20367
VALUE ADDED TAX — Appellant claiming relief for input tax incurred on transaction in period 09/99 — claim correct when made — transaction cancelled in period 12/99 but no attempt made to adjust VAT account — assessment to recover input tax made for period 09/99 — whether made for correct period —Sixth VAT Directive arts 11(C)(1), 20(1) — VATA s 73(1), (2), VAT Regs reg 38 — assessment made for correct period — appeal dismissed
	
MANCHESTER TRIBUNAL CENTRE

	GENIE FINANCIAL SERVICES EUROPE LTD	Appellant

	- and -

	THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Manchester on 18 June 2007

Andrew Hitchmough, counsel, instructed by Dorsey & Witney, for the Appellant 
 
James Puzey, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	I take the facts of this appeal from the parties’ agreed statement of facts and issues, the skeleton arguments produced by counsel—Andrew Hitchmough for the Appellant and James Puzey for the Respondents—and from the documents produced to me. I heard no oral evidence.
2.	The Appellant, Genie Financial Services Europe Ltd (GFSE) is one of a group of companies which, together, manufacture and supply industrial equipment. The ultimate parent, I understand, is an American company, Genie Industries Inc, which (by US subsidiaries) manufactures the equipment. It has two relevant United Kingdom subsidiaries, Genie (UK) Limited (GUK), which imports the equipment from the United States, and GFSE. GUK sells equipment to customers who wish to buy it outright or to make their own financing arrangements, but when a customer wishes to acquire the equipment from GUK on lease or on other credit terms funded by the group, GUK sells it to GFSE, which then enters into a leasing contract or some other credit arrangement with the customer. GFSE has no other trading activity.
3.	In late 1999, a customer, Nationwide Access Ltd (Nationwide) decided to acquire certain equipment manufactured by the group in the US. It indicated that it intended to do so by means of leases to be entered into between it and GFSE. GUK imported the goods from the US and sold them, by means of several separate transactions, to GFSE, issuing appropriate VAT invoices; the two companies were not in a VAT group. In their respective returns for the period to 30 September 1999 (period 09/99), GUK accounted to the Commissioners for the output tax generated by the sales, and GFSE claimed credit for the same sum as input tax. The Commissioners allowed the claim, which amounted in all to £980,500. It is common ground that there was nothing unusual about the sales by GUK to GFSE, that, had the leases to Nationwide proceeded, GFSE would have made onward taxable supplies, and that when GFSE submitted its 09/99 return it genuinely believed that the input tax credit was properly due. The equipment was entered in GFSE’s plant and machinery ledger account, but it did not physically move by reason of its sale by GUK to GFSE.
4.	However, in December 1999, and before the equipment had been supplied to it, Nationwide changed its mind, and decided to arrange the financing of its acquisition by other means. From GFSE’s and GUK’s perspective, there was to be an outright sale. Group policy dictated that GUK made outright sales and that GFSE did not; thus it was necessary for title in the equipment to be transferred back from GFSE to GUK in order that the latter could sell it to Nationwide. 
5.	The Appellant’s case is that the transfer of the title was effected, on 31 December 1999, by cancellation, or reversal, of the earlier sales by GUK to GFSE, and the making of a corresponding amendment to GFSE’s plant and machinery ledger account; again, the equipment did not move. GUK did not, however, issue a credit note to GFSE and, although it issued an invoice to Nationwide, it did not account to the Commissioners for the output tax it had charged, although Nationwide had an entitlement to input tax credit, on the strength of the invoice GUK had issued. Eventually, after some intervention by the Commissioners, GUK rectified its accounting errors and nothing turns on them in this appeal.
6.	GFSE made no adjustment to its VAT account following the return of the equipment to GUK.  It had received credit from GUK (by means of an internal accounting adjustment) in consequence of the cancellation of the sales. In net terms, it was left with the input tax credit which it had received, but no corresponding output tax liability. 
7.	GFSE did not dispute the Commissioners’ contention that, at the time, its accounting records were in considerable disarray, due largely to substantial staff turnover. Its records contained many mis-postings and the correction and verification of the accounts which were eventually undertaken took a long time. The Commissioners detected that an accounting error had been made in relation to the transactions with which I am concerned in the course of a visit in November 2000. There were some intervening events of no lasting significance, before, on 3 September 2002, the Commissioners assessed GFSE in order to recover the claimed input tax credit of £980,500. The assessment was made in respect of period 09/99, that is the period in which the claim had originally been made, and not by reference to period 12/99, in which the adjustments consequent upon the cancellation were made. 
8.	The Appellant accepts that it should have repaid the £980,500 for which it had received credit as input tax, and that it has not done so. But, it says, the Commissioners have assessed for that sum in the wrong period, with the consequence that the assessment is invalid, and they are now out of time to make another assessment for the correct period. Mr Hitchmough argued that the assessment should have been made for period 12/99, in which period the transfer of the equipment was cancelled and in which the obligation to repay arose, and not for period 09/99, when the initial claim for credit was made.
