondents in response to my directions consisted of two witness statements. One of those was the statement of Philip Mansfield, an Officer of Customs and Excise. Sinclair Accounting in its letter of 19 July 2004 objected to the admission of this statement. In view of the objection I have decided not to admit the statement in evidence, however, I have admitted the letter of Mr Mansfield dated 14 May 2001 because the Appellant produced it as part of his case at the hearing on 18 June 2004. There has been no written objection to the second statement, which is of Geoffrey Alec Pearce, an Officer of Customs and Excise, concerning his visit to the Appellant in 1997. 

11.	 I proceeded on the basis that both the original assessment for unpaid VAT in respect of the supplies to Italy and Israel and the outstanding interest were under appeal. However, I have dealt with the assessment and the interest as separate items in the decision because my jurisdiction on Appeal is different as between the VAT assessment and the interest. 

The Assessment

12.	 The assessment of £42,472 consisted of £29,629.69 relating to supplies of exports or removals from the UK and £12,842 relating to either input tax errors or output tax, which had been under declared on sales. The dispute between the parties focussed on the £29,629.69 and concerned whether the Appellant had valid documentary evidence within three months of the supply to justify the zero-rating of the exports from the UK. 

The Legislation for the Zero-rating of Exports and Removals of Goods from the UK 

13	Section 30 of the Value Added Tax 1994 deals with the zero-rating of goods exported to a place outside the member States and with the removal of goods from the UK and their acquisition in another member State by a person who is liable for VAT.

14.	Section 30(8) of the 1994 Act 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 either exported or  removed from the UK and acquired by a person in another member State. Regulations 129 and 134 of the VAT Regulations 1995 give authority to the Commissioners for Customs and Excise to set conditions determining whether the goods exported or removed qualify for zero-rating. 

15.	 VAT Notice 703 “Exports and Removal of Goods from the United Kingdom”, which has the force of law, defines the conditions for zero-rating. They include the type of export or removal evidence required; the time limit in which the goods must leave the UK; and the time limit in which export or removal evidence must be obtained. Unless all the relevant conditions are met, a supply must not be zero-rated as an export or removal.

16.	Paragraph 1.6 of the Notice explains the rationale behind the imposition of conditions, namely that

	“During the financial year 1994/1995 goods to the value of £135 billion were zero-rated for VAT purposes as exports or intra EC removals. It is vital that only genuine exports are zero-rated, otherwise there would be potentially huge losses of VAT revenue and abusers of the system would gain an unfair advantage over their competitors. The conditions set out in the regulations and this Notice are necessary to keep these risks to a minimum whilst ensuring that VAT export procedures are kept as simple as possible”.

17.	Paragraph 2.2 of the Notice sets out the exporter’s obligations in respect of the zero-rating of supplies, namely:

a)	ensure that the goods are exported from the UK within the specified time (three months);
b)	obtain and keep valid official or commercial evidence of export  within specified time limits (three months from date of supply);
c)	not deliver or post the goods to a UK customer’s address in the UK even if it is claimed they are for a subsequent export;
d)	not allow the goods to be collected by or on behalf of a UK customer even if it is claimed they are for subsequent export;
e)	keep records of export transactions which should be made available to visiting officers; and 
f)	comply with the law and the conditions of Notice 703. 

18.	Paragraph 5.2 of the Notice explains the documentary evidence required to prove that the goods have been exported from the UK, namely: official evidence (normally a Single Administrative Document stamped by Customs and Excise) or commercial evidence (authenticated way bills, bills of lading, certificates of shipping) supported by other documentation associated with the supply such as customer’s order, sale documentation and evidence of payment or receipt of goods abroad. 

19.	The documents obtained as proof of export must clearly identify the following:

a)	the exporter
b)	the customer
c)	the goods, including the accurate value
d)	the export destination

20.	Paragraph 8.4 of  VAT Notice 703 deals with the conditions for zero-rating goods removed from the UK to another member State. The supplier must ensure that: 

a)	The customer’s EC VAT registration number including the 2-letter country code prefix  is 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 is 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.

21.	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.

22.	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.

23.	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).

The Evidence

24	The Appellant was a dealer in antiques and second-hand furniture selling only to the trade. He started in his business in 1991 taking about six years to become established. The Appellant has been registered for VAT under registration number 588 8844 55 from 1 February 1995.

