18720

VALUE ADDED TAX – zero-rating – supplies of goods to a person in another member state - whether the supply involved the removal of the goods from the United Kingdom -  no – whether national legislation compatible with Article 28cA(a) of the Sixth Directive – decision on that issue deferred– appeal stood over pending the judgment of the Court of Justice in Teleos  - EC Sixth Council Directive (77/388/EEC) Art 28cA(a);  VATA 1994 s 30(8)(a); VAT Regulations 1995 SI 1995 No. 2518 Reg 134; Notice 703 para 8.4

LONDON TRIBUNAL CENTRE

STARMILL UK LIMITED
Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

			Tribunal:	DR A N BRICE (Chairman)
MR A J RING FTII ATT
MR R L JENNINGS FCA FTII

Sitting in public in London on 28 June 2004

Carol Fraser, with Aryeh Kramer of Messrs Joseph Ackerman Solicitors, for the Appellant 

Rebecca Haynes of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

PRELIMINARY DECISION
The appeal

1.	Starmill (UK) Limited (the Appellant) appeals against two assessments, namely:

(1)	an assessment dated 24 October 2002 for tax of £314,431 with interest of £6,388.55 making a total amount assessed of £320,819.55; this assessment was in respect of the monthly accounting periods ending on 31 April 2002 and 31 May 2002; and

(2)	an assessment dated 13 November 2002 for tax of £135,829 and interest of £4,523.29 making a total amount assessed of £140,352.29. This assessment was in respect of the monthly accounting period ending on 31 March 2002.

2.	The assessments were raised because Customs and Excise were of the view that certain supplies of goods made by the Appellant to a customer in Spain should be standard-rated and not zero-rated because Customs and Excise were not satisfied that the supply involved the removal of the goods from the United Kingdom. The Appellant appealed because it was of the view that the supplies it had made were zero-rated because they were taxable supplies to value added tax registered customers in another member state (Spain).

The legislation  

3.	Article 28cA of the EC Sixth Council Directive (77/388/EEC) provides:

“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 [of a member state] 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.”

4.	Section 30 of the Value Added Tax Act 1994 (the 1994 Act) contains the provisions about zero-rating. The relevant parts of section 30(8) provide:

“(8)	Regulations may provide for the zero-rating of supplies of goods … in cases where-
(a)	the Commissioners are satisfied … 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 in that member State…; and
(b)	such other conditions, if any, as may be specified in the regulations or the Commissioners may impose, are fulfilled.” 

5.	The regulations referred to in section 30(8) are found in regulation 134 of the Value Added Tax Regulations 1995 SI 1995 No. 2518. Regulation 134 provides:

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

6.	The conditions imposed by the Commissioners under section 30(8) and regulation 134 are contained in paragraph 8.4 of Notice 703 which provides:

“8.4	If you supply goods to a customer who is registered for VAT in another EC member state, you may zero-rate your supply in the UK provided-

•	you obtain and show on your VAT sales invoice your customer’s EC VAT registration number, including the two-letter country code prefix … ;

•	the goods are sent or transported out of the UK to a destination in another EC member state; and

•	within three months of the date of supply, you obtain and keep valid commercial documentary evidence that the goods have been removed from the UK…

Unless you meet all these conditions you cannot zero-rate your supply and you must account for VAT on the goods in the UK … unless the goods are zero-rated in their own right. 

If your EC customer collects or arranges for the collection of the goods and their removal from the UK you should-

•	confirm how the goods are to be removed from the UK and confirm what proof of removal will be sent to you; and

•	consider taking a deposit from your customer equal to the amount of VAT you will have to account for if you do not get satisfactory evidence of removal of the goods from the UK. (The deposit can be refunded when you have received evidence which proves that the goods have been removed from the UK.)”

