J P Commodities Ltd v Revenue & Customs [2006] UKVAT V19904 (22 November 2006)

19904

VALUE ADDED TAX — zero-rating — sales of good to Gibraltar-registered trader – goods transported to Belgium – purchaser not registered for VAT in Belgium – whether UK-registered supplier permitted to zero-rate supplies — Sixth Directive articles 28a, 28c — VATA 1994 s 30 — VAT Regulations 1995, reg 134 — Public Notice 725, paragraph 3 — whether conditions imposed by Notice authorised by article 28c — yes — whether conditions applicable to sale to unregistered trader — conditions validly imposed and applicable to sales — supplies not zero-rated — appeal dismissed. 

MANCHESTER TRIBUNAL CENTRE

J P COMMODITIES LIMITED
Appellant
- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

		Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Birmingham on 7 November 2006 

Timothy Brown, counsel, instructed by AIMS Partnership plc for the Appellant 
Owain Thomas, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

DECISION
1.	The Appellant, J P Commodities Limited, which is a VAT-registered trader in the United Kingdom, made two sales of electronic goods—hand-held games machines and MP3 players—to Bronteum, a company registered in Gibraltar, in December 2005. It did not, however, deliver the goods to Bronteum in Gibraltar, but (at Bronteum’s request) to an address in Belgium. Bronteum was not registered for VAT in Belgium. The Appellant took the view that as its sales were made to a purchaser established outside the territory of the European Union they were zero-rated, and prepared its invoices to Bronteum on that basis. It had bought the goods within the United Kingdom and in its VAT return for the period 12/05 claimed credit for the input tax it had incurred in the purchases. The return, by which a net repayment was sought, prompted an investigation by the Respondents. They concluded that the Appellant’s treatment of its two sales was incorrect. They accept that the goods were bought by the Appellant, sold to Bronteum and sent to Belgium, where they arrived. Their position is that the law does not permit the zero-rating of a sale made in this fashion, and that the Appellant must account for output tax on the sale. They adjusted the Appellant’s return accordingly, and the Appellant now challenges that adjustment. The tax in issue, £75,979.56, represents the VAT fraction of the Appellant’s aggregate selling price. 
2.	Before me the Appellant was represented by Timothy Brown and the Respondents by Owain Thomas, both of counsel. I heard oral evidence from Prithpal Singh Johal, the Appellant’s only director, and had the unchallenged statement of Farzana Malik, the HMRC officer whose decision it was to adjust the return. I was provided with a bundle of relevant documents, skeleton arguments from both sides, copies of relevant authorities and a statement of the agreed facts and disputed issues. 
3.	The facts of the case were indeed largely agreed and Mr Johal’s evidence in chief was almost entirely formal. He had been able to establish, after the disputed decision was made, that Bronteum had sold the goods on to a customer which (as the Respondents agree) was located and VAT-registered in Luxembourg. It appears, although the evidence on this point was not conclusive, that the goods did travel to Luxembourg, but it is not known whether the Luxembourg customer accounted there for acquisition tax. It has to be assumed, since it was not registered for VAT there, that Bronteum did not account for acquisition tax in Belgium, which (it was also agreed) was the Member State of acquisition of the goods sold to it by the Appellant, and that it did not claim credit for the same sum as input tax. It is clear that Bronteum did not charge VAT on its sale to the Luxembourg company. Copies of its invoices to that company were provided; although the amounts charged have been obscured, it is apparent that there is no addition to them for VAT, nor any indication that the prices charged are VAT-inclusive. The invoices bear no VAT registration number, of either seller or buyer.
4.	Mr Johal told me he believed that, since Bronteum was established in Gibraltar, the Appellant’s sale was one made to a customer outside the Member States and was properly zero-rated. He had, he said, raised the matter with his contact at Bronteum, who told him that Bronteum frequently made purchases from EU-based traders who zero-rated their sales even though the goods themselves did not leave the territory of the EU. Mr Johal relied on what his contact told him, and made no further enquiries elsewhere.
5.	Mr Thomas’s cross-examination of Mr Johal was directed, in large part, towards establishing that he had not taken proper care but, since the Respondents do not formally allege anything more serious than a misunderstanding of the law against the Appellant, and it is unnecessary for the purpose of deciding this appeal to make any finding of fact about the nature of his conduct, I do not propose to say any more about Mr Johal’s cross-examination, beyond the comment that, while he may have acted somewhat naively, I have no reason to think that Mr Johal realised at the time that he might be doing anything improper. 
6.	Mr Brown founded his argument in support of the contention that the Appellant had correctly zero-rated its supplies to Bronteum on article 28c of the Sixth VAT Directive (77/388/EEC) which, so far as presently material, is as follows: 
“Without prejudice to other Community provisions and subject to conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse, Member States shall exempt:	 	