25.	On 8 April 1998, Mrs Akpinarlioglu, a Senior Officer of Customs and Excise, visited the Appellant at his premises as part of a routine VAT inspection. She examined the VAT accounts from the period 04/95 through to 1/98. She found that supplies to the gross value of  £198,943 did not have in her view sufficient evidence to support zero-rating.  These supplies consisted of removals or exports of furniture to Italy and Israel. The supplies were evidenced by invoices which were correctly marked with the customers’ VAT registration number in respect of the Italian sales. However, Mrs Akpinarlioglu could find no documentary evidence which could satisfy her that the furniture had actually left the UK. She also found errors in other aspects of the accounts, such as the apportionment of input tax between business and non business use, understatement of output tax on two specific sales and claiming buyer’s premium as VAT.

26.	Mrs Akpinarlioglu held a further meeting with the Appellant on 21 April 1998  which was followed up by a letter dated 30 April 1998 confirming their discussions. In the letter she advised the Appellant of the proof required for zero-rating of exports and sales to member States, the need for full details on sales invoices and the requirements of cash accounting. She had another meeting with the Appellant on 19 June 1998, which led to the issuing of the VAT assessment of £42,472 plus interest on 17 August 1998.

27.	The Appellant was adamant that he had the proof required to establish zero-rating of the exports and removals at the time of Mrs Akpinarlioglu’s inspection. He considered that she was being too prescriptive about the requirements. He pointed out to the Tribunal that he was visited from another Customs and Excise Officer (Mr Pearce) prior to her inspection. That Officer had gone through his books and invoices and did not raise an assessment. Mr Pearce’s witness statement confirmed his visit to the Appellant on 24 November 1997 which was to verify a claim to input tax of £3562.08 in respect of period 01/97. Mr Pearce verified the claim and raised a Notice of Assessment to credit the said amount. Mrs Akpinarlioglu accepted that she may have covered the same ground as Mr Pearce but her remit was to carry out a full inspection, which she did in April 1998. 

28.	Another Officer (Mr Mansfield) got involved in the case in July 2000 after Mrs Akpinarlioglu’s Inspection. He confirmed that he received a satisfactory response from the Italian Authorities regarding the required proof of export documentation and was able to accept the Appellant’s claim for repayment of output tax on the Italian supplies. The Appellant also sought advice from one of the Customs and Excise Offices about the basket of evidence required to establish proof of the zero-rating of exports and sales to member States but no advice was received from the office. Mr Pearce, however, gave the Appellant oral advice on the requirements for evidence of despatch of goods from the UK to other member States.

29.	The Appellant stated that the invoices for the sales to Italy and Israel contained the names and addresses of the customers, the amount, driver’s stamp and bank stamp. He believed that confirmation from his bank that the money had been received from his customers was sufficient proof that the furniture had left the UK. Mrs Akpinarlioglu accepted that the Appellant had shown her the bank statements, however, she rejected the statements as proof of the goods leaving the UK because they did not identify the source of the transfer of money which prevented her from tying the transfer of money to specific invoices and customers.

30.	The Appellant produced various documents to the Tribunal to demonstrate that he had proof that the goods had left the UK. One set of the documents consisted of an invoice addressed to a customer in Israel dated 23 February 1996 accompanied by a Bill of Lading dated 12 March 1996. The bill of lading, however, identified the shipper as Paul Graham Antiques not the Appellant. Mrs Akpinarlioglu had seen this document during her inspection but was not prepared to accept it as proof because of the naming of Paul Graham Antiques.  The Appellant supplied an additional letter to the Tribunal from Paul Graham Antiques, which said that they examined the Appellant’s copy invoices confirming that all goods listed thereon were shipped by themselves on the relevant containers for which they had provided the Appellant with Bills of Lading. The letter, however, was dated 16 June 1999. 

31.	The Appellant provided another invoice dated 3 April 1996 but this time to a customer in Italy. The invoice contained details of the VAT registration number of the customer and was stamped by an Italian firm which the Appellant said transported the goods to Italy. Attached to the invoice was a letter from the Italian customer confirming receipt of the goods from the Appellant. Mrs Akpinarlioglu agreed that the letter from the Italian customer with the invoice would have amounted to sufficient proof that the goods had been removed from the UK. However, the letter was dated 30 June 1999, more than three years after the goods were supplied.