The issues 

7.	The Appellant’s main argument was that the goods had been removed from the United Kingdom and it had produced documentary evidence of the removal. Its alternative argument was that the national legislation was not compatible with Article 28cA(a) of the Sixth Directive which did not require proof of the actual removal of the goods out of the member state of dispatch. Customs and Excise argued that the documentary evidence produced by the Appellant did not satisfy them that the goods had been removed from the United Kingdom and so the conditions mentioned in section 30(8) and regulation 134 had not been complied with. They also argued that the tribunal should not determine the Appellant’s alternative argument until after the Court of Justice had given judgment in the case of R (on the application of Teleos Plc) v Customs and Excise Commissioners [2004] EWHC 1035.

8.	Thus the issues for determination in the appeal were:

(1)	whether the goods had been removed from the United Kingdom; or, in the alternative,

(2)	whether the national legislation was compatible with Article 28cA(a) of the Sixth Directive.	

The applications

9.	Before the hearing of the appeal commenced we heard two applications.

(1) –  Application that the appeal be struck out 

10.	The Appellant applied for the appeal to be struck out because of the failure of the Respondents to comply with a direction of the Tribunal about the time for service of their skeleton argument. 

11.	The facts relating to this application are that on 19 September 2003 Customs and Excise applied for the whole appeal to be stood over pending the outcome of Teleos (whose appeal had not then been heard by the High Court). This application was considered by the Tribunal at a directions hearing on 6 November 2003 when the Tribunal gave directions for an early hearing of this appeal. Those directions included a direction that the Respondents should serve their skeleton argument not less than three days before the hearing. The Respondent’s skeleton argument was served at the tribunal centre on Friday 25 June 2004 and the hearing commenced on Monday 28 June 2004. The skeleton argument indicated that Customs and Excise were of the view that the Appellant’s alternative argument (that the domestic legislation was not compatible with Article 28c(A)(a) of the Sixth Directive) could not be considered until after the Court of Justice had given judgment in Teleos. 

12.	Mr Kramer for the Appellant argued that the delay in serving the skeleton argument had to be considered within the context of the delay in the appeal generally. He relied upon the judgment of Lightman J in Commissioners of Customs and Excise v A & D Goddard (a firm) [2001] STC 725 at paragraph 16(c) and (d). He also argued that the Respondents’ skeleton argument was an attempt to re-instate matters already decided at the hearing on 6 November 2003. Finally, he argued that the delay in receiving the skeleton argument had severely prejudiced the Appellant who had been left with inadequate time to prepare for the hearing.  

13.	For Customs and Excise Ms Haynes argued that she had not received notice of the Appellant’s application for the appeal to be struck out and did not have instructions. She regretted that the skeleton argument had been served late but she was not aware of the direction given on 6 November 2003. The matters covered in the skeleton argument were not new and mainly re-stated the statement of case and dealt with matters raised in the Appellant’s skeleton. Since the directions hearing on 6 November 2003 the Administrative Court had, on 5 May 2004, given its decision in Teleos and had concluded that the correct interpretation of Article 28cA(a) should be referred to the Court of Justice; the parties to the appeal of Teleos were currently drafting the text of the Question for the Court of Justice. As soon as Customs and Excise had become aware that the facts in Teleos were very similar to the facts in this appeal the Appellant had been kept informed. She distinguished Goddard which concerned an “unless” order.  

14.	In considering the arguments of the parties we bore in mind that the only provision in the Value Added Tax Tribunals Rules 1986 SI 1986 No. 590 which would permit us to strike out an appeal appears in Rule 18 which provides that a tribunal shall strike out an appeal where no appeal against the disputed decision lies to the tribunal. Rule 18 is clearly not applicable in this appeal and so we treated the Appellant’s application as an application under Rule 19(4) to allow the appeal because Customs and Excise had failed to comply with the direction about the time of service of their skeleton argument. We regarded the following factors as relevant. First, we did not consider that it would be proportionate to allow the appeal because, if there had been delay, it had been very short.  Next, the Appellant was aware of the decision in Teleos as a copy of it was included in their bundle of documents. Thirdly, we did not consider that the Appellant would be prejudiced by the late receipt of the skeleton as it repeated matters in the statement of case. (Later this view was confirmed as, within the context of the second application, the Appellant wanted to proceed with the hearing and was clearly ready to do so.) Finally, we were of the view that the interests of justice would best be served if the appeal were heard and decided on its merits. We distinguished the decision in Goddard which concerned an “unless” order. 

