19647
REPAYMENT SUPPLEMENT – VAT credit – Claim  arising from 25 transactions – Single amount claimed – Amount shown in return was excess of input tax over output tax relating to all transactions of that period – Respondents dealt with claim by pursuing seven inquiries into seven groups of those transactions – Respondents paid the input tax attributable to each group as and when each inquiry finished – Respondents withheld part of claim until well after end of relevant period – Whether  failure to pay any part of amount claimed within relevant period results in Respondents incurring repayment supplement on the whole amount claimed for the period – No – Whether VAT credit is to be disintegrated into the separate transactions carried on during the period to which claim relates – No – Whether each inquiry into each group of transactions comprised in claim has its own relevant period – No – Appeal dismissed – VAT Act 1994 s.79

LONDON TRIBUNAL CENTRE

	OLYMPIA TECHNOLOGY LTD	           Appellant
(No.2)

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						ROY JENNINGS FCA FTII

Sitting in public in London on 1 and 2 June 2006

Jolyon Maugham, counsel, instructed by Chilterns, VAT consultants, for the Appellant 

Nicola Shaw, counsel, instructed by the acting general counsel and solicitor to HMRC, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	Olympia Technology Ltd (“Olympia”) appeals against a decision of the Commissioners (“the Customs”) of 26 May 2005 as to the amount of repayment supplement due to Olympia. The effect of that decision was for repayment supplement to be due in respect of £193,704 comprised in Olympia’s claim for a VAT credit (of £806,212 in aggregate) but not due in respect of the balance of that claim (£602,508).  

The background

2.	In the course of its business Olympia has been purchasing computer components and mobile phones and selling them to purchasers outside the UK.  It has accounted for VAT monthly. Its returns show input tax on its purchases. Olympia’s sales to non-UK purchasers are zero-rated.  

3.	On 10 November 2003 the Customs received Olympia’s VAT return for the period 10/03. This claimed repayment of £806,202. The claim related to 25 transactions. A package of documents (sales and purchase invoices) relating to the claim for the period had been delivered to the Customs by hand on 31 October 2003.  

4.	The Customs notified Olympia on 12 November 2003 that a full verification exercise was to be undertaken in relation to the return. A visit was arranged for 19 November 2003. On seven dates from 19 December 2003 until 16 April 2004 Olympia received payments amounting in aggregate to £612,508. The outstanding balance (i.e. £193,704) of the claim for the 10/03 period (i.e. £806,202) was determined by the Customs not to be repayable. That determination was appealed to the VAT and Duties Tribunals. On 20 May 2005, shortly before the hearing of that appeal, £193,704 plus repayment supplement was repaid to Olympia.

5.	It was not and never had been in dispute that payment of the £193,703 was delayed beyond the period prescribed by section 79 of VAT Act 1994 (“the prescribed period”).

The relevant statutory provision

6.	These are set out in the Appendix to this Decision.

The issues

7.	The primary issue, entirely a matter of law, proceeds on the basis that the £612,508, all of which had been paid by 16 April 2004, had been paid to Olympia within the prescribed period.  The question is whether, as Olympia contends, section 79 requires that repayment supplement be due on the entirety of the tax credit of £806,202 on the grounds that, properly construed, where any part of the VAT credit (i.e. £193,703 in the present case) is delayed beyond the prescribed period, repayment supplement is due on the full amount of tax credit claimed. If that question is answered in Olympia’s favour, no further issues of law or fact arise.  

8.	The Customs’ position on the primary issue is that each separate transaction comprised within Olympia’s 10/03 return represents a separate claim for input tax and a separate VAT credit for the purposes of section 79(1)(a); each such claim and each payment falls to be examined separately for the purposes of determining whether the payment in question has been  made within the prescribed period. If the Customs are right then three issues of fact arise in relation to each such claim and each payment.  The question that arises for these is whether, as Olympia contends, the conditions set out in section 79(1)(a) and (2) are satisfied in respect of each transaction.  These can be broken down as:

(i)	whether, and if so when, a reasonable inquiry was raised in relation to the particular claim and consequent payment (i.e. those attributable to the particular transaction);
(ii)	on what date did the Customs receive a complete answer to their inquiry (for purposes of section 79(4)(b)) and 
(iii)	when was a written instruction directing the making of the particular payment issued (for the purposes of section 79(2)(b)).

