19256

VALUE ADDED TAX – ZERO-RATING –supplies of mobile phones to a person in another Member State- International Consignment Notes (CMRs) contained false particulars – unreliable evidence demonstrating actual removal – no other evidence to substantiate removal – Commissioners entitled to conclude that the mobile phones had not been removed –whether domestic legislation compatible with Article 28cA(a) of the Sixth Directive- subject to referral to Court of Justice in Telios – Appeal stood over for final determination pending Court of Justice and High Court decisions in Telios.

LONDON TRIBUNAL CENTRE

	ATLANTIC ELECTRONICS	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal:	MICHAEL TILDESLEY OBE (Chairman)
					SHEILA EDMONDSON FCA (Member)

Sitting in public in London on 15 August 2005

Carol Fraser of Howard Kennedy Solicitors for the Appellant

Nicola Shaw, Counsel instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

INTERIM DECISION
The Appeal

1.	The Appellant was appealing against an assessment for VAT dated 27 September 2002 in the sum of £241,079.
The Disputed Issues
2.	The Appellant company has been established for 30 years trading in electronic products. In 2002 the Appellant supplied mobile phones to Total Telecom (Espagna) SL, a Spanish company. The Appellant treated those supplies as zero rated because the mobile phones had been removed from the United Kingdom to another Member state. As a result of an investigation of supplies made to Total Telecom (Espagna) SL by another United Kingdom business unconnected with the Appellant, the Respondents re-examined the documentary evidence supplied by the Appellant to justify the zero-rating of its supplies to the Spanish company. The Respondents concluded from the re-examination that the documentary evidence relied upon by the Appellant was materially flawed and did not demonstrate that the mobile phones had been removed from the United Kingdom. Thus the Respondents issued an assessment for VAT in the sum of £241,079 on the supplies of mobile phones on the basis that they were standard rated for VAT purposes.
3.	The issues in dispute were whether:
(1)	  The Appellants had met the requirements of the United Kingdom legislation to justify zero rating the supplies of the mobile phones. The Appellant contended that it had unequivocally met them by providing a complete audit trail of documents demonstrating the removal of the phones from the United Kingdom. The Respondents disagreed, key documents were materially flawed which broke the audit trail and undermined the reliability of those documents as satisfactory proof of the removal of the phones. The Respondents emphasised that the Appellant had to prove on the balance of probabilities that the phones were actually removed from the United Kingdom.
(2)	 The requirements of the United Kingdom legislation for zero rating removal of goods to another Member State did not comply with Article 28(c)(A) of the EC Sixth Council Directive  (77/388/EEC). The United Kingdom legislation required proof of actual removal of the goods which was said by the Appellant to be an unwarranted interpretation of the phrase used in Article 28(c)(A): “a supply which involves the removal of goods from the United Kingdom ” as meaning achievement of removal of the goods from the United Kingdom. This issue has been referred to the European Court of Justice in R (on the application of Teleos PLC) v Customs and Excise Commissioners [2004] EWHC 1035. The parties, therefore, agreed if the Appellant was unsuccessful with its first ground of Appeal this second issue should be stood over until the Court of Justice has delivered judgment. 
The Legislation
4.	Section 30 of the Value Added Tax 1994 deals with the zero-rating of goods removed from the United Kingdom and their acquisition in another Member State by a person who is liable for VAT. Section 30(8) of the 1994 Act enables the making of regulations which provide for the zero-rating of supplies of goods where the Commissioners are satisfied that the goods have been removed from the United Kingdom and acquired by a person in another Member State. Regulation 134 of the VAT Regulations 1995 gives authority to the Commissioners to set conditions determining whether the goods removed qualifies for zero-rating. 
5.	 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 removal evidence required; the time limit in which the goods must leave the United Kingdom; and the time limit in which removal evidence must be obtained. Unless all the relevant conditions are met, a supply must not be zero-rated as a removal.
6.	Paragraph 8.4 of VAT Notice 703 deals with the conditions for zero-rating goods removed from the United Kingdom to another Member State. The supplier must ensure that 