15.	For those reasons we dismissed the Appellant’s application. 

(2)	Application for the hearing of the appeal to be adjourned 

16.	Customs and Excise then applied for the hearing of the appeal to be adjourned pending the decision of the Court of Justice in Teleos. 

17.	For Customs and Excise Ms Haynes argued that the facts in Teleos were very similar to the facts in the present appeal and the alternative issue in this appeal was the same as the issue in Teleos which had been referred to the Court of Justice. There was no sense in proceeding with the second issue in this appeal until the judgment of the Court of Justice was known. And there was no point in proceeding with the first issue either as it might not determine the appeal and, further, the question whether by repaying input tax Customs and Excise must have “been satisfied” under section 30(8)(a) and regulation 134 had been considered by Moses J in Teleos although no decision on that matter had yet been given.    

18.	For the Appellant Ms Fraser argued that the tribunal should proceed to hear the evidence and argument on the first issue and give a preliminary decision on that issue deferring the hearing of the second issue until the Court of Justice had given its judgment in Teleos.  The Appellant had a right to have its appeal heard  The first issue concerned the national legislation only and did not depend upon the judgment of the Court of Justice in Teleos.  A decision for the Appellant on the first issue would determine the appeal. 

19. 	In considering these arguments we preferred those of Ms Fraser. We also bore in mind that although Customs and Excise was a party to the appeal of Teleos, the Appellant in this appeal was not. This Appellant had the right to have its appeal heard within a reasonable time. We therefore decided to hear the evidence and argument about the first issue in the appeal with the aim of reaching and releasing a decision on that issue and, if it did not determine the appeal, then standing the second issue over until after the publication of the judgment of the Court of Justice in Teleos. 

20.	For those reasons we dismissed the application of Customs and Excise and proceeded to hear the first issue in the appeal which was whether the goods had been removed from the United Kingdom.

The evidence

21.	Each party produced a bundle of documents. Oral evidence was given on behalf of the Appellant by Mr Sarkis Chirkinian, a shareholder and employee of the Appellant. Oral evidence was given on behalf of Customs and Excise by Mr Roderick Guy Stone, an Officer of HM Customs and Excise. Since 2001 Mr Stone has been responsible for the trade sector in the southern region affected by missing trader intra-Community fraud. He was responsible for enquiries into the value added tax affairs of the Spanish company to whom the Appellant and other traders sold mobile telephones and was responsible for the decision to assess the Appellant. Mr Stone emphasised to us that there was no allegation by Customs and Excise of fraud by the Appellant.   

The facts

22.	From the evidence before us we find the following facts. 

The Appellant

23.	The Appellant is a company which is registered for value added tax and which trades from an address in Ealing. It purchases and sells mobile telephones.
The sales of the telephones 

24.	Between March and May 2002 the Appellant sold Nokia 8310 mobile telephones on six occasions. Details are:Invoice date			Number of telephones sold		Price 	7	March 	2002			1,500			£315,000	11 	March 	2002			3,000			£597,000	8	April 	2002			3,490			£691,020	22	May 	2002			1,235			£242,677.50	22 	May	2002			3,000			£589,500	22	May	2002			3,000			£588,00025.	The telephones were sold to a Spanish company trading in Spain which company was sometimes known as Total Telecom Espana SA and sometimes known as Ercosys Mobil SA. The goods were sold on the basis that legal delivery of the goods took place when they were released and placed at the disposal of the purchaser at a named place. The Spanish company would instruct the Appellant to deliver the goods to a named warehouse. The goods were then held at the warehouse until they were removed by carriers on behalf of the Spanish company. After each removal the warehouse sent the Appellant an international consignment note as evidence of the removal of the telephones from the United Kingdom.
The international consignment notes. 

