20895
VALUE ADDED TAX  zero-rating — intra-Community trade — Sixth Directive art 28c(A)(a) — VAT Regs 1995, reg 134 — Public Notice 725 para 4.3 — CMRs used as evidence of removal from UK probably falsified  — whether Appellant took sufficient care — no — appeal against assessment for output tax  dismissed

MANCHESTER TRIBUNAL CENTRE

	N2J LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR			HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Colin Bishopp (Chairman)
			Alban Holden

Sitting in public in Manchester on 1 and 2 September 2008

Andrew Young, counsel, instructed by Dass Solicitors, for the Appellant
Jonathan Cannan, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
1.	The question for our determination in this appeal is whether the Appellant, N2J Limited (“N2J”), was entitled to zero-rate supplies of mobile phones it made, or claims to have made, to a customer based in another member State of the European Union, and which were sent to an address in the Netherlands. N2J contends that the supplies were made and the phones transported to their intended destination, and that all the conditions which must be satisfied if such supplies are to be zero-rated have been satisfied. The Commissioners contend that the phones could not have reached the stated destination, claimed to be a warehouse, because it is in fact a domestic property without storage facilities, that the transport documents (international consignment notes generally known by their French acronym CMRs) on which N2J bases its claim that the goods arrived at their destination had been falsified, and that the person purportedly acting as the recipient of the goods has been convicted in the Netherlands of offences of participating in  VAT frauds of a character from which one can properly infer that he did not receive the goods and falsified the CMRs.
2.	Formally, the appeal is against the Commissioners’ decision, communicated by letter of 21 March 2006, to amend N2J’s VAT return for the period 01/06. The effect of the amendment was to reduce the amount due to N2J, a repayment trader, by £1,163,718.27. As the claim made by the return had already been met, N2J is required, if this appeal fails, to repay that sum. In short, the Commissioners argue that as the conditions for zero-rating the supplies were not met, N2J must account for output tax on the consideration.
3.	N2J was represented before us by Andrew Young and the Commissioners by Jonathan Cannan, both of counsel. We heard the evidence of Neil Pursell, N2J’s finance director, and of Liliana Abreu, who worked in its sales department. We had no oral evidence from the Commissioners, but had the statement of Stephen Nealy, an officer of HMRC, in which he describes the enquiries made by the Dutch fiscal authorities. He also exhibited various documents which had been provided by the Dutch authorities.
4.	The history of the case is unusual. The Commissioners based their decision, at first, on the fact that although N2J’s invoices named its customer as Pro-Choice Comércio Internacional (“Pro-Choice”), a Portuguese company based in Madeira, the CMRs recorded that the customer was Imex Enterpriser NV (“Imex”), a Belgian company. An explanation was offered by N2J which we set out below. We learnt that the explanation did not entirely satisfy the Commissioners’ officers, but they recognised that the reasons they had first given for arguing that the sales could not properly be zero-rated could not succeed and, only days before the hearing of the appeal was to begin, in February 2007, the Commissioners applied for permission to serve a new statement of case, setting out different grounds. The hearing was vacated, and a new statement of case, relying on the evidence obtained from the Netherlands and the falsity of the CMRs, was served. 
5.	N2J was incorporated in 2001 as a property development company but it was not successful in that business and, in 2004, it began dealing in telecommunications equipment. The change of trade was duly notified to the Commissioners. Mr Pursell told us that he and N2J’s other directors were aware of the risks of dealing in mobile phones, and of the need to take precautions, particularly by making “due diligence” enquiries into potential suppliers and customers. Those enquiries were Mr Pursell’s responsibility. They included, in particular, checks on the suppliers’ and customers’ VAT registrations. Although such checks could be undertaken by means of the European Commission’s web site, he knew it was preferable to make them of the Commissioners’ office at Redhill. Unfortunately, he said, the response times from the Redhill office were very poor.
6.	N2J’s first sale to Imex took place in September 2005. N2J checked Imex’s VAT registration with the Redhill office, and was told that the number and other details given did not match the Commissioners’ records. Despite that adverse information, N2J relied on a search it made of the Commission’s web site, which indicated that the registration was valid and subsisting. The goods were transported, or purportedly transported, from the premises of the freight forwarders by whom they were held, K & L Logistics of Stoke-on-Trent, to Imex’s chosen destination, Magic Transport International (“Magic”) in Amstelveen, the Netherlands. So far as N2J knew, Mr Pursell said, the goods were indeed transported to Magic, payment for them was made and no complaint was received of shortage or defect.
7.	N2J agreed to make further supplies to Imex in the latter part of October 2005. Again, its check of the Commissioners’ Redhill office yielded a negative result. On this occasion N2J decided not to proceed even though, on the day following its informing Imex of its decision, a further check of the European Commission’s web site revealed that Imex’s VAT registration was valid. N2J had by then committed itself to the purchase of the goods but Miss Abreu managed to find another purchaser, Pro-Choice. 
