20078

REPAYMENT SUPPLEMENT – 30 day period – Time to be left out of account for inquiry – Date when Customs first considered inquiry necessary – VATA 1994 s.79(3)(a), (4)(a) – VAT Regulations 1995, regs 198 and 199 – Preliminary point decided against Appellant

LONDON TRIBUNAL CENTRE

	S & I ELECTRONICS PLC	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	THEODORE WALLACE (Chairman)
						KENNETH GODDARD MBE

Sitting in public in London on 28 February and 1 March 2007

Michael Patchett-Joyce, instructed by Hassan Khan & Co, for the Appellant 

Richard Smith, instructed by the Acting Solicitor for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This decision concerns a preliminary issue in an appeal concerning the right to repayment supplement under section 79 of the VAT Act 1994 for period 10/04, in respect of input tax mainly incurred on mobile telephones sold to overseas customers.  The main appeal also concerns periods 11/04, 12/04, 01,05, 02/05 and 05/05.

2.	The preliminary issue concerns the start of the period to be left out of account under regulation 198(a) of the VAT Regulations 1995. Regulation 198(a) was made under section 79(3)(a), but is to be applied in accordance with section 79(4)(a).

3.	The issue was the date on which Customs first considered it necessary to make an inquiry within section 79(3)(a) in respect of a repayment claim for period 10/04. 

4.	Mr Patchett-Joyce contended that it was on 7 December 2004 the date when Douglas Armstrong, a Band 7 officer, wrote to the Appellant stating that the repayment for period 10/04 would not be authorised until Customs were satisfied with the bona fides of the repayment including verification of transactions.

5.	Mr Smith said it was at the latest on 25 November when another officer, Bob Ross, visited the Appellant at Mr Armstrong’s request to collect the documents supporting the repayment claim.

6.	The appeal was listed for 3 days in respect of all periods.  Customs produced over 50 pages of documents which should have been disclosed much earlier and indeed which should have been exhibited to the witness statement by Mr Armstrong served pursuant to a direction by the Tribunal.  Around 20 documents were only produced on the day before the hearing.  Mr Armstrong was not present on the first day to explain the documents.  We did not allow an application by Mr Patchett-Joyce for the appeal to be allowed under Rule 19(4).  In so far as Customs were in breach of the direction we considered that to allow the appeal would be disproportionate in this case.

7.	We decided to consider the starting date of the period to be left out of account in respect of period 10/04 as a preliminary matter, since this was a separate issue not substantially affected by the late material.

8.	The return containing the repayment claim for period 10/04 was received by Customs on 5 November 2004.  If the Appellant is correct the 30 day period under section 79(2A) had expired before the inquiry under section 79(3)(a) was raised with the result that the repayment supplement is due regardless of subsequent events.  If Customs are correct the 30 days stopped running on 25 November and the further question will arise as to when written instructions directing the refund were issued within section 79(2)(b).

9.	A subsidiary issue is also considered in the decision, namely whether, if the visit of Mr Ross was an inquiry, it ended within section 79(4)(b) when he collected the documents which he obtained on that day, in which case Mr Armstrong’s letter of 7 December evidenced a further inquiry.

The Legislation

10.	The relevant parts of section 79 and the VAT Regulations 1995 are as follows:

	 	“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 or refund is not issued by the Commissioners within 			the relevant period,
			…

		(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, …

		(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 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.

		(5) Except for the purpose of determining the amount of the 			supplement-

			(a) a supplement paid to any person under subsection (1)(a) 			above shall be treated as an amount due to him by way of credit 			under section 25(3)….

		(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…

		(7) If the Treasury by order so direct, any period specified in the order 		shall be disregarded for the purpose of calculating the period of 30 			days referred to in subsection (2A) above.”

VAT credit is explained in section 25(3):

		“(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 96 provides:

		“authorised person” means any person acting under the authority of the 		Commissioners;

Regulations 198 and 199 of the VAT Regulations 1995, which contain the regulations under section 79(3), provide 

	“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 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, …	

	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…”.

The Facts

10.	There was a substantial bundle of documents.  Mr Armstrong gave evidence and was cross-examined.  We find the following facts.

11.	The Appellant was registered for VAT with effect from 1 June 1980.  At all material times the Appellant traded in telecommunications equipment, mainly mobile telephones.  The Appellant also traded in white goods.  It was a repayment trader since most of its sales were to overseas customers mainly in the EC.