(1)	The customer’s EC VAT registration number including the 2-letter country code prefix  is displayed on the VAT sales notice.
(2)	The goods are sent out of the United Kingdom to a destination in another EC member state
(3)	Valid documentary evidence of the removal from the United Kingdom 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.
7.	If the EC customer collects or arranges for the collection of goods and their removal from the United Kingdom, Notice 703 requires the supplier to:
(1)	confirm how the goods are to be removed from the United Kingdom and confirm what proof of removal will be sent to him;
(2)	consider taking a deposit from his customer equal to the amount of VAT he will have to account for if no satisfactory evidence of removal is forthcoming.
8.	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 United Kingdom:
(1)	commercial transport documents from the carrier responsible for removing the goods from the United Kingdom;
(2)	customer’s order;
(3)	inter-company correspondence;
(4)	copy sales invoice;
(5)	advice note;
(6)	packing list;
(7)	details of insurance or freight charges;
(8)	evidence of payment;
(9)	 evidence of receipt of goods abroad;
(10)	any other documents relevant to the removal of goods in question which would normally be obtained in the course of intra-EC business.
The documents used must provide clear evidence that the goods have been removed from the United Kingdom, not just that the sale has taken place.
9.	Paragraph 8.9 of Notice 703 requires additional documentary evidence of removal of goods from the United Kingdom to that listed in paragraph 8.7 where the EC customer collects goods in the United Kingdom, namely:
(1)	a written order which shows the name, address and VAT number of the acquirer and the address where the goods are to be delivered; and
(2)	a signature for the goods and the registration number of the vehicle which is to carry out the goods out of the United Kingdom (if going by road).
10.	International consignment notes (referred to as CMR in this Appeal) are issued under the Carriage of Goods by Road Act 1965 which was enacted to give effect to the Convention on the Contract for the International Carriage of Goods (CMR Convention).
11.	The CMR Convention applies to every contract for the carriage of goods by road in vehicles for reward when the place of taking over of the goods and the place designated for delivery are situated in two different countries of which at least one is a contracting party to the Convention. The United Kingdom and Spain are contracting parties. Article 4 of the Convention provides that the contract of the carriage shall be confirmed by the making of the consignment note, for which there is no prescribed form but must contain details of the date and place at which it is made out; the name and address of the sender; the name and address of the carrier; the place and date of the taking over of the goods; the place designated for the delivery; and the name and address of the consignee. In ordinary circumstances the Respondents will accept a CMR international consignment note as evidence of the removal of goods from the United Kingdom. 
The Evidence
12.	We heard evidence from
(1)	Mr Shandip Popat who dealt with the Appellant’s export business.
(2)	Mr Roderick Guy Stone, HM Revenue and Customs Officer responsible for the investigation into the VAT affairs of Total Telecom Espana SL.
(3)	Mr Richard John Lang, HM Revenue and Customs Officer, responsible for making enquiries about the transporters of the mobile phones.
We also received an agreed bundle of documents.
13.	The Appellant has been trading in electronics for 30 years with many of its customers from outside the United Kingdom. The Appellant has developed proper procedures under the control of Mr Popat which incorporated due diligence tests for handling exports and removals from the United Kingdom.
14.	In 2002 Mr Popat met the Directors of Total Telecom (Espana) SL at a Computer and Mobile Trade Fair in Hanover, Germany. There the two companies agreed to trade with each other and exchanged company details including VAT numbers. The Appellant  carried out due diligence tests on Total Telecom (Espana) SL. It obtained a reference from one of its trading companies in Spain, which confirmed that Total Telecom was a reputable company. In addition the Appellant checked with the Respondents which confirmed the VAT number of Total Telecom and that the Appellant could trade with the company.
