ZERO-RATING – Proof of export – Channel Islands – Pearl necklace taken to Channel Islands and sold there – No SAD – Whether alternative evidence of export is acceptable – No 

LONDON TRIBUNAL CENTRE

	KEEN JEWELLERY LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)

Sitting in public in London on 6 November 2006

David Keen, director, for the Appellant 

Paul Key, instructed by the acting general counsel of solicitor to HMRC, for the Respondents

© CROWN COPYRIGHT 2006

SECOND PRELIMINARY DECISION

1.	Keen Jewellery Ltd (“KJ”) appeal against an assessment issued by the Customs on 25 October 2005.  The material component of the assessment, i.e. the amount relevant to the present appeal, is for the period 07/03 and is in the sum of £5,138.  The assessment is for VAT due on a supply of goods by KJ, KJ claims that this was a zero-rated supply by way of export to Jersey

2.	The issue in the appeal is whether KJ is entitled to treat the supply as zero-rated, being a “supply of goods exported by the supplier to a place outside the EC” within the meaning of section 30(6) of Value Added Tax Act 1994.  The supply actually took place on 30 April 2003 in Jersey.  This was two days after the date of export.

Factual background

3.	KJ carries on business in Hatton Garden, London, as importer, manufacturer and distributor of jewellery.  KJ has been registered for VAT since 1995.

4.	In April 2003 KJ took delivery of a cultured pearl necklace.  This was imported from a consignor in Japan (accompanied by an air waybill).  The transporter issued a VAT invoice to KJ and KJ duly accounted for VAT to the Customs.  

5.	KJ had imported the necklace to meet a possible purchase order from Aurum, a jeweller in Jersey, Channel Islands.  One of Aurum’s customers had expressed an interest in buying a necklace of the sort imported to the UK by KJ.  That customer needed to see it before deciding whether to buy it.  Correspondingly Aurum needed a firm order from its customer before buying the necklace from KJ.

6.	The necklace was therefore imported to the Channel Islands so that it could be shown to Aurum which in turn would show it to its customer.  At the time of export and until Aurum and KJ agreed o the sale, the necklace remained in the possession and ownership of KJ.

7.	Normally when KJ exports goods it does so by post and the Customs accept the air waybill as evidence of export.  On this occasion the value of the necklace exceeded KJ’s insurance cover for mailed goods.  KJ engaged a Mr Graham Ryman as agent to take the goods to Jersey so that they could be shown to Aurum and Aurum’s customer.  Mr Ryman gave evidence.  He had duly taken the necklace in his baggage to Jersey. He had not obtained any form of official proof of export from the Customs when he left for Jersey. He produced an air ticket and accommodation invoice to show that he had flown to Jersey on 28 April 2003 and remained there for two nights.  On 30 April Aurum purchased the necklace from KJ.  KJ invoiced Aurum for the sale on the same day.  

8.	The invoice issued by KJ to Aurum is dated as 30 April 2003.  It details the goods supplied as one “10-10.5 M M White Akoya Row Pearls”.  It provides Aurum’s Jersey address.  It records the price as £34,500 and the VAT as nil.

9.	KJ treated the sale to Aurum as zero-rated export.  However following an inspection in 2005 Customs issued an assessment for VAT at the standard rate (for £5,138) on the basis that, there being no acceptable proof of export, the supply to Aurum did not qualify for zero-rating.  

The Channel Islands

10.	The Channel Islands, including Jersey, are part of the Customs territory of the Community; but they do not form part of the fiscal (VAT) territory of the Community.

The statutory provisions

11.	Section 30(6) of VATA provides as follows:

“A supply of goods is zero-rated by virtue of this subsection if the Commissioners are satisfied that the person supplying the goods – 

(a)	has exported them to a place outside the Member States; or 
(b)	… , 

and in either case if such other conditions, if any, as may be specified in regulations or the Commissioners may impose are fulfilled.”

12.	Section 30(8) provides that:

“Regulations may provide for the zero-rating of supplies of goods, or Of such goods as may be specified in the regulations, in cases where – 

(a)	the Commissioners are satisfied that the goods have been or are 	to be exported to a place outside the Member States …; and
(b)	such other conditions, if any, as may be specified in the 	regulations or the Commissioners may impose are fulfilled.”