12.	On 5 November 2004 Customs received the return for October reclaiming £1,294,106 VAT.  It is apparent from a comparison of Boxes 1, 2 and 6 that sales to other EC member sales excluding VAT were £5,755,250 and exports to other countries were £145,430.  UK sales were £222,885.  Over 90 per cent of acquisitions were from UK suppliers.

13.	On 10 November, apparently in response to an e-mail from Mr Ross, a Band 7 Customs officer at Finchley who was then the allocated officer for the Appellant, the Appellant e-mailed a copy of the return and the Sage back-up papers to Mr Ross together with the September invoices and asked when Mr Ross could visit to review the return.

14.	On 18 November due to the heavy work load in London the matter was allocated to Mr Armstrong, another Band 7 officer, based at Washington, Tyne and Wear, by the regional co-ordinator.  Mr Armstrong telephoned Mr Ross to inform him.

15.	On 22 November Mr Ross e-mailed Mr Armstrong stating that he had a copy of the return and back-up papers and that he usually had a look before visiting to pick out the likely back to back EC deals.  He stated that he had to visit before the end of the week and asked Mr Armstrong whether he wanted him to pick out the big deals and schedule them.

16.	On 24 November Mr Ross sent a breakdown of the return to Mr Armstrong by e-mail and Mr Armstrong telephoned him asking him to pick up the purchase and sales invoices and proof of export including CMRs, airway bills and ferry tickets.  Mr Ross visited the Appellant on the following day and collected the material.  No visit report was produced nor any receipt for documents.

17.	On 29 November Mr Ross told Mr Armstrong that he had all the records and would be sending them once he had linked up the sales and purchases.  Mr Armstrong told Mr Ross that he would write to the trader regarding extended verification.  Mr Ross sent the records by internal mail on 2 December and Mr Armstrong received them on 7 December.

18.	On 7 December Mr Armstrong examined the records for completeness and put them on a spreadsheet.  He identified various matters for further checks, including the need for ferry or euro tunnel tickets.

19.	On 7 December Mr Armstrong wrote the letter referred to at paragraph 4 above headed “Verification of repayment return Period 10/04.”  The letter started by stating that the repayment would not be authorised until Customs were satisfied with the bona fides of the repayment including verification of transactions. The letter stated that “the veracity of a repayment claim of some £1,294,106.10 must be established before repayment is authorised and this is the purpose of our enquiries.”  The letter stated that inquiries had already commenced and that once completed a decision would be made on the level of repayment.  Mr Armstrong keyed in an electronic template headed “Notification of Commencement of Extensive Verification.”  This contained a space for the “Date Verification Authorised” to be filled in.  It was blank on the copy produced in evidence.

20.	On 8 December Mr Armstrong asked Mr Ross about 3 purchase invoices from New Way Associates Ltd relating to deals in September.  Mr Ross said that he did not do an extended verification on the September claim and was happy for the input tax on those invoices to be released.

21.	Mr Armstrong said in evidence that he did not know whether Mr Ross had any earlier case papers and that if so he had not sent them to Mr Armstrong.  He said that he had to inform the trader of an extended verification.

22.	He told Mr Patchett-Joyce that at that time Customs were treating EC and non-EC deals differently, one of the main purposes of withholding the repayments was to see whether Customs could establish circularity of goods and payments to raise an assessment for non economic activity : that was policy at the time.

23.	He accepted that in picking up the papers on 25 November Mr Ross was carrying out a purely administrative exercise.  He would expect him to visit every month.  He needed the documents to verify the purchase items and the zero-rating of sales.  There were no standard instructions to obtain those documents.

24.	Mr Armstrong told the Tribunal that the template referred to in paragraph 19 was a standard form which he filled out when he commenced verification.  It required approval.  Box 6 was the box for authorisation.  He sent it to Graeme Liddell, a band 9 officer on 7 November.  Mr Liddell should have filled in the date and returned it, but may have given authorisation orally.  He said that Mr Barry Johnson, the regional co-ordinator, told him that he wanted an extensive verification on 18 November when taking over the case.

25.	He told Mr Patchett-Joyce that the template exhibited must have been the version he sent to Mr Liddell; he had not seen another version, although there must have been updating versions.  He said that it was a management tool for his superior.  When asked why he did not send a letter until 7 December if he had taken over the case for extended verification on 18 November, he said that he had no explanation.

26.	Mr Armstrong then told the Tribunal that he did not have any doubt that extended verification would be authorised because he had been told to carry it out.  He then said that he sent the letter without getting the authorisation back.  He said that he had oral authorisation on 18 November.  He said that he normally just checked with the Regional co-ordinator whether to carry out an extended verification.