26.	The international consignment notes were issued under the Carriage of Goods by Road Act 1965 (the 1965 Act) which was enacted to give effect to the Convention on the Contract for the International Carriage of Goods by Road (the CMR Convention). The Convention was signed at Geneva on 19 May 1956 and is set out as a Schedule to the 1965 Act. The United Kingdom, France and Spain were among the contracting parties to the CMR Convention.  

27.	Article 1 of the Convention provides that the Convention applies to every contract for the carriage of goods by road in vehicles for reward when the place of taking over of the goods and the place designated for delivery are situated in two different countries of which at least one is a contracting party to the Convention. Article 4 provides that the contract of carriage shall be confirmed by the making out of a consignment note. Article 5 provides that the consignment note shall be made out in three original copies signed by the sender and by the carrier. The first copy shall  be handed to the sender; the second shall accompany the goods and the third shall be retained by the carrier. There is no prescribed form for a consignment note but Article 6 provides that it shall contain certain information including: the date and place at which it is made out; the name and address of the sender; the name and address of the carrier; the place and date of the taking over of the goods; the place designated for delivery; and the name and address of the consignee. Normally Customs and Excise will accept a CMR international consignment note as evidence of the removal of goods from the United Kingdom.

The Appellant’s documentation

28.	The documentation produced by the Appellant indicated that each consignment of mobile telephones followed a similar pattern with a number of events all happening on the same day. The 7 March 2002 consignment started with a purchase order received from the Spanish company for 1,500 telephones to be collected from a warehouse called Paul’s Freight Services in Hayes. The Appellant sent a proforma invoice to the Spanish company confirming the purchase order. This was accompanied, or followed very shortly, by an official invoice with value added tax at the zero-rate which also stated that the goods would be released on payment. The Appellant then sent a message to Paul’s Freight Services asking that 1,500 telephones should be allocated to the Spanish company; the message asked Paul’s Freight Services to notify the Spanish company when the goods had been received but that the stock was not to be released until further instructions were received from the Appellant. Later the Appellant informed Paul’s Freight Services that the stock was released but was not to be removed.  The Appellant then received payment from the Spanish company and sent Paul’s Freight Services a full and final release which stated title to the stock had passed to the Spanish company and that it would be their responsibility to arrange for the future movement of the stock. Because the Spanish company was then a new customer of the Appellant, the Appellant asked it to sign a form stating that the goods would be exported from the United Kingdom but would remain within the European Union. Such a statement was signed by the Spanish company on 12 March relating to the first and second consignments but was also marked “Not collected yet”. The last document produced by the Appellant was an international consignment note.

29.	The international consignment note relating to the Appellant’s first consignment showed the date and place at which it was made out as 10 March 2002  and London; the name and address of the sender as the Appellant; the name and address of the carrier as Allan Morris Limited of Flintshire; the registration number of the vehicle as Y721 LCW; the place and date of the taking over of the goods as Paul’s Freight; the place designated for delivery as Calais, France and the name and address of the consignee as the Spanish company. The international consignment note for the second consignment was very similar. 

30.	The other four international consignment notes followed a similar pattern save that the place of taking over the goods was not Paul’s Freight Services but Euro Cellars Limited of Kent and the carrier was not shown as Allan Morris Limited of Flintshire but as Wilkinson Transport or Wilkinson Transporters (with no address). Also, the vehicle registration numbers differed.   

The Appellant’s returns 

31.	The Appellant zero-rated the supplies of the goods under section 30(8) and regulation 134 and submitted its monthly value added tax returns to Customs and Excise. The only supplies were those made to the Spanish company. On its returns for the three months of March, April and May 2002 the Appellant claimed input tax in respect of its purchase of the telephones. The Appellant claimed that all the documentation mentioned above for each consignment was also sent to the Uxbridge Office of Customs and Excise at the times that the returns were sent.  