32.	Following Mrs Akpinarlioglu’s visit the Appellant contacted his customers to obtain additional documentation. In respect of the exports to Israel he informed Mrs Akpinarlioglu that he sold it to a third party who then sold it on to customers in Israel.

33.	In June 2000 the Appellant submitted a repayment claim for the output tax assessed on the supplies to Italy. The Respondents accepted the claim subject to minor amendments, which involved the tax computation and the exclusion of a limited number of invoices.  On 12 January 2004 the Respondents agreed to the Appellant crediting his current VAT return with the tax assessed on the disputed supplies to Israel.  

The Decision regarding the Assessment for the Exports and Sales to Israel and Italy

34.	The onus is upon the Appellant to demonstrate on the balance of probabilities that he had documentary evidence within three months of the supply to support the zero-rating of his sales to Israel and Italy. The legislative framework particularly Notice 703 places detailed obligations upon the trader in respect of the required documentary evidence to prove that the goods have left the UK. If the trader does not possess the necessary evidence he is required to charge VAT at the standard rate on his exports or sales to member States. The fact that the trader later produces the required evidence outside the three month time period does not vitiate the original VAT assessment at the standard rate. Instead the trader is entitled as at the date of production of such evidence to a credit for the VAT liability previously assessed.

Did the Appellant meet the conditions for zero-rating the supplies to Israel?

35.	Paragraph 5.2 of Notice 703 requires the trader to provide official evidence in the form of a Single Administrative Document (SAD) or commercial evidence plus other documentation associated with the supply. Paragraph 5.4 stipulates that the official or commercial evidence must clearly identify the exporter, customer, goods including value and the export destination. The Appellant supplied the Tribunal with a letter from Paul Graham Antiques dated 16 June 1999, a Bill of Lading and an invoice as documentary evidence to support the zero-rating of his exports to Israel. The letter dated 16 June 1999 was outside the three month time limit because all the disputed supplies to Israel took place in the time frame 1 May 1995 to 31 January 1998. Therefore, I have disregarded this letter for the purpose of determining whether the Appellant had sufficient evidence within three months of the date of the supply. 

36.	The Bill of Lading supplied by the Appellant was capable of meeting the commercial evidence limb for paragraph 5.2. However, the Bill of Lading did not refer to the Appellant as the exporter of the goods, instead it named Paul Graham Antiques as the shipper. Thus the Bill of Lading did not establish that the Appellant  exported the goods to Israel. The invoice by itself was not sufficient to meet the documentary evidence requirements of paragraph 5.2 of Notice 703. I, therefore, conclude that the Appellant did not have the required documentary evidence within three months of the date of supply to zero-rate the supplies to Israel.

Did the Appellant meet the conditions for zero-rating the supplies to Italy?

37.	Notice 703 places different requirements for documentary evidence to establish removal of goods from the UK to member States than for exports outside the European Community. Paragraph 8.7 requires a combination of documents but that combination must establish that the goods have been removed from the UK, not just that a sale has taken place.

38.	The Appellant supplied the Tribunal with a letter in Italian from his customer in Italy dated 30 June 1999 together with an invoice dated 3 April 1996. For the purpose of my decision I disregarded the letter because it was outside the required time frame since all the disputed supplies to Italy took place between 1 May 1995 to 31 January 1998.  The invoice contained details of the goods and the customer including his VAT reference number. It was also stamped with the address details of “Autotrasporti”, which according to the Appellant was the firm that transported the goods to Italy.  I do not consider that the invoice with the transporters’ stamp meets the requirements of paragraph 8.7. In my judgment there is no combination of documents which is required by the said paragraph. Further, the transporters’ stamp does not establish that the goods were removed from the UK. The Appellant stated in evidence that he showed Mrs Akpinarlioglu details of the bank transfer from his Italian customer.  However, the transfers did not identify their source, in which case it was not possible to link payment with specific invoices. I am, therefore, satisfied that the Appellant did not have the required documentary evidence within three months of the date of supply to zero-rate the supplies to Italy.