Submissions

27.	Mr Smith submitted that “raising” an inquiry within section 79(3)(a) includes the date on which Customs first consider it necessary to make an inquiry.  The inquiry must follow the decision even if only by a “scintilla temporis”.

28.	He said that he did not submit that the starting date was when the return was received; the repayment was not inhibited at that time.  The first contact was the visit by Mr Ross on 25 November to obtain records for Mr Armstrong to complete verification : that contact was an “inquiry relating to the requisite return or claim.”  The inquiry was into the validity of the claim for £1,294,106. He said that whether each visit starts an inquiry depends on the circumstances.  A trader might not know of an inquiry, although it would be ideal if he did.  Here the visit was directed at a particular question, namely the overseas sales.  Customs could not take a proper view of which sales fell into which category until the documents were looked at.  The collection of the documents was an integral part of the inquiry, not just gathering information.

29.	He said that the starting date for the inquiry was 25 November at the latest.  The fact that Mr Armstrong asked Mr Ross to obtain all the records did not mean that the inquiry was not focussed.  In Cellular Solutions (T Wells) Ltd v Revenue and Customs Commissioners (2006) Decision No. 19903 the Tribunal held that an inquiry means a particular question, citing Customs and Excise Commissioners v L Rowland & Co (Retail) Ltd [1992] STC 647 at 655.  The inquiry might be made of any person under section 79(4) including a Customs officer, see the definition of “authorised person” in section 96(1).  He said that all that matters in the present case is that a particular inquiry into the repayment claim was raised on 25 November.  It is clear that the inquiry was pursued thereafter because the records were taken away.

30.	Mr Patchett-Joyce said that it is a potentially undesirable state of affairs if legitimate traders can be subject to inquiries which stop the clock without their knowledge.  He referred to Rowland at page 655.  He said that the statement of principle by Auld J was carried through to section 79(4)(b).  The inquiry in subsection (4)(b) referred back to such an inquiry as mentioned in subsection (3)(a).  Here the inquiry started with the letter of 7 December.

31.	He said that an information gathering exercise such as that on 25 November is different in quality from an inquiry within section 79(4).  He accepted that a request to another officer to fill in details of a transaction involving a trader would be an inquiry.  He said that if an initial inquiry is to be covered it must be purposive and not just an information gathering exercise. The Tribunal was entitled to draw an adverse inference from the failure to call Mr Ross as a witness.  If Mr Ross did raise an inquiry he got an answer in the form of a sheaf of documents: he was either satisfied or he would have asked for missing material. He was an experienced officer, the inference must be that he decided not to pursue his inquiry further. Either Mr Ross was engaged in a purely administrative exercise or he was inquiring himself and got what he wanted. If there was an inquiry on 25 November, the letter of 7 December notified a further successive inquiry by Mr Armstrong.

Conclusions

32.	At the outset Mr Smith on instructions contended that the appeal in respect of period 01/05 was out of time and that leave should not be given.  In fact an application for leave to appeal out of time had been listed for 9 September 2005 after Customs had objected following a direction on 5 July 2005 that leave be given subject to any objection; the hearing was vacated when Customs served a notice stating that they did not object to the application.  In case the notice did not have the effect of reviving the direction of 5 July, we gave leave to the Appellant.

33.	This is a most unsatisfactory case.  The law is to say the least confusing in that section 79(4)(a) sits oddly with section 79(3)(a) and is inconsistent with regulations 198 and 199 which were not amended when the predecessor of section 79(4) was inserted in 1992. The evidence as to the facts, which were solely within the knowledge of Customs, was confusing. As already stated substantial material was only produced to the Appellant at a very late stage and the only witness for Customs did not attend on the first day and had failed to exhibit the documents, on which his statement depended, to the statement. The appeal was listed for 3 days which was clearly inadequate in view of the volume of material covering six separate periods. We decided to address the issue covered by this decision only and to adjourn the remainder of the appeal to a later hearing to be listed for 5 days.

34.	Since it is common ground that Customs received the return for period 10/04 reclaiming £1,294,106 on 5 November 2004, if Mr Patchett-Joyce is correct in contending that the period to be left out of account in computing the 30 day period under section 79(2A) did not start until 7 December, the supplement of 5 per cent amounting to £64,705 is due.