32.	When they received the Appellant’s returns Customs and Excise paid the input tax claimed to the Appellant.      
The enquiries of Customs and Excise

33.	In about July 2002 Mr Stone was investigating a large repayment claim made by another trader in mobile telephones who also sold telephones to the same Spanish company. That investigation revealed that the international consignment note in respect of that consignment was false in a number of respects. Officers of Customs and Excise then obtained copies of the international consignment notes for supplies to the Spanish company by the Appellant and others. 

34.	Mr Stone noted that the international consignment notes relating to the Appellant’s consignments which showed Wilkinson Transport or Transporters as carrier did not contain the address of the carrier in breach of the CMR Convention. Further these international consignment notes showed the place designated for delivery as Longueville SARL, Parc d’Enterprise, Courtimms, Calais, France. Enquiries established that there was no such company in existence and no company of that or any similar name at that address. The actual location of Parc d’Enterprise did not exist. 

35.	The solicitors for the Spanish company provided Customs and Excise with details about Wilkinson Transport including an address in King’s Lynn, a telephone number, a facsimile transmission number, a mobile telephone number and a value added tax registration number. Customs and Excise did not have any record of Wilkinson Transport or Transporters being registered for value added tax. The value added tax registration number provided belonged to a Wilkinson Hardware Stores of Worksop. The telephone number provided belonged to another company in King’s Lynn. Mr Stone therefore concluded that there was no such carrier as Wilkinson Transport  or Wilkinson Transporters.   

36.	Mr Stone also made enquiries of Allan Morris Transport Limited and they told him that they did not undertake international road haulage. Allan Morris Transport Limited is registered for value added tax and all the supplies it made in 2002 were standard-rated supplies. 

37.	Mr Stone also made enquiries of the Driver and Vehicle Licensing Agency (DVLA) by reference to the vehicles mentioned in the international consignment notes. With the exception of a vehicle belonging to Allan Morris Transport Limited the vehicles were either not known to the DVLA or, where registration details belonged to genuine vehicles, those vehicles were not capable of transporting the declared quantity of mobile telephones. 

38.	The international consignment notes were the only documents produced by the Appellant to prove that the goods had been removed from the United Kingdom. (The form signed by the Spanish company stated that the goods “would be” exported and were “not yet collected” and so could not be proof of export.) As the carriers mentioned on the international consignment notes did not exist; as the address in France did not exist; as the registration numbers of the vehicles were false; and as the vehicles had not been used for the carriage of the consignments, Mr Stone concluded that he did not have sufficient evidence that the telephones sold by the Appellant had been removed from the United Kingdom.    
39.	Mr Stone also discovered that, on the same day as the Appellant had sold the telephones to the Spanish company, the Spanish company had sold the telephones to other United Kingdom companies who had in turn sold them on to other United Kingdom companies all on the same day. This also made it improbable that the telephones had been removed from the United Kingdom.  

40.	Mr Stone therefore formed the view that he was not satisfied that the telephones sold by the Appellant had been removed from the United Kingdom and so the supplies of the telephones should have been standard-rated and not zero-rated. Accordingly, he issued the assessments the subject of this appeal in order to recover the output tax which should have been paid with the Appellant’s returns. The arguments 

41.	For the Appellant Ms Fraser argued that regulation 134 provided that, if the conditions of the regulation were complied with, the supply “shall” be zero-rated. Customs and Excise had been provided with documentation evidencing the removal of the goods from the United Kingdom at the time of the returns and the fact that the input tax claimed on those returns had been paid to the Appellant indicated that at that time Customs and Excise were satisfied that the conditions for zero-rating had been met. She relied upon Teleos at paragraph 147 for the principle that the international consignment notes were not invalid. 