(a)	supplies of goods … dispatched or transported by or on behalf of the vendor or the person acquiring the goods out of the territory referred to in Article 3 but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods …”
7.	It is common ground that that provision applies to supplies of the kind in issue here. The conditions prescribed by that article were satisfied here, Mr Brown said, because the goods were transported by the vendor—the Appellant—from one member State, the United Kingdom, to its customer, a taxable person acting as such in another member state, Belgium. Thus the Appellant was right to exempt (in the UK, zero-rate) the supply. The Respondents’ contention that a “taxable person” must be registered, rather than merely liable to register (and correspondingly taxable), added a further condition which was not to be found either in article 28c or elsewhere in the Directive. The meaning of “taxable person” was made clear by article 4(1) of the Directive, in which the concept of registration did not appear: 
“‘Taxable person’ shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.”
8.	Paragraph 2 includes the activity of trading. Domestic legislation, Mr Brown continued, did not help the Respondents. Article 28c is implemented by section 30 of the Value Added Tax Act 1994. Subsections (1) and (8) are as follows:
“(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section – 
(a)	no VAT shall be charged on the supply; but 
(b)	it shall in all other respects be treated as a taxable supply;
and accordingly the rate at which VAT is treated as charged on the supply shall be nil.”
“(8) 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 or that the supply in question involves both – 
(i)	the removal of the goods from the United Kingdom; and
(ii)	their acquisition in another member State by a person who is liable for VAT on the acquisition in accordance with provisions of the law of that member State corresponding in relation to that member State, to the provisions of section 10; and 
(b)	such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled.”
9.	Here too, Mr Brown maintained, the conditions were satisfied. Whether or not it was registered in Belgium, Bronteum was, in the words of section 30(8)(a)(ii), “liable for VAT on the acquisition” (liability which section 10 of the 1994 Act regulates in the UK: it was agreed that Belgian law contains a corresponding provision). No requirement that the person concerned actually be registered was to be found either in section 30(8) or in the domestic implementation of article 4 of the Directive, namely section 3(1) of the 1994 Act —“a person is a taxable person … while he is required to be registered”; thus liability to register, or to account for tax, was enough.
10.	It was true, Mr Brown agreed, that section 30(8) permitted the imposition of conditions, but those on which the Respondents claimed to rely were of no application here. Those conditions were imposed, or purportedly imposed, by regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518) and by Public Notice 725. The former is as follows: 
“134	Where the Commissioners are satisfied that—
(a)	a supply of goods by a taxable person involves their removal from the United Kingdom,
(b)	the supply is to a person taxable in another member State; 
(c)	the goods have been removed to another member State, and 
(d)	the goods are not goods in relation to whose supply the taxable person has opted, pursuant to section 50A of the Act, for VAT to be charged by reference to the profit margin on the supply
the supply, subject to such conditions as they may impose, shall be zero-rated.”
11.	There, too, the specified requirement is no more than that the customer be taxable: the condition that he be registered emerges only from the Public Notice, the relevant part of which reads: 
“3.	Zero-rating of supplies of goods to VAT registered customers in another Member State
3.1	Can I zero-rate a supply of goods to a VAT registered customer in another Member State?
Yes, you may zero-rate your supply in the UK provided all the following conditions are met: 
The text in this box has the force of Law
Condition	Description	
1	You obtain and show on your VAT sales invoice your customer’s VAT registration number including the 2-letter country code prefix – see paragraph 12.16	
2	The goods are sent or transported out of the UK to a destination in another Member State. 	
3	You hold satisfactory commercial documentary evidence that the goods have been removed from the UK. Guidance on proof of removal of goods is contained in Notice 703 Exports and removals of goods from the United Kingdom	
3.2	What should I do if I cannot meet all the conditions in paragraph 3.1?
You must charge and account for tax in the UK, at the rate on the supply of the goods in the UK, if you cannot meet all the conditions in paragraph 3.1 …”
12.	Mr Brown’s argument was that it is apparent from the wording of the Notice itself that it does not apply in a case where the customer, though taxable, is not registered. The heading to Section 3 refers to “registered customers in another Member State”; therefore by its own terms it can have no application to a case in which the customer is not registered. No other part of Notice 725 deals with that situation, and one has therefore to look to article 28c(A)(a) and section 30. The Respondents’ attempt to rely on paragraph 3.1 of Notice 725 must fail because the result would be a breach of the principle of effectiveness: it would be impossible for a trader in the Appellant’s position to comply with the condition that the customer’s VAT registration number be shown on his invoice, since plainly he could not obtain a non-existent number. Moreover, article 28c was directly enforceable in the United Kingdom since there was a clear analogy with article 13 which, in Becker v Finanzamt Münster-Innenstadt (Case 8/81) [1983] ECR 53, had been held to have direct effect. Article 13 requires Member States to exempt certain transactions “under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse”—that is, on precisely the same conditions as those permitted by article 28c. At paragraphs 33 and 34 of its judgment in Becker the Court of Justice said: 