Regulation 129(1) of the VAT Regulations 1995 (SI 1995/2518) outlines the conditions for zero-rating goods to be exported outside the Member States as follows:

“Where the Commissioners are satisfied that – 

(a)	goods intended for export to a place outside the Member States have 	been supplied, otherwise than to a taxable person, to – 

(i)	a person not resident in the United Kingdom,
(ii)	a trader who has no business establishment in the United 	Kingdom from which taxable supplies are made, or
(iii)	…, and

(b)	the goods were exported to a place outside the Member States, 

the supply, subject to such conditions as they may impose, shall be zero-rated”.

13.	The Customs’, Revenue and Customs Notice 703 VAT, “Export of goods from the UK August 2005”, the text of which was, I understand, similar to the text of the Notice in force in April 2003, includes the following provisions:

“3.3	A supply from the UK to a customer outside the EC is liable to the zero-rate as a direct export where you:

•	ensure the goods are exported from the EC within the specified time limits;
•	obtain official or commercial evidence of export as appropriate within the specified time limits; 
•	keep supplementary evidence of the export transaction, and
•	comply with the law and conditions of this Notice.”

That provision is said to have the force of law.  Paragraph 6.4 of Notice 703, which also has the force of law, provides that:

“6.4	The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:

•	the supplier;
•	the consignor (where different from the supplier);
•	the customer;
•	the goods;
•	an accurate value;
•	the export destination;
•	and the mode of transport and route of the export movement.”

14.	Paragraphs 5.1 and 5.2 of Notice 703 (as in force at the time when the alleged export took place) provide, so far as is relevant, as follows:

“5.1	General

This section explains the documentary evidence which is required for a supply of goods exported outside the EC to be zero-rated.  Section 6 describes the documentary evidence which is required for some specialized methods of export.

5.2	Proving exportation of goods from the UK

Proof of export consists of – 

•	official evidence – normally a Single Administrative Document (SAD) (Form C88) stamped by Customs and Excise, as described in paragraphs 1.10, 3.2, Appendix D and Customs Notice 275 “export procedures”, or
•	commercial evidence as explained in paragraph 5.3”.

15.	Paragraph 5.4 of Notice 703 provides as follows:

“The documents you obtain as poof of export, whether official or commercial, must clearly identify –

•	the exporter
•	the customer
•	the goods, including an accurate value
•	the export destination.

It is important to know exactly which documents are needed, especially for the  specialized methods of export explained in section 6 and for goods exported as Merchandize in Baggage (MIB) (see paragraph 5.7).  If you do not obtain and hold satisfactory proof of export within the appropriate time limit, you will be assessed for tax due on the supply (see paragraph 9.1).”

16.	Paragraph 5.7 of Notice 703 (as it appeared in 2003) provides as follows:

“If you or your overseas customer export goods in baggage … copy 2 and copy 3 (marked “for VAT purposes only”) of the SAD (Form C88) must be presented to the MIB officer at the place of export from the EC for a certification of shipment on the reverse of copy 3.  Copy 3 will be handed back to you or your overseas customer as evidence of export for retention in your records.”

17.	Paragraph 6.18 of Notice 703 (as it stood at the time) provides as follows:

“Evidence of export for goods sent to the Channel Islands is as follows:

…

•	goods carried as Merchandize in Baggage – a Customs’ certified copy 3 of the SAD (Form C88)”.

Conclusion

18.	As I read paragraphs 5.7 and 6.18 of Notice 703 (set out in paragraphs 16 and 17 above) “commercial” evidence of export will not qualify the export of goods for zero-rating where “official” evidence should have been obtained in respect of that export.

19.	The position here is that the evidence actually provided by KJ at the hearing is acceptable “commercial” evidence of the export of the necklace.  The case law has, however consistently stated that Notice 703 and its requirements for “official” evidence are to be applied strictly.

20.	It is not in dispute that KJ did not, at the time of export of the necklace, present the necklace to any export officer at the airport; nor did KJ provide an export declaration, i.e. a completed or partly-completely SAD.  