9.	The assessment was made, he argued, using the powers conferred on the Commissioners by section 73(1) of the Value Added Tax Act 1994 which provides that:
“… where it appears to the Commissioners that [a trader’s VAT return is] incomplete or incorrect, they may assess the amount of VAT due from him …”
10.	An assessment made in respect of period 09/99 in order to recover the input tax was, he said, misconceived because the return, when it was submitted, was correct. All of the conditions on which the claim for credit was made were satisfied: GFSE had acquired the equipment, held a valid invoice supporting the claim, and had the intention of making an onward taxable supply. It was not until the following period, 12/99, that GFSE’s intention changed, and the relevant adjustments were made. In fact, GFSE’s intention changed only because of Nationwide’s decision to buy the equipment outright rather than to enter into leases, and GFSE was in much the same position as the trader in Belgium v Ghent Coal Terminal NV (Case C-37/95) [1998] STC 260, that is, it had been obliged by circumstances beyond its control to abandon its intention of using the equipment for the purpose of making onward taxable supplies, and was required instead to adjust its accounts to reflect both the cancellation of the acquisitions from GUK and the VAT consequences of that cancellation.
11.	The treatment of adjustments was, at that time, governed by article 20(1) of the Sixth VAT Directive (77/388/EEC) (since replaced by articles 184 to 186 of Directive 2006/112). So far as material it read:
“The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:
(a)	where that deduction was higher or lower than that to which the taxable person was entitled;
(b)	where after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained …”
12.	Article 11(C)(1) (since replaced by article 90 of the 2006 Directive) was also in point:
“In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.”
13.	In the United Kingdom articles 11(C)(1) and 20(1) are reflected in regulations 34, 35 and 38 of the Value Added Tax Regulations 1995 (SI 1995/2518), but only regulation 38 can have any application to this case. So far as relevant it reads:
“(1)	… this regulation applies where—
(a)	there is an increase in consideration for a supply, or
(b)	there is a decrease in consideration for a supply,
which includes an amount of VAT and the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place.
…
(2)	Where this regulation applies, the taxable person shall adjust his VAT account in accordance with the provisions of this regulation.
…
(4)	The recipient of the supply, if he is a taxable person, shall—
(a)	in the case of an increase in consideration, make a positive entry; or
(b)	in the case of a decrease in consideration, make a negative entry,
for the relevant amount of VAT in the VAT allowable portion of his VAT account.
(5)	Every entry required by this regulation shall … be made in that part of the VAT account which relates to the prescribed accounting period in which the increase or decrease is given effect in the business accounts of the taxable person.”
14.	The effect of the cancellation of the supply of the equipment by GUK to GFSE, Mr Hitchmough said, was to reduce the consideration for the supply to zero. The cancellation had taken place in period 12/99, which was “after the end of the prescribed accounting period in which the original supply took place”, and, by virtue of paragraph (1), regulation 38 was engaged. Paragraph (4) required GFSE to make a negative entry in its VAT account, and paragraph (5) required it to do so in period 12/99, when the decrease was given effect in its own accounts. It had not done so, and the Commissioners should have assessed it for that failure, but by reference to the period in which the failure had occurred, and not, as they had done, by reference to the period in which the original supply took place. Thus the assessment was invalid and should be discharged.
15.	Mr Hitchmough derived support for his arguments from comments made by the Advocate General in Ghent Coal Terminal. At paragraph 43 he said:
“… it is the acquisition of the goods by a taxable person acting as such that gives rise to the application of the VAT system and therefore of the deduction mechanism. The use to which the goods are put, or intended to be put, merely determines the extent of the initial deduction … and the extent of any adjustments in the course of the following periods …”
16.	At paragraph 48, he referred to 
“The principle of legal certainty, according to which the rights and obligations of taxable persons cannot depend on facts, circumstances or events which occurred after they were recognised by the tax authority.”
17.	Those comments, Mr Hitchmough argued, were consistent only with the proposition that any assessment against GFSE must be made in respect of the period in which the adjustment was made; it was wholly contrary to the principle of legal certainty to relate the adjustment back to the period in which the credit had originally been claimed. Moreover, the Commissioners’ position would lead them into the difficulty that a trader might make an adjustment of the kind in issue here so long after the initial claim had been met that they were already out of time to assess for the excessive credit which had been granted, a point touched upon, though in my view not conclusively, by Thorpe LJ in Customs and Excise Commissioners v Croydon Hotel & Leisure Co Ltd [1996] STC 1105 at 1109b.