15.	Total Telecom advised the Appellant that it would arrange transport of the mobile phones through its shipping agents, Euro Cellars Limited based in Kent. The Appellant performed due diligence tests on Euro Cellars. Mr Patel and Mr Popat visited Euro Cellars to meet with its Directors and to verify its procedures which included the provision of documentation to demonstrate the removal of goods from the United Kingdom. Mr Patel had previously done business with Mr Hercules, one of the Directors for Euro Cellars, and found him to be reliable. They discovered that Euro Cellars was used by the Respondents as a bonded warehouse and was subject to monthly inspections. The Appellant also checked the bona fides of Euro Cellars with the Professional Association for Warehousing, and the Respondents’ office at Croydon. The Appellant received the necessary assurances from these two bodies.
16.	On 28 May, 28 June and 3 July 2002, the Appellant sold consignments of mobile phones to the total value of £1,767,500 to Total Telecom. The Appellant followed identical procedures for the sale of each consignment which was as follows: 
(1)	The initial offer and acceptance was carried out between the parties either over the phone or by e-mail. After the deal was struck Total Telecom would fax a signed purchase order. The Appellant responded by faxing a pro-forma invoice which contained the sale particulars, terms and conditions, and payment details. The invoice was endorsed with: “we need CMR or AWB to show that the goods are exported”..
(2)	Mr Popat would then go to the warehouse where the Appellant’s goods were stored to check that goods were in stock and securely packaged. Mr Patel would stay at the Appellant’s premises to await instructions from the bank to confirm that Total Telecom had paid over the money. The bank faxed the Appellant with details of receipt of payment which stated that the ordering customer was “Total Telecom Espana SL of San Pedro de Alcautara, Marbella and that the payment was made via “Lloyds TSB Bank PLC (United Kingdom International Services).
(3)	Once payment had been received the Appellant would fax a sales invoice to Total Telecom which recorded details of the sale and the VAT number of the Spanish company. It would  fax its own warehouse informing the warehouse staff to release the goods to Total Telecom Espana SL and to follow the instructions of the Spanish company about delivery of the goods. The Appellant required the warehouse staff to make sure they received the necessary assurance from Total Telecom’s shipping agents that the goods were exported and to obtain a copy of the CMR or AWB. 
(4)	Euro Cellars faxed a copy of the CMR to the Appellant. Euro Cellars and the carrier would sign the first copy. Shortly afterwards the Appellant received a further copy of the CMR signed by Total Telecom, delivered by DHL, a reputable and worldwide courier, from the Spanish address of the company.
(5)	The Appellant retained copies of the invoices, purchase order, instructions from the bank, correspondence with its own warehouse and with Euro Cellars, and the various signed copies of the CMR including the delivery receipt from DHL. The copies were kept in a file available for inspection by the Respondents.
(6)	The Appellant claimed input tax on each sale in the appropriate monthly return. The Respondents verified the claims against the documentation before making the repayment of input tax. According to Mr Popat the Respondents’ officers were very satisfied with the Appellant’s record keeping and did not identify to the Appellant any gaps in the documentation.
(7)	The Tribunal saw the complete set of documents for each sale except the purchase order which was only provided in respect of the first sale.
17.	On or around 18 July 2002 Mr Stone, HM Revenue and Customs officer authorised a visit to Earthshine Ltd in connection with a large repayment claim made by the company in respect of mobile phone supplies to Total Telecom in Spain. Arising from that investigation Mr Stone identified material defects with the CMRs relied upon by Earthshine Ltd which led Mr Stone to widen his investigation to include the Appellant’s supplies to Total Telecom.
18.	Mr Stone identified the following defects in the CMRs relied upon by the Appellant:
(1)	The name of the carrier in the CMRs was either Wilkinson Transporters or Transports Carpentier. There was no address recorded for the carriers.
(2)	On 9 October 2002 Monsieur David Sagnard, Director General for Transports Carpentier, was interviewed by the French authorities. He confirmed that Transport Carpentier had never done business with Euro Cellars and Total Telecom. Further he used only French registered lorries.
(3)	The solicitors for Total Telecom provided Mr Stone with an address for Wilkinson Transporters which turned out to be an address for Wilkinson Hardware Stores. Mr Stone received confirmation from Wilkinson Stores that they were home, garden and DIY retailers and were not involved in the transport of mobile phones to the continent.