“33. The ‘conditions’ referred to are intended to ensure the correct and straightforward application of the exemptions. A Member State may not rely, as against a taxpayer who is able to show that his tax position actually falls within one of the categories of exemption laid down in the directive, upon its failure to adopt the very provisions which are intended to facilitate the application of that exemption. 
34.	Moreover, the ‘conditions’ refer to measures intended to prevent any possible evasion, avoidance or abuse. A Member State which has failed to take the precautions necessary for that purpose may not plead its own omission in order to refuse to grant to a taxpayer an exemption which he may legitimately claim under the directive, particularly since in the absence of specific provisions on the matter there is nothing to prevent the State from having recourse to any relevant provisions of its general tax legislation which are designed to combat evasion.”
13.	The position was the same in this case: article 28c conferred on traders the right to exempt, or zero-rate, transactions such as those in issue here. If the United Kingdom wished to impose conditions restricting that right it could do so, within the limits permitted by the Directive, but it could not rely, as against a trader such as the Appellant, on its failure to do so. If Notice 725 did not cover the Appellant’s position, the Respondents could not rely on inference or analogy to fill the gap.
14.	 For the Respondents, Mr Thomas founded his argument on the proposition that the Appellant’s case was wholly contrary to the clear purpose of the Directive, namely that, unless otherwise specifically provided, all transactions should be taxed in a manner which placed the burden of the tax, ultimately, on the final consumer. Far from ensuring that the goods in this case were taxed—that is, by the accounting for acquisition tax in Belgium—the Appellant’s interpretation would have the effect of enabling traders easily to avoid tax by simply neglecting to register, or by selling goods to customers who had neglected to register. The purpose of this part of the Directive could be derived from the preamble to Council Directive 91/680/EEC, by which article 28c was inserted into the Sixth Directive. That preamble includes the words:
“Whereas … intra-Community transactions carried out by taxable persons other than exempt taxable persons should be taxed in the Member States of destination, at those Member States’ rates and under their conditions.” 
15.	Article 28a(1) and (3) contained the provisions by which that objective was brought into effect:
“(1)	The following shall also be subject to value added tax:
(a)	intra-Community acquisitions of goods for consideration within the territory of the country by a taxable person acting as such or by a non-taxable legal person where the vendor is a taxable person acting as such …
(3)	‘Intra-Community acquisition of goods’ shall mean acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported.”
16.	Although it was true that none of articles 28a and 28c and section 30(8) used a description such as “taxable and registered person” it was clear that this was what was intended. Article 22 of the Sixth Directive imposed various regulatory requirements, including the obligation to register, on taxable persons, and much of the Sixth Directive was predicated upon compliance by traders with those requirements—article 28b, which deals with the place within the Community where goods and services are deemed to be supplied, depends for its effect upon the system of registration of those making acquisitions; and article 28c itself, at E(3), imposes requirements on Member States by reference to traders’ registrations. The reasoning was easily identified: the exemption of the transaction in the Member State of the supplier was balanced by the taxation of the same transaction in the Member State of the recipient. The Appellant’s interpretation of the legislation would upset that balance. 
17.	It has already been determined by this tribunal that, in the context of article 28c, “taxable person” must be taken to mean a person registered for VAT. In Red Giant Promotions Limited v Customs and Excise Commissions (1998, Decision 15677) the tribunal was required to consider the predecessor of Notice 725, then Notice 703, which (so far as material here) was in similar terms. It was the Appellant which wished to establish that its customer was, or was to be treated as, a taxable person. The Tribunal did not have sufficient evidence on which it might make a finding of fact about the status of the customer (Tronika), in Italy in that case, but assumed for the purpose of argument that it was liable to register. It dealt with the Appellant’s argument that liability to register was enough for article 28c to apply in this way: 