Conclusions on the primary issue

9.	The term “VAT credit” is defined in section 25(3) as “an amount which is due under this subsection”.  The taxable person’s entitlement to credit is granted by section 25(2).  At the end of each prescribed accounting period, the taxable person is entitle “to credit for so much of his input tax as is allowable under section 26 and to deduct that amount from any output tax that is due from him”. Section 25(3) deals with taxable persons, colloquially known as “repayment traders”, for the relevant prescribed accounting period. It provides that where “the amount of the credit exceeds that of the output tax”, the amount of the excess shall be paid to the taxpayer by the Commissioners”. The subsection concludes with the definition of VAT credit.

10.	On first impression section 25 reads as if a taxpayer has one entitlement to payment of a single and inseverable VAT credit for the prescribed accounting period in question. That entitlement arises from his claim, contained in his return for the prescribed accounting period, which shows a VAT credit being the excess of a single amount of input tax over the output tax (again shown as a single amount) due from him.  The VAT credit is the result of one arithmetical calculation relating to two aggregate amounts. There can only be one excess. Nothing in section 25 requires either of those two amounts to be disintegrated  into its constituent supplies.

11.	The Customs do not read section 25 that way.  They say that each return will  be concerned with as many transactions as take place during the prescribed accounting period.  Here, each of the twenty-five different transactions contained within the 10/03 return represented a separate VAT credit within section 79(1)(a) and a separate claim for repayment.  Thus the “payment” (in section 79(1)(a) and (2)(b)) is, say the Customs, the payment of each separate VAT credit.  On that basis, the Customs’ interpretation runs, there were separate inquiries of varying lengths into certain of the twenty-five transactions. Each inquiry had its own period and for the duration of each one the clock was stopped. Each inquiry concluded with a “payment” being authorized.  Seven such payments were made, all of which took place within the prescribed period (i.e the relevant period referred to in subsection 2(b)).

12.	The Customs accept that, as regards the £193,704 payment of March 2005, that was made outside the prescribed period.  It was properly increased by the addition of 5% of that amount.

13.	The expression “VAT credit”, as defined in section 25(3), occurs in numerous places in the VAT Act.  We were referred to at least seventeen other instances.  On each occasion it is used to connote a single amount.  See for example section 84(8) which deals with the case where on an appeal it is found that “the whole or part of any VAT credit due to the Appellant has not been paid”; the provision directs that “so much of that amount” shall be repaid. The same sense of a single and inseverable amount is found in paragraphs 1 and 2 of Article 18 of the Sixth VAT Directive.  Article 18.1 contains the rules governing the right to deduct. Article 18.2, for example, provides that “the taxable person shall effect the deduction by subtracting from the total amount of a value added tax due for a given period the total amount of the tax in respect of which, during the same period, the right to deduct has been given and can be exercised under the provisions of paragraph 1”.

14.	Nothing in section 79 requires a different construction. In particular, the context of the term VAT credit in section 79(1)(a) does not admit of its being construed as a collection of different VAT credits, and consequently of different “amounts”, wherever that word is found in section 79.  In summary there is one VAT credit arising for each claim for each prescribed accounting period the amount of which falls to be increased by the 5% repayment supplement, always given that the conditions in section 79(2) are satisfied.

15.	We should mention that the Customs draw support for their argument (that each transactions covered by the 10/03 return represent a separate claim for a credit) from the words of section 79(3).  These direct that in computing the 30 day period “there shall be left out of account periods … referable to the raising and answering of any reasonable inquiry relating to the separate return or claim”.  That, they say, implies that each transaction, being the basis of a separate claim for VAT credit, is capable of having its own inquiry period.  We do not agree.  It seems to us that the reference to “periods” in section 79(3) is a reference to successive rather than concurrent periods.  Even if the exercise required by section 75 were an investigation into each, of what may be numerous, transactions in a return, there would still need to be a reference in section 79(3) to  “periods”.  Thus the presence of that word does not advance the construction sought by the Customs.  

16.	To that extent we agree with the argument for Olympia.  This is a case where section 79(1)(a) applies; Olympia is entitled to a single VAT credit of £806,202.  But are the conditions mentioned in section 79(2) satisfied?  It is not in dispute that conditions (2)(a) and (c) are satisfied. Condition (2)(b) requires that “a written instruction directing the making of the payment or refund is not issued by the Commissioners with the relevant period”.  Olympia says that condition (2)(b) is satisfied in this case; it is satisfied in relation to part of the claim for the VAT credit.  As a matter of construction therefore (says Olympia) section 79(1) requires that repayment supplement be paid in respect of the entirety of the VAT credit.  As already noted, the response of the Customs has been to say that each payment related to a separate VAT credit claimed for the 10/03 period.  For the reasons already given we do not accept the construction sought by the Customs.  The question remains however whether it is correct to say of Olympia’s claim for VAT credit for the 10/03 period that “a written instruction dealing with the making of the payments or refund” was “not issued by the Commissioners within the relevant period”.  To say “No” would be as misleading and untrue as would be the answer “Yes”.  This is because, as a matter of fact, £612,508 was paid to Olympia within the relevant period while only £193,703 was not so paid.