(4)	The places for delivery of the mobile phones recorded on the CMRs were two addresses of companies in Calais, France not Total Telecom’s address in Spain. Mr Stone’s further enquiries revealed that the address of one of the Calais companies was fictitious in every respect, whilst in respect of the other, the address existed but not the company.
(5)	The CMRs contained details of the drivers and the registration numbers of the vehicles which were allegedly involved in the transport of the mobile phones from Euro Cellars to Total Telecom. Mr Stone’s enquiries with DVLA revealed that none of the registration numbers were known to DVLA.  
19.	Mr Stone concluded from his investigation that the CMRs relied upon by the Appellant to justify zero-rating of its mobile phone supplies to Total Telecom contained false particulars about the carrier, the transporting vehicle and the destination address. Mr Stone was, therefore, not satisfied that they constituted proof that the mobile phones were delivered to their stated address or even removed from the United Kingdom. Thus on 27 September 2002 he raised an assessment for VAT for the output tax on the Appellant’s three supplies to Total Telecom. The assessment took account of the input tax that the Appellant was entitled to claim on these supplies. 
20.	Mr Stone acknowledged that where there was evidence of a sale the Respondents would ordinarily accept valid CMRs as good evidence that the goods have been removed from the United Kingdom. However, in this instance the CMRs contained false information which in his view did not constitute valid documentary evidence to prove removal. The Respondents did not allege that the Appellants were involved in a fraud. 
21.	Mr Stone could not give categorical evidence about the eventual destination of the Appellant’s supplies of mobile phones. However, his investigation revealed that at the time of the Appellant’s supplies, Total Telecom made onward supplies of mobile phones to three United Kingdom registered traders based in the United Kingdom. Thus this finding together with the material defects on the CMRs was in our view persuasive evidence that the mobile phones supplied by the Appellant never left the United Kingdom. 
22.	The Appellant provided no direct evidence that the phones supplied by the Appellant were actually removed from the United Kingdom. The Appellant, however, supplied a copy of Total Telecom’s Spanish VAT return which in the Appellant’s view demonstrated that Total Telecom had accounted for the VAT payable on the acquisition of the Appellant’s mobile phones and by implication Total Telecom must have received the phones at its office in Spain. Mr Stone pointed out that Total Telecom in its VAT return had set off the acquisition tax against the output tax resulting in a net repayment claim. In Mr Stone’s view the return was incorrect because no acquisitions took place in Spain. The correctness of Mr Stone’s interpretation was dependent upon whether the phones were actually acquired by Total Telecom in Spain which brings us back to the original starting point about whether the phones actually left the United Kingdom. Thus we conclude that the VAT return was not reliable evidence supporting the Appellant’s assertions that Total Telecom had paid the VAT on the Appellant’s mobile phone supplies; and that Total Telecom received the phones in Spain. We are inclined to agree with Mr Stone’s conclusion that the VAT return was part of Total Telecom’s subterfuge in respect of its dealings with innocent United Kingdom companies. 
The Reasons for Our Decision
23.	 The Respondents were critical of the Appellant for not querying why the destination address was France rather than Spain and for not carrying out checks on the drivers and the carriers. The Respondents also pointed out that the Appellant should have obtained additional evidence such as ferry tickets to establish that the mobile phones had been removed from the United Kingdom. The Appellant in response considered it acted properly by carrying out due diligence tests on the freight forwarder, Euro Cellars and was entitled to rely on the expectation that Euro Cellars would carry out its responsibilities in accordance with the law and established procedures. Further the HM Revenue and Customs Officers who inspected the Appellant’s records did not advise the Appellant to obtain copies of ferry tickets. Notice 703 makes no explicit reference to ferry tickets.
24.	We conclude from the evidence that the Appellant was a responsible and conscientious trader which took its legal responsibilities in respect of VAT on exports and removals seriously. We agree with the findings of Mr Justice Moses in Teleos at paragraphs 129 and 147 where he stated that there was nothing in the various defects of the CMR to put a prudent trader on notice and that the liability of the trader should not depend upon the Commissioners’ views as to how scrupulously the trader conducted the transactions in question.