35.	Under regulation 198(a), made under section 79(3)(a), the period starts with “the raising … of any reasonable inquiry relating to the … return or claim.”  Under regulation 199(4)(a), also made under section 79(3)(a), the period is “taken to have begun on the date when the Commissioners first raised the inquiry.”  By section 79(4)(a) for the purposes of the regulations the period referable to the inquiry “begins with the date on which the Commissioners first consider it necessary to make such an inquiry.”

36.	Since the decision to make an inquiry must logically precede the actual raising of the inquiry, even if only by a scintilla temporis, section 79(4)(a) conflicts with section 79(3)(a) and with regulations 198 and 199.  It is clear however that section 79(4)(a) takes priority, as held by the Tribunal in Cellular Solutions at [8].

37.	The inquiry referred to in section 79(4) is that referred to in section 79(3)(a), namely, “any reasonable inquiry relating to the … return or claim.”  Furthermore it is clear from section 79(4) that it may be made of any person, including a Customs officer, and is not limited to the person making the return.

38.	In Rowland [1992] STC 647, Auld J held that the word inquiry in the repayment legislation meant an inquiry in the sense of a question or questions put to the taxpayer for him to answer rather than an inquiry in the sense of a general investigation concluded by a report.  He said that the word “reasonable” applies to the nature of the inquiry.

39.	Section 15 of the Finance (No.2) Act 1992 introduced what is now section 79(4) making it immaterial whether the inquiry is made of the taxpayer or of any other person including a Customs officer.  However the words “the raising and answering of any reasonable inquiry relating to the requisite return” were left unchanged and the decision of Auld J interpreting those words is clearly binding subject to section 79(4).

40.	It is significant that the word “inquiry” is qualified by the word “reasonable”.  Under section 79(4)(a) the period to be left out of account starts when “the Commissioners first consider it necessary to make such enquiry.”  “Such” refers back to section 79(3)(a).  In the context that the nature of the inquiry must be reasonable, it is clear that it must be necessary for some reason involving some element of thought or consideration.

41.	It is trite law that the Commissioners are entitled to satisfy themselves that a claim for input tax is valid.  However, if the mere fact that repayment is inhibited, perhaps because of the parameters set by a computer programme, before a return is even considered has the effect that the clock stops in computing the 30 day period, the purpose of section 79 would be largely defeated.  Mr Smith did not submit that this is the case.

42.	In our judgment the clock stops under section 79(4) when an officer acting on behalf of the Commissioners considers that an inquiry is necessary into the return or claim, whatever form such inquiry may take.  This involves consideration of the matter by the officer and the officer forming the opinion that it is necessary to ask questions of someone.  It may be that consideration is given before a return is made on the basis of prior information.  However that does not alter the need under section 79(4)(a) read with section 79(3)(a) for an officer to consider it necessary to make an inquiry relating to the return or claim.

43.	In the present case Mr Smith identified the date of the visit by Mr Ross on 25 November as the latest starting date for the inquiry.  It appeared that he submitted that Mr Armstrong was the officer who considered the inquiry to be necessary.

44.	The matter is complicated by the letter of 7 November and the procedure evidenced by the template referred to at paragraph 20 above.  The template which was one of the documents produced at a late stage specifically provides for the verification to be authorised.  Mr Armstrong’s evidence was that he asked Mr Liddell for authorisation and that he sent the letter without getting authorisation back.  We found his evidence as to this to be confused.  It is apparent from the template that Customs’ procedures required Mr Armstrong to obtain authorisation.  If he had authorisation already he had no need to ask Mr Liddell for it.  

45.	Mr Pritchett-Joyce did not challenge Mr Armstrong’s evidence that the template was a management tool and did not submit that the authorisation for extensive verification was the same as the decision that an inquiry within section 79(4)(a) was necessary.

46.	We conclude on the evidence before us that the template was no more than a piece of paperwork only relevant to whether the trader was to be notified of extensive verification and has no bearing on the date when the Commissioners first considered it necessary to make an inquiry in this case.

47.	We accept Mr Smith’s submission that the Commissioners considered an inquiry to be necessary by 25 November at the latest when at Mr Armstrong’s request Mr Ross collected the material supporting the repayment claim. Since Mr Ross took the  material away with him on 25 November, we do not consider that he can be taken to have been satisfied within section 79(4)(b) that he had received a complete answer nor can he be taken to have determined not to pursue the inquiry further.  In any event he was acting on behalf of Mr Armstrong by that time.

48.	The result is that we decide the preliminary issue in respect of period 10/04 against the Appellant.

THEODORE WALLACE
CHAIRMAN

RELEASED: 22  March  2007

LON/05/682