ALERIS RECYCLING (SWANSEA) Limitedappellant

[2010] UKFTT 341 (TC)

TC00623

Appeal number: LON 2008/1568

VAT – ASSESSMENT – Appellant obtained valid commercial evidence for exports and removals of goods outside three month period – HMRC issued assessment for VAT plus default interest – Appellant entitled to cancel out that part of the assessment relating to the VAT leaving outstanding the default interest – Was the assessment valid and issued to best judgment? – Yes – Was HMRC entitled to charge interest in these circumstances? – Yes – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

ALERIS RECYCLING (SWANSEA) LimitedAppellant

- and –

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: Michael Tildesley OBE (TRIBUNAL JUDGE) Gareth Jones MBE JP

Sitting in public at 45 Bedford Square, London WC1 on 27 May 2010

Alan Bates, counsel instructed by Deloitte for the Appellant

Richard Smith counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

DECISION

The Appeal

1. The Appellant was appealing against HMRC’s assessment dated 15 August 2007 in the sum of ₤855,330 plus default interest of ₤100,695.53 for VAT periods from 08/04 to 12/06.

The Dispute

2. The Appellant submitted that the Appeal raised a short but important point relating to the making of assessments by HMRC. The assessment concerned the Appellant’s VAT treatment of exports and removals of goods which were eligible for zero-rating provided specific legal requirements were met. A VAT inspection of the Appellant’s records showed that it did not have the necessary commercial evidence to demonstrate that the goods had left the United Kingdom. HMRC gave the Appellant time to gather the requisite evidence. On the follow-up inspection HMRC was satisfied that the commercial evidence obtained was sufficient to zero rate the disputed exports and removals. HMRC, however, assessed the Appellant for unpaid VAT and default interest for the periods when it did not have the requisite evidence. The amount assessed for unpaid VAT was cancelled out by an authorised adjustment to the Appellant’s VAT return which left outstanding default interest in the sum of ₤100,695.53.

3. The Appellant submitted that the assessment was invalid and not made to best judgment. According to the Appellant, there was no power to issue the assessment since it was made after satisfactory evidence of the export or removal had been produced, in which case no VAT remained outstanding to trigger the assessment. If the contention on invalidity did not find favour, the Appellant further submitted that the assessment for default interest was in the circumstances of this Appeal disproportionate and contrary to fiscal neutrality.

4. HMRC disagreed with the Appellant’s analysis. HMRC pointed out that if the Appellant did not have the necessary evidence within three months of the export or removal, it was required to treat the supplies as standard rated for VAT purposes. The fact that the Appellant obtained the necessary evidence after the three month time period did not invalidate the assessment or render the demand for default interest disproportionate. HMRC asserted that the Court of Appeal in C & E Commissioners v Musashi Autoparts Europe Limited [2004] STC 220 had already ruled against the Appellant on the issues in this Appeal. In HMRC’s view, the Appellant had a high hurdle to overcome, the Tribunal was bound by the decision in Musashi Autoparts Europe Limited.

5. The Appellant countered that the European Court of Justice decision in Collee v Finanzamt Limburg an der Lahn C-146/05 [2008] STC 757 which was made subsequent to Musashi had changed the landscape. According to the Appellant, the principles established by Collee supported its analysis of the legal position and that the judgment in Musashi had to be interpreted in the light of Collee. If it was not possible to reconcile Musashi with Collee, the Tribunal should consider a reference to the European Court of Justice. HMRC challenged the significance placed by the Appellant on Collee. HMRC contended that Musashi was distinguishable on the facts from Collee. Further the UK legislation was compatible with the principles enunciated in Collee.

The Facts

6. The parties did not call oral evidence. Their respective cases were based on submissions. The bundle of documents contained witness statements of Wyn Hutchinson for the Appellant and William John Devereaux for HMRC which were admitted in evidence. Mr Hutchinson was employed by the Appellant as a Plant Controller with specific financial responsibilities for the Swansea Plant. Mr Devereaux was the HMRC Officer who carried out the inspection of the Appellant’s VAT affairs and issued the disputed assessment.

7. The Appellant’s principal business was the recycling of valuable aluminium waste materials and the manufacture of aluminium products for sale to the aluminium (wrought and casting) industries within the United Kingdom, mainland Europe and elsewhere. The Appellant’s turnover was