25.	The Appellant in turn was critical of Mr Stone for basing his assessment on the false particulars in the CMR. The Appellant referred to another comment from Mr Justice Moses in Teleos at paragraph 148 where he stated that the CMRs were not invalid, the evidence in them has merely proved on subsequent enquiry to be false. In the Appellant’s opinion Mr Stone’s assessment of 27 September 2002 was entirely invalid, excessive, unwarranted in law and must be quashed. However, Mr Justice Moses  also pointed out at paragraph 140 that
“Domestic legislation coupled with the notices do not, therefore, provide any express assurance that obtaining a CMR from the supplier, providing evidence of removal, itself assures the right to zero rate”.
26.	We find the following facts in relation to this Appeal:
(1)	The Appellant was a responsible and conscientious trader which took its legal responsibilities in respect of VAT on exports and removals seriously.
(2)	The CMRs for each of the Appellant’s supplies to Total Telecom  contained false particulars about the details of the carrier, the place of destination for the goods and the vehicle registration. The false particulars undermined the reliability of the CMRs for establishing that the mobile phones were removed from the United Kingdom. 
(3)	The Appellant was not put on notice by the various defects in the CMRs.
(4)	The VAT return of Total Telecom produced by the Appellant did not constitute evidence that the mobile phones had been removed from the United Kingdom. The VAT return was part of the subterfuge perpetuated by Total Telecom to disguise the movements of its purchases.
(5)	The Appellant adduced no direct evidence that the mobile phones sold to Total Telecom had been removed from the United Kingdom. The Respondents’ evidence indicated that the mobile phones never left the United Kingdom and had been sold by Total Telecom to UK registered traders. 
(6)	The remaining documents (the invoices, purchase orders. bank and warehouse instructions) produced by the Appellant were evidence of the sale of the mobile phones but not of their removal from the United Kingdom.
27.	We conclude from our findings of fact that the Appellant has failed to satisfy us on the balance of probabilities that the mobile phones supplied to Total Telecom were removed from the United Kingdom. We are, therefore, satisfied on the evidence that the Respondents were entitled to conclude that the mobile phones had not been removed from the United Kingdom. 
28.	The domestic legislation dealing with removal of goods from the United Kingdom to a VAT registered person in another Member State requires proof of actual removal of the goods before they can be zero-rated. Our findings that the Appellant has not provided satisfactory proof of actual removal of the mobile phones would mean in ordinary circumstances that the Appellant was not entitled to zero-rate the supplies to Total Telecom and its Appeal should be dismissed. However, we are not dealing with ordinary circumstances because the status of the domestic legislation is subject to a referral to the European Court of Justice in Teleos.  Also Mr Justice Moses has reserved his judgment on whether the subsequent assessment by the Respondents amounted to an abuse of power until after the decision of the European Court of Justice. In those circumstances we will not make a final determination on the Appellant’s appeal until the decisions of the European Court of Justice and Mr Justice Moses in the Teleos are known. We, therefore, order that the Appeal be stood over and re-listed before us once those judgments have been delivered.
29.	  The Respondents applied for their costs against the Appellant if the Appellant was unsuccessful with its first ground of Appeal. The Respondents’ ground for their application was that the Appellant’s appeal was hopeless from the start because the facts and the issues to be decided were identical to the Teleos case and to Starmill UK Ltd [2004] VAT decision number 18720. We consider that there are subtle differences between this Appeal and Starmill UK Ltd in that it would appear that the Appellant in this case was more diligent in carrying out checks against Total Telecom and Euro Cellars. Although the Appellant has not been successful with its first ground of Appeal, our findings of fact on the Appellant being a responsible and conscientious trader mindful of his legal obligations may have a bearing on the abuse of power issue to be decided by Mr Justice Moses. In those circumstances we consider it inappropriate to make an order of costs at this stage but reserve our decision on costs until the Appeal is finally determined.  

MICHAEL TILDESLEY

CHAIRMAN
RELEASE DATE: 20 September 2005

LON/02/1141