8.	On 26 and 27 October 2005 N2J bought seven consignments of phones, of various brands and model. Five consignments were bought from Hillgrove Trading Limited, all on 26 October, and the remaining two from In2Digital.com Limited, both on 27 October. On the same dates N2J issued so-called “pro-forma invoices” (that is, invoices which N2J did not regard as VAT invoices even though they have all the characteristics of VAT invoices) to Imex. Quite why N2J did so was not clear. In each case, exactly the same phones were sold as had been bought, and for no evident reason both the suppliers and N2J issued multiple invoices—N2J issued an invoice which matched its supplier’s invoice for each parcel of phones. When Mr Pursell told her that the sales to Imex could not proceed, Miss Abreu telephoned Imex to cancel them, and then looked for another purchaser; she had, she said, several outstanding requests from other customers, including Pro-Choice, with which N2J had dealt before. Pro-Choice agreed to buy all of the phones which had been destined for Imex, and Miss Abreu arranged for fresh pro-forma invoices to be issued (again, we do not know to what purpose) followed by “proper” invoices.
9.	It is conspicuous that Pro-Choice was not only willing to buy all of the phones which N2J had intended to sell to Imex, but that it was willing to pay exactly the same price, in every single case, and to take delivery at the same place, that is Magic’s premises, or supposed premises, in the Netherlands. We mention at this point that while it is understandable that a Belgian company might require delivery in the Netherlands, it is difficult to understand why that would be an acceptable destination for a company based in Madeira. We were told that K & L Logistics had been informed of the change in the identity of the purchaser but had failed to issue the CMRs in the new name (or to correct the CMRs it had already issued) and it was for this reason that the CMRs showed Imex rather than Pro-Choice as the consignee.
10.	There was one matter on which there was an—in our view significant—difference of recollection between Mr Pursell and Miss Abreu. He recalled that it had been agreed with Pro-Choice that it would pay for the phones when it had the necessary funds, and that in the meantime they would remain in storage at Magic’s premises. In the event, Pro-Choice made a large number of payments, eventually discharging the whole debt in February 2006. Miss Abreu, who by her own account had negotiated the sales, had no recollection that N2J had agreed, contrary to the indication on its invoices that immediate payment was required, to accept instalments, although she later found herself having to chase Pro-Choice for payment. Neither she nor Mr Pursell could tell us who was to pay Magic’s storage charges, what arrangements had been made for insurance of the goods, or what was to happen if Pro-Choice did not in fact pay. N2J had no direct contact with Magic at any time—all the arrangements were made for it, we were told, by K & L Logistics, selected by N2J as its freight forwarder for no better reason than that the goods were stored at its premises—and there was nothing before us to suggest that N2J had, or had even thought about, satisfying itself that Magic’s premises were suitable for the storage of the phones, worth altogether more than £7 million, for what turned out to be a period of about three months.
11.	The conditions which must be satisfied if supplies of goods from a trader in one member State of the European Union to a taxable person in another member State may be zero-rated are to be found in article 28c(A) of the Sixth VAT Directive (77/388/EEC)—the European legislation in force at the time, since replaced by article 131 of Directive 2006/112. So far as material, that article read:
“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 [that 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 …”
12.	That provision is implemented in the United Kingdom’s legislation by section 30(8) of the Value Added Tax Act 1994 and regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518). Mr Young did not suggest that those provisions failed to implement the directive correctly. Regulation 134 authorises the Commissioners to impose the conditions envisaged by article 28c(A). The terms of the conditions imposed by the Commissioners are set out at what is now paragraph 4.3 of Public Notice 725. They were formerly set out, in identical words, in an earlier version of the Notice, as follows:
When can a supply of goods be zero-rated?
The text in this box has the force of law
A supply from the UK to a customer in another EC Member State is liable to the zero rate where:
• 	you obtain and show on your VAT sales invoice your customer’s EC VAT registration number, including the 2-letter country prefix code; and
• 	the goods are sent or transported out of the UK to a destination in another EC Member State; and
• 	you obtain and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out at paragraph 4.4.
13.	The Commissioners’ case is that, while N2J has complied with the first condition, the other two are not satisfied: they do not concede that the goods were, as a matter of fact, transported out of the UK, and they do not accept that the CMRs produced by N2J are “valid commercial evidence” of removal.