“… a more formidable objection to [the Appellant’s] submission is that it was common ground that at no material time did Tronika have a Community VAT identification number. The Sixth Directive clearly envisages that a taxable person acquiring goods under an intra-Community acquisition will have had a VAT identification number issued to him: see Article 28b.A.2, which deals with the place of intra-Community acquisitions of goods. In my judgment the requirements of paragraph 8.4 of Notice 703, as explained in paragraphs 8.5 and 8.6, and in particular the requirement that the supplier’s invoice must show his customer’s Community VAT number, or a number which he reasonably believes to be that number, are conditions which were validly laid down for the purpose specified in Article 28c.A of the Sixth Directive. None of the Appellant’s invoices to Tronika showed any number for Tronika which remotely resembled a Community VAT number. I am not satisfied, so far as it is relevant, that at the respective times of the disputed supplies Tronika was a taxable person within the meaning of the Sixth Directive …”
18.	Even if that conclusion were wrong, Mr Thomas continued, the requirements imposed by paragraph 3.1 of Notice 725 were plainly authorised by the opening words of article 28c, which permitted Member States to impose conditions for the “correct and straightforward” application of the exemption. If one accepted that the purpose of the article was to ensure that in trade between taxable persons in different Member States tax would be imposed in the state of acquisition, it was impossible to say that a requirement that the recipient’s registration particulars be set out on the invoice was contrary to the purpose of the Directive; ensuring that the recipient was indeed registered was the best possible way of ensuring that the relevant conditions would be complied with. It could not be said that obtaining a customer’s VAT registration number imposed so great a burden on a trader that there was a breach of the principle of effectiveness. The impossibility of doing so when he did not have such a number was no more than the means of ensuring that the underlying condition on which exemption in the supplier’s Member State could be secured, namely that tax would be accounted for in the Member State of the acquirer, was satisfied. 
19.	Mr Brown’s argument that paragraph 3 of Notice 725 referred only to persons who were both taxable and registered in the Member State of acquisition, Mr Thomas said, did not stand up to scrutiny. Only the part of the paragraph which appeared in the box had statutory force, and Mr Brown could not argue, as he had attempted to do, that the remainder of paragraph 3.1 and paragraph 3.2 should be treated in the same way; they were provided merely for explanatory purposes, and it was quite clear to a dispassionate reader of the Notice that if the conditions set out in the box could not be met, the sale must be standard-rated, whether or not the customer was registered. The Notice did no more than proceed upon the assumption that traders complied with their legal obligations. The reasoning behind it was the same as that of Article 28a, namely that tax would be properly accounted for in the Member State of acquisition.
20.	The Directive must be interpreted purposively and domestic legislation is to be construed, wherever possible, upon the assumption that it was intended to implement the Directive correctly: Marleasing SA v La Commercial Internacional de Alimentacion SA (Case C-106/89) [1990] ECR I-4135; the Notice should be construed, therefore, on the footing that the UK intended to implement the Directive, and had in mind the principle that supplies of goods should not escape taxation: Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252. Mr Brown’s approach was formalistic, and offended those principles. Moreover, exemptions should be construed narrowly: Stichting Uitvoering Financiële Acties v Staatssecretaaris van Financiën (Case B48/87) [1989] ECR I-1737. Thus the Appellant could claim the benefit of article 28c and section 30 only where it clearly satisfied the conditions on which that benefit was contingent.
21.	In my judgment Mr Thomas’s arguments are compelling. I agree with him that the Council cannot possibly have intended that article 28c should be capable of use as a means of evading the imposition of tax, as Mr Brown’s arguments necessarily imply. Indeed he accepted, in the course of argument, that even if the Appellant had known that Bronteum intended to sell the goods by retail in Belgium without accounting for output tax, and was complicit in that intention, it would still be entitled to zero-rate its supply. That, plainly, cannot have been the Council’s intention. A purposive interpretation of article 28c makes it clear that the conditions imposed by Notice 725 are within the contemplation of the opening words of the article, and I see nothing offensive in their application to cases where the recipient has no VAT registration as well as to those cases where he does (though it might be prudent to amend the Notice to make that clear beyond any possible doubt). I do not accept Mr Brown’s argument that the absence of express mention of those traders who have not registered leads to the conclusion that the conditions do not apply in the case of a supply to such a person; nor do I accept his argument that the principle of effectiveness is offended when a trader cannot comply with a condition designed to ensure compliance with the purpose of the Directive in question. In other words, the principle of effectiveness cannot be prayed in aid as a means of avoiding that purpose.
22.	It follows that the conditions on which the Appellant might zero-rate its supplies to Bronteum were not met, and it is obliged to account for output tax at the rate applicable in the place of supply, in this case the United Kingdom, on those supplies. I understand that there was no dispute about the amount of the tax. 
23.	The appeal is dismissed. I make no direction in respect of costs. 

COLIN BISHOPP 
CHAIRMAN
Release Date: 22 November 2006
MAN/06/0173