21.	On first looking at the provisions of Notice 703 and its surrounding provisions, I was concerned that the rules did not appear to cover the situation where the goods in question have left the UK in the possession of a carrier and where there is either no consignee or no more than an expectation that a particular person will become the consignee.  Here the necklace left the UK (in the baggage of Mr Ryman as KJ’s agent) and Aurum was, at most, expected to be the consignee.  My concern was that SADs in all their different forms each have boxes in which the name of the consignee is to be written.  How could a SAD rank as “official” evidence of export when, because there was no consignee, the consignee box had been left empty?  In other words was a SAD only appropriate to the case where there was an actual consignee at the time of the export?

22.  	I issued a Direction at the end of the Preliminary Decision that I issued on 17 November 2006 asking for copies of the paperwork in force at the time of export and for a witness statement explaining the relevant Customs procedures.  A witness statement was duly provided by a Policy Adviser of the Customs.  It reads as follows:

“The export declaration must be lodged at the Customs Office responsible for supervising the place where the exporter is established or where the goods are packed or loaded for export shipment (Article 161 of the Counsel Regulation (EEC) No.2913/92 of 12 October 1992 refers).  The official model for written declarations to Customs by the normal procedure, for the purposes of placing goods under a Customs procedure or re-exporting them in accordance with Article 182(3) of the Code, shall be the Single Administrative Document (SAD) (Article 205(1) of the Commission Regulation (EEC) No.2454/93 of 2 July 1993 refers).  For national legislation the 1979 Customs and Excise Management Act section 53 stipulates entry outwards of goods from the UK.  Goods carried by passengers in accompanied baggage for trade or business use are known as Merchandise in Baggage (MIB).  Where MIB goods are to be exported the appropriate form of proof of export is the SAD.  Advice on how to complete the export declaration is detailed in Notice 1 Merchandise in Baggage.  The November 1994 version (which was extant in April 2003) sets out at Appendix B, on a box-by-box basis, the minimum information required on the SAD.  There is no requirement to complete box 8 (Consignee details) on the SAD.”

23.	For completeness I quote from Notice 6 (Merchandise in Baggage) which deals with “Export Procedure” in Part 6.  This reads:

“17.	What must I do?

… declarations are … required for goods despatched to any of the “special territories” within the Custom area of the EC. …

If you are carrying MIB and are travelling to a third country (or one of the “special territories”), you are required to declare goods in the UK.  You must:

•	arrive well before your schedule departure time; and
•	present the goods to the export officer at the port or airport together with an export declaration (copies 2 and 3 of the C88).

If you have not completed the C88, an officer will advise you on how to complete it.

Appendix B details the boxes to be completed on the Form C88 when it is being used as a pre-shipment declaration under the standard export declaration procedure.  You should note that if you use the low value goods on non-statistical procedures you only have to complete a minimum number of boxes.

The export declaration must be accompanied by any other export documentation which may be required (e.g. an export licence).”

Appendix B of Notice 6 gives instructions as to how to complete Form C88, the SAD.  Specific instructions relate to Boxes 1-5, 14 and 17.  Nothing is said about Box 8 (Consignee details).  

24.	The new information indicates to me that the SAD can operate as appropriate “official” evidence of export even though the Consignee box has been left empty.  It would follow that KJ failed to provide evidence of export for the necklace when it was taken to the Channel Islands in April 2003.  On that basis KJ’s appeal would have to be dismissed.

25.	I express this as a provisional view because KJ have not had the opportunity to respond to the witness statement.  I therefore give KJ until the end of May 2007 in which to provide a written response directed specifically at the evidence provided by the Customs by the Policy Adviser.  If KJ wish to take this course, their response should explain why it would not be the right course for this Tribunal to dismiss their appeal.

DIRECTION

IT IS DIRECTED THAT:

The Appellant shall have until 31 May 2007 in which to lodge (if they choose to do so) a written response directed at the evidence of the Policy Adviser.  This response should address the question as to whether, in the light of that evidence, this appeal should not be dismissed.  If no response is lodged, the appeal will be dismissed without further hearing.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 27   March  2007

LON/06/164