14.	N2J’s case is that there was good evidence that the supplies had taken place, that there was no evidence to support the contention that the goods had not left the country, and that N2J had no reason to suspect that the goods were not transported or that the CMRs could not be taken at face value. Mr Young pointed out that, as we accept, N2J had been able to produce comprehensive documentation in relation to each purchase and sale, including N2J’s purchase orders, suppliers’ invoices, inspection reports (supplied by the freight forwarders), Pro-Choice’s purchase orders, N2J’s invoices and transport documents, in addition to the CMRs in most cases, the CMRs themselves and evidence of payment. The contention that the phones had not left the country was based on an inference drawn from the supposed falsification of the CMRs, but while the record of conviction of the proprietor of Magic indicated that he had falsified some CMRs and had been involved in tax fraud, it did not indicate that every transaction in which he had been involved was in some way fraudulent, and none of the relevant transactions was identifiably referred to in the information provided by the Dutch authorities about their investigations, the prosecution and the conviction.
15.	Mr Young relied on what was said by the Court of Justice in R (Teleos) v Revenue and Customs Commissioners (Case C-409/04) [2008] STC 706 at paragraph 51 of its judgment:
“To oblige taxable persons to provide conclusive proof that the goods have physically left the member State of supply does not ensure the correct and straightforward application of the exemptions. On the contrary, that obligation places them in an uncertain situation as regards the possibility of applying the exemption to their intra-Community supplies or as regards the need to include VAT in the sale price.”
16.	The exemption referred to in that paragraph is that permitted by article 28c(A), and is called zero-rating in the UK. The court went on, at paragraph 68, to add:
“The reply to the third question referred must therefore be that the first subparagraph of Article 28c(A)(a) of the Sixth Directive is to be interpreted as precluding the competent authorities of the member State of supply from requiring a supplier, who acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for VAT on those goods where that evidence is found to be false, without, however, the supplier’s involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion.”
17.	Mr Young argued that the conditions described there were not met: N2J had evidence (the CMRs) which at first sight established its right to zero-rate the supplies; it had acted in good faith; its involvement in the evasion was not established or even suggested; and it had taken proper care, particularly by documenting its transactions thoroughly. The judgment in Teleos made it clear that it was not open to the Commissioners to require N2J to account for output tax on the sales.
18.	Mr Cannan began by referring us to the recent judgment of Warren J in Kalron Foods Ltd v Revenue and Customs Commissioners [2007] STC 1100, in which he repeated the by now well-established principle that it is for the taxpayer to show that an assessment, or a decision of the Commissioners such as this, is wrong. He too relied on paragraph 68 of the judgment in Teleos, arguing that N2J could not show that it had taken “every reasonable measure in [its] power” to ensure that the transactions were not connected with fraud.
19.	In our view Mr Cannan’s argument is right. He pointed out, correctly, that the evidence of Mr Pursell and Miss Abreu was vague and, as we have mentioned, inconsistent. Miss Abreu, in particular, could remember very little not only of the detail of the transactions, but of the other suppliers and customers with whom she dealt, and even of the colleagues, fellow employees of N2J, with whom she worked. It is true that the documentation produced by N2J is in good order, but we do not find that a conclusive point since it is possible to create comprehensive documentation regardless of the true nature of the transaction to which it refers. 
20.	What is in our view most significant is that N2J took almost everything on trust: it relied on third parties (that is, K & L Logistics, who had been engaged by its own suppliers) for assurance that the goods existed, and were what they were claimed to be, undertaking no inspections of its own; it agreed to their being transported to a warehouse of which it knew nothing and with whose proprietor it had had no direct contact; it arranged no insurance of the goods; it accepted payment by instalments with no agreement on the time over which payment would be made; and it had no fall-back arrangement if Pro-Choice should default. When one adds those factors to N2J’s lack of any curiosity when it found that Pro-Choice was willing to buy exactly the same goods as N2J had already agreed to sell to Imex, at exactly the same price, and that it wanted the goods delivered to the same warehouse, in a country remote from its own base, one would have thought that alarm bells would immediately start ringing. Miss Abreu was not merely vague in her recollection. It was clear to us as she gave her evidence that she felt very uncomfortable, and we came to the conclusion that she did indeed have misgivings at the time about what she was being required to do by her employers.
21.	In our view it should have been perfectly plain that the transactions into which it was entering were likely to be dubious, if not more, but N2J carried on, without making any of the obvious enquiries. It is an inescapable conclusion that it did not take “every reasonable measure” to avoid becoming involved in fraudulent transactions, that the “at first sight” validity of the CMRs is displaced, and that the Commissioners were right to deny N2J the benefit of zero-rating the supplies.
22.	The appeal is, therefore, dismissed. Mr Cannan asked for permission to apply for a direction in respect of costs should the Commissioners succeed, and we grant that permission.

COLIN BISHOPP
CHAIRMAN
Release Date: 12 December 2008
MAN/06/0214