42.	For Customs and Excise Ms Haynes argued that Customs and Excise could not have been satisfied the goods had been removed from the United Kingdom. The international consignment notes had very little evidential value because they contained false particulars, especially about the carrier and the designated place of delivery, and the fact that the Spanish company sold the telephones on the same day to other United Kingdom companies made it improbable that the telephones had been removed from the United Kingdom. The mere fact that the input tax claimed in the returns had been paid did not constitute an expression by Customs and Excise that they were satisfied that the goods had been removed from the United Kingdom; the full facts had not come to light until later in  2002. She relied upon paragraphs 126 and 127 of the judgment in Teleos for the principle that Customs and Excise were entitled to conclude that the telephones had not been removed from the United Kingdom. 

Reasons for decision

43.	In considering the arguments of the parties we start with the legislation. Section 30(8) provides that supplies of goods are zero-rated where Customs and Excise are satisfied that the supply involved the removal of the goods from the United Kingdom. Regulation 134 repeats the requirement that Customs and Excise must be satisfied that the supply involved the removal of the goods from the United Kingdom and also removal to another member state. 

44.	On the evidence before us we are not satisfied that the goods were removed from the United Kingdom and we are of the view that, when Customs and Excise concluded that they were not so satisfied, that was a reasonable conclusion for them to reach. The provisions of section 30(8) and regulation 134 only apply if Customs and Excise are satisfied that the goods are removed from the United Kingdom. In our view the fact that Customs and Excise were supplied with documentation at the time of the returns, and paid the input tax claimed, does not mean that they were then satisfied that the goods had been removed from the United Kingdom. The acceptance of a return, and a repayment of input tax claimed in the return, must always be subject to the right of Customs and Excise to make subsequent enquiries in order to verify any matter in the return and to raise an assessment if it is within the statutory time limits. At paragraph 147 of his judgment in Teleos Moses J said that the international consignment notes were not invalid but the evidence contained in them had proved, on subsequent enquiry, to be false. We adopt that principle in this appeal. 

45.	We also adopt the words of Moses J at paragraphs 126 and 127, namely:

“I am satisfied, on the evidence, that not only were the Commissioners entitled to conclude that the mobile phones had not been removed from the United Kingdom. Apart from the evidence of the CMRs  [international consignment notes] … there is no evidence that they were removed. It is clear to me that the Commissioners were entitled to conclude that the CMRs [international consignment notes] were false in two material particulars. The destination shown in France was false. The transport identified by the registered number did not exist or was not suitable for carrying mobile phones. Finally, the transporter identified either did not transport the mobile phones or was not engaged in the trade of transport.”   

46.	Our conclusion on the first issue in the appeal is that we are not satisfied, and it  was reasonable of Customs and Excise not to be satisfied, that the goods were removed from the United Kingdom; and so the supplies should be standard-rated and not zero-rated. 

47.	That conclusion does not determine the appeal which will now be stood over until after the publication of the judgment of the Court of Justice in Teleos. 

Costs

48.	The Appellant applied for its costs in any event on the basis that Customs and Excise had caused delay in bringing the appeal on for hearing and had failed to comply with directions about the service of witness statement and skeleton arguments. For Customs and Excise Ms Haynes asked if she could take instructions on these matters.  

49.	If the Appellant wishes to pursue its application for costs at this stage then it should make a separate application to the Tribunal supported by a skeleton argument setting out the facts and matters upon which it seeks to rely. A separate hearing will then be arranged for that application.  

WE DIRECT:

(1) 	that our decision on the first issue in the appeal is that the goods were not removed from the United Kingdom; 

(2)	that the hearing of the second issue in the appeal be stood over until after the publication of the judgment of the Court of Justice in Teleos; and 

(3)	that, if the Appellant wishes to pursue its application for costs at this stage, then it should make a separate application to the Tribunal supported by a skeleton argument setting out the facts and matters upon which it seeks to rely and a separate hearing will then be arranged for that application.  

DR A N BRICE

CHAIRMAN

RELEASE DATE:05/08/2004

LON/2002/1031 LON/2002/1032LON/2002/103303.08.04