17.	We are satisfied that on its ordinary and unstrained meaning section 79(2)(b) can be read as recognizing part payments and part refunds of the VAT credit for the particular period, taking the VAT credit as a single amount.  Thus where by the end of the prescribed period, extended because the clock has stopped to enable reasonable inquiries to be made, a part payment has (as here) been made to a taxable person, the amount of that part payment earns no repayment supplement.

18.	It is argued for Olympia that such a construction defies the purpose of section 79 which, as Auld J observed in Customs and Excise Commissioners v L Rowland & Co (Retail) Ltd [1992] STC 647 at 655, was designed to act as a “spur to efficiency” on the part of the Commissioners. The Commissioners, faced with a multitude of different transactions covered by one return, might (Olympia observe) be tempted into deferring repayment of any amount until completion of all the different inquiries into all the transactions irrespective of whether they had already satisfied themselves in relation to particular transaction.  We do not accept that.  That sort of delaying action would violate the principles of proper administration. As Lightman J observed in paragraph 42 of his judgment in R (on the application of UK Tradecorp) v Customs and Excise Commissioners [2005] STC 138 –

“Community law obliges member states to proceed with an investigation of claims to input tax expeditiously and proportionately and to pay claims which are (or to the extent that they are) admitted or established, promptly …”

It follows that we are against Olympia on this primary point.  Repayment supplement is not due on part payments of a VAT credit made during the relevant period.

The first factual contention raised by Olympia

19.	Section 79(3) enables Regulations to provide for periods to be left out of account in computing the 30 day relevant period. One such period (i.e. that in subsection (3)(a)) is the period “referable to the raising and answering of any reasonable inquiry relating to the requisite return or claim”. Those words are transposed into the relevant Regulation, i.e. regulation 198 of the Value Added Tax Regulations 1995 (SI 1995/2518).

20.	Olympia say that the evidence adduced by the Customs is not sufficient to satisfy the Tribunal that any period was referable to any such reasonable inquiry.  The only evidence adduced by the Customs (say Olympia) shows that their inquiries were directed towards establishing that the transactions in question were of a “non-economic activity”.  The tribunal decisions in Bondhouse and Optigen had been based on the proposition, subsequently ruled by the European Court of Justice to be incorrect in law, that circular chains of supply where one supplier in the chain goes missing or operates with a hijacked registration number, are not economic activities for VAT purposes. Inquiries based on the Tribunals’ erroneous decisions (Olympia argues) will not, in the light of the ruling of the Court of Justice, be “reasonable”.  

21.	The tribunal does not, we accept, have authority to look at the manner in which an inquiry has been conducted and determine that it was unreasonable on that basis.  But can the tribunal exclude an inquiry and the time spent on that inquiry on the grounds that it was unreasonable to have embarked on it in the first place?  “Unreasonable” used in this sense must mean that the decision to inquire has been based on a misconception of the law.  We acknowledge that it is possible to envisage an obvious misreading of the law leading to an unnecessary and therefore unreasonable inquiry. But that is not the position here. Here, to judge from the unchallenged evidence of Mr Peter Birchfield, team leader of the MTIC Technical and Co-ordination Team of HMRC, the Customs have been aware of the so-called carousel style of fraud since at least 1997. The Customs reacted with a national strategy that has investigated repayment claims and typical situations where frauds have been found to take place.  In some cases they have prosecuted. In others they have sought to establish a legal justification for withholding repayment claims. The apparent legal justification at the time of the present “inquiry” was that a chain of transactions with a fraudulent objective resulted in each transaction comprised in the chain being disqualified from ranking as an economic activity; consequently each “trader” participating in the chain, whether or not a knowing participant in the fraud, could not claim input tax in respect of his acquisition of goods said to be moving round the chain. That was how the Court of Justice explained the Customs’ approach in paragraph 18 of the decision in Optigen etc (C-354/03).  The Court of Justice ruled that the taxable person’s right to deduct input tax was not affected by the fact that at some other point in the same chain of supply a transaction was vitiated by VAT fraud, unless the taxable person knew or had means of knowing of the fraud.