The Actions of Mrs Akpinarlioglu were inconsistent with those of her colleagues

39.	The Appellant suggested in his evidence that Mrs Akpinarlioglu adopted an interpretation of the Regulations governing exports and removals which was at variance with the interpretation put on those Regulations by her colleagues. I found no evidence to support the Appellant’s view.  Mr Pearce was dealing with a specific enquiry regarding a claim for input tax of £3562.08 in respect of period 01/97. Unlike Mrs Akpinarlioglu he did not carry out a full inspection. Mr Mansfield was dealing with the situation in 2000 by which time the Appellant gathered the required documentary evidence to claim credit for the output tax assessed on the supplies to Israel and Italy. The fact that the Appellant obtained the necessary documentary evidence at a later date did not undermine the original assessment by Mrs Akpinarlioglu. My findings on the disputed assessments support the approach taken by Mrs Akpinarlioglu.  

40.	In view of my findings in paragraphs 34 to 39 I uphold the assessment of 17 August 1998 in respect of the Appellant’s supplies to Italy and Israel and, therefore, dismiss the Appeal in relation to this  aspect of the assessment. I note that the Appellant has subsequently obtained credit for the tax assessed on these supplies because he has now provided satisfactory documentary evidence about the goods leaving the UK. 

The Remaining Assessment of £12,842

41.	The VAT assessment in the sum of  £42,472 issued on 17 August 1998 contained a sum of £12,842 which did not relate to the disputed supplies to  Israel and Italy. According to the Respondents the assessment was necessary to correct  input tax errors or collect output tax which had been under declared on sales. I have made no decision on this aspect of the assessment because it was not part of the Appeal. The Respondents have indicated that the Appellant does not owe any VAT in relation to the £12,842.
 
The Appeal against the Interest

42.	The Respondents have stated in their letter dated 28 July 2004 that the amount of default interest in dispute was £7,019.23, of which £4,878 represented the interest owing on the assessment of the supplies to Israel and Italy. The balance owing in interest (£2141.23) was connected with the VAT assessment for £12,842.

43.	The Appellant’s basis for his Appeal against the interest imposed was the decision in the VAT & Duties Tribunal case of  Musashi Autoparts Europe Ltd v Commissioners for Customs and Excise (2002) VAT Decision No. 17771. The Tribunal found as a preliminary point of law that the Commissioners were not entitled to recover interest on a VAT assessment where the trader later produces satisfactory evidence of removal of goods from the UK to justify the zero-rating of those goods. The Tribunal decision went to the heart of the Appellant’s case and gave him grounds to challenge the interest imposed on the VAT assessment of his supplies to Israel and Italy. 

44.	The High Court, however, overturned the Tribunal’s decision at about the same time the Appellant submitted his Notice of Appeal. Justice Lightman in Commissioners for Customs and Excise v Musashi Autoparts Europe Ltd [2003] STC 449 held that

“Satisfaction of the conditions for zero-rating merely entitled the taxable person as at the date of such satisfaction to a credit for the VAT liability previously acknowledged or assessed. The satisfaction of the liability under the assessment of VAT in no way discharged or undermined the assessment for interest. On satisfaction of the liability for VAT, there could be no further accrual of interest, but the liability for accrued interest continued undisturbed”.

Thus the High Court has removed the Appellant’s ground of appeal that he was not liable to pay the interest accrued on the VAT assessment for his supplies to Israel and Italy even though he was able after the three month period to satisfy the conditions for zero-rating these supplies. 

44.	The Tribunal’s jurisdiction to determine Appeals on assessments for interest is limited by section 83 of the VAT Act 1994. There is no right of Appeal to the Tribunal about the Commissioners’ decision to exercise their discretion to assess default interest. Further the Appeal jurisdiction does not include determining whether the Appellant is liable to pay the interest.  My power on Appeal is restricted to considering the amount of interest assessed but only to the extent that the amount is appropriate in accordance with the legislation. The Appellant gave no evidence about whether the amount of interest was appropriate.

45.	In the light of the High Court decision in Musashi Autoparts Europe Ltd and the lack of evidence on the part of the Appellant challenging the amount of interest assessed, I dismiss the Appeal in respect of the default interest, which has been assessed at £7,019.23.

46.	In conclusion I have dismissed the Appeals against the VAT assessment in the sum of £29,629.69 in respect of the Appellant’s supplies to Israel and Italy and the assessment for interest in the sum of £7,019.23. I have made no decision about the assessment for £12,842 because it was not included in the Notice of the Appeal. I make no order for costs. I would ask the Respondents to grant the Appellant time to pay the interest due.

 
MICHAEL TILDESLEY
CHAIRMAN
Release Date: 9 December 2004

MAN/2003/0302