18.	Mr Puzey’s principal argument was that Mr Hitchmough’s starting point was wrong. The assessment had, he said, been made, not under subsection (1) of section 73, but under subsection (2):
“(2)	In any case where, for any prescribed accounting period, there has been paid or credited to any person—
(a)	as being a repayment or refund of VAT, or
(b)	as being due to him as a VAT credit,
an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.”
19.	That provision, he said, made it clear that the assessment was properly made for period 09/99. That was the period for which the credit was paid. The cancellation by GUK and GFSE of the sales of the equipment to GFSE necessarily related back to that period. The effect of the cancellation was that sales which, when the return was submitted, were thought to have been made later turned out to be treated, by GUK and GFSE themselves, as if they had not been made; thus the power to assess conferred by subsection (2) was engaged. He sought to distinguish Ghent Coal and similar cases, such as Intercommunale voor Zeewaterontzilting v Belgian State (“INZO”) [1996] STC 569 on the ground that, there, the taxpayers had in fact applied the goods and services in respect of which their input tax claims were made in preparation for the making intended supplies; here, GFSE had merely cancelled the acquisitions, without making any use of them at all. Moreover, the point at issue in Ghent Coal and INZO was not whether the claims should be adjusted, but whether they should have been allowed at all, and the judgments could not be of direct guidance here.
20.	Even if, he continued, the assessment had been made, contrary to his primary contention, using the power in section 73(1), it had been made for the correct period. It was true that, when GFSE submitted its 09/99 return, that return appeared to be correct. By its action of cancelling the purchases, GFSE had made it an incorrect return. There was nothing in subsection (1) which anchored the time at which the accuracy of the return must be considered to the moment it was submitted. If, as here, a trader retrospectively cancelled a transaction, that cancellation must affect the accuracy of the return by which the trader accounted for the cancelled transaction. In addition, he said, regulation 38 could not apply since this was not, as Mr Hitchmough had argued, one in which the consideration for a supply had been reduced; there was no longer a supply for which there could be any consideration.
21.	In my judgment Mr Puzey’s arguments are right, and for the reasons he advanced. The opening words of article 20(1) of the Sixth Directive, “The initial deduction shall be adjusted” and the following provisions of the article indicate that it is the original claim, itself, which is to be adjusted. There is nothing in the article which indicates when the adjustment is to be made, and nothing inconsistent with (though, it has to be said, equally nothing which clearly supports) the Commissioners’ position that the adjustment relates back to the period in which the initial deduction was made. On the other hand, article 11(C)(1) of the Sixth Directive provided that, in the case of cancellation, it is the taxable amount which is to be reduced, implying, in my judgment, not a separate, balancing exercise in a later period but an adjustment to the original output tax liability and corresponding input tax claim, an adjustment which could take place only by reference to the period in which the liability and claim arose. It seems to me clear that section 73(2) of the 1994 Act, in implementing that provision, makes it quite clear that a retrospective adjustment is not merely possible, but appropriate:  the facts, as they later turned out to be, were that GFSE had cancelled the transactions, and had thereby reduced the amount for which it was entitled to credit.
22.	I agree too that regulation 38 does not apply to a case in which the consideration is not reduced, but cancelled altogether because the underlying supply has itself been cancelled. The wording of the regulation clearly contemplates the continuing existence of the supply.
23.	It does not seem to me that Ghent Coal and INZO are of great assistance. As Mr Puzey pointed out, the question of subsequent adjustment of a claim, valid when made, was not in issue, and I do not think it should be overlooked that the change of course in this case was not attributable to external factors over which GFSE had no control, but to its group policy that only GUK made outright sales. But for that policy GFSE could itself have sold the equipment to Nationwide. For similar reasons I am not persuaded that the principle of legal certainty assists GFSE. The principle is not designed to protect a taxpayer from the consequences of his own actions.
24.	Had GUK and GFSE accounted for the change of intention by GFSE selling the equipment back to GUK, or by GUK issuing credit notes, in period 12/99 it may well be that an assessment for any tax not correctly accounted for should have been made for that period; but that is not what GFSE and GUK did. They chose instead to treat the sales as if they had not occurred: that is, they retrospectively cancelled the transactions on which GFSE’s claim had been based. I agree with Mr Puzey that the effect was to transform a return which was correct when rendered into a return which was no longer correct. The claim based on that return could no longer be justified, and the Commissioners were right to assess in order to recover that which had been, by reason of GFSE’s own actions, over-claimed in that period. 
25.	The appeal is, therefore, dismissed. Mr Puzey did not seek a direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 20 September 2007
MAN/02/0417