22.	In November 2003 when the present inquiry started there were, according to Mr Birchfield, a large number of carousel frauds based on mobile telephones that were being investigated. Those investigations called for the production of transaction chain sheets for each deal and each transaction in the chain sheet was checked out with the VAT office dealing with the traders up and down the chains.  Here the 10/03 return followed eleven returns for the previous eleven months and each of the claims for input tax ranged from £250,000 to £2 million.  The 10/03 return related to twenty-five deals (and in nineteen of these the Customs discovered a fraudulent trader in the same chain).

23.	Whatever the correct legal analysis, the transactions upon which Olympian based its 10/03 claim needed investigating and verifying.  For the claim to have related to an economic activity real transactions had to have taken place and the Customs had to have been satisfied that real consignments of real mobile telephones had been made. They needed to find out whether the tell-tale signs of fraud were in evidence: apparently they were in nineteen of the transactions.  It was in our view, and in the light of Mr Birchfield’s evidence, wholly rational that the Customs should have embarked on the inquiry or inquiries commenced in November 2003. Indeed if they had failed to have done so they would have been exposed to serious criticism for dereliction of duty.

24.	We are therefore against Olympia on the second question.  There was in our view “a reasonable inquiry” relating to the 10/03 claim for the purposes of section 79(3)(a).  

The remaining points taken by Olympia

25.	Olympia’s remaining arguments are based on the correctness or otherwise of the Customs proposition that each of the twenty-five transactions comprised in Olympia’s return for 10/03 represents a separate claim for input tax and a separate VAT credit for the purposes of section 79(2)(a). It would follow from that proposition that different relevant periods would exist in relation to each transaction and, in determining whether the conditions of section 79(2) were satisfied, each such period would be defined by reference to its own inquiry and its own written instructions directing the making of the payment.

26.	For the reasons given in relation to Olympia’s primary argument, we think that the Customs’ proposition is wrong. There is in our view one relevant period in relation to each claim.  That period will be 30 days allowing for the clock to be stopped during the period of any such inquiry as falls within section 79(3)(a). Where section 79(3) refers to “periods” referable to any reasonable inquiry it and subsection (4) are, as noted in paragraph 15 above, contemplating successive periods of inquiry each of which leads to a “complete answer” falling within the relevant period.

27.	It is not in dispute that the relevant period started on 10 November 2003.  The inquiry ceased on 30 March 2004 when, according to the unchallenged evidence of Mr Peter Birchfield, a meeting was held at Dorset House at which final decisions were made to release the amounts outstanding of £126,161 and £27,300 and to issue a decision letter to Olympia disallowing the remaining £193,704.  We therefore take 30 March 2003 as the date on which the relevant period ended in the sense prescribed by section 79(4)(b).

28.	We come now to the third question, namely whether a written instruction directing the making of the payment was issued by the Customs within the relevant period: see section 79(2)(b).  The expression “the payment” refers, as we have already pointed out, to the VAT credit which section 25(3) directs “shall be paid to the taxpayer”.  Of the £806,202 claimed by Olympia, £193,704 remained unpaid until May 2005, i.e. well after the end of the relevant period.  The balance of £612,508 was paid well within the relevant period, taking that as the 30 days starting on 10 November 2003 and leaving out of account the inquiry period from 12 November 2003 until 30 March 2004.  

29.	Payment of the balance of £612,508 was made in seven amounts.  The first five were within the inquiry period.  Precisely how each of the payments was calculated is not clear to us, but this does not affect the issue.  According to Peter Birchfield’s unchallenged evidence, on 30 March 2004 the “final decisions were made to release the outstanding amounts of £126,161 and £27,300”.  The evidence of Mr Stewart Yule, the VAT officer working in the MTIC team at the relevant time, can be summarized as follows.  During the meeting of 30 March 2004 the decision had been taken as to what to do in relation to the deals that were still outstanding.  In six of the deals it was noted that the goods had been returned to the UK by Olympia’s European customer shortly after being removed from the UK and a defaulting UK trader had been identified in the supply chain.  Similar features had been observed in relation to five of the other transactions.  Nonetheless it was felt that there were insufficient grounds to withhold repayment of input tax, save in respect of £193,704 of the repayment claim for 10/03.  Decision letters and an adjustment letter had been sent to Olympia at the end of March 2004 confirming the adjustment to the 10/03 period.  The overall adjustment resulted in a repayment of £98,861, being authorized on 2 April 2004.  In addition the repayment of £27,300 for another deal had been held up until 15 April 2004.  On that date a VAT 641 was raised releasing the amount of £27,300.

30.	On the assumption that the last payment was made on 15 April 2004, it will have been paid well within the 30 day period, i.e. two days in November 2003 and sixteen days in 2004, i.e. from 30 March until 15 April.  It follows that written instructions must have been given by 15 April.  Indeed there is no suggestion that directions to make the final payment were made after that date.  

31.	For those reasons we are against Olympia.  The conditions in section 79(2)(b) are not satisfied save in relation to the final payment of £193,704 made in May 2005.  

Costs

32.	The Customs asked for their costs.  Their Statement of Case had put Olympia on notice of this.

33.	Olympia put forward no reasons for resisting the request.  We see no reason for refusing the request.  We therefore direct that Olympia pay to the Customs their reasonable costs of an amount to be agreed.  In the absence of agreement the amount shall be referred back to the Tribunal for further directions.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 11 July 2006

LON/05/596

APPENDIX

THE RELEVANT LEGISLATION

VAT Act 1994 provides:

“25	A taxable person shall – 

(a)	in respect of supplies made by him, and
(b)	in respect of the acquisition by him from other member 	States of any goods,

account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provisions for different circumstances.

(2)	Subject to the provisions of this section, he is entitled at the end of 	each prescribed accounting period to credit for so much of his input tax 	as is allowable under section 26, and then to deduct that amount from 	any output tax that is due from him.

(3)	If either no output tax is due at the end of the period, or the amount of 	the credit exceeds that of the output tax, then, subject to subsections (4) 	and (5) below, the amount of the credit or, as the case may be, the 	amount of the excess shall be paid to the taxable person by the 	Commissioners, and an amount which is due under this subsection is 	referred to in this Act as a “VAT credit”.

Section 79 provides:

“79	Repayment supplement in respect of certain delayed payments or 	refunds

(1)	In any case where – 

(a)	a person is entitled to a VAT credit …

and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater.

(2)	The said conditions are – 

(a)	that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and

(b)	that a written instruction directing the making of the payment of refund is not issued by the Commissioners within the relevant period, and

( c)	that the amount sown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250 whichever is the greater.

(2A)	The relevant period in relation to a return or claim is the period of 30 days beginning with the later of – 

(a)	the day after the last day of the prescribed accounting period to which the return or claim relates, and

(b)	the date of the receipt by the Commissioners of the return or claim.

(3)	Regulations may provide that, in computing the period of 30 days referred to in subsection (2A) above, there shall be left out of account periods determined in accordance with the regulations and referable to – 

(a)	the raising and answering of any reasonable inquiry relating to the requisite return or claim.

(b)	the correction by the Commissioners of any errors or omissions in that return or claim, and

(c)	in the case of a payment, the following matters, namely – 

any such continuing failure to submit returns as is referred to in section 25(5), and

compliance with any such condition as is referred to in paragraph 4(1) of Schedule 11.

(4)	In determining for the purposes of regulations under subsection (3) above whether any period is referable to the raising and answering of such an inquiry as is mentioned in that subsection, there shall be taken to be so referable any period which – 

(a)	begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and

(b)	ends with the date on which the Commissioners – 

(i)	satisfy themselves that they have received a complete answer to the inquiry, or
(ii)	determine not to make the inquiry or, if they have made it, not to pursue it further,

but excluding so much of that period as may be prescribed, and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person.

(6)	In this section “requisite return or claim” means – 

(a)	in relation to a payment, the return for the prescribed accounting period concerned which is required to be furnished in accordance with regulations under this Act …”

The regulations referred to in section 79(3) are regulations 198 and 199 VAT Regulations 1995 which, so far as is relevant, provide:

“Part XXII
Repayment Supplement

Computation of period:

198

In computing the period of 30 days referred to in section 79(2)(b) of the Act, periods referable to the following matters shall be left out of account – 

(a)	the raising and answering of ay reasonable inquiry relating to the requisite return or claim,

(b) and (c)	…

Duration of period

199

For the purpose of determining the duration of the periods referred to in regulation 198, the following rules shall apply – 

(a)	in the case of the period mentioned in regulation 198(a), it shall be taken to have begun on the date when the Commissioners first raised the inquiry and it shall be taken to have ended on the date when they received a complete answer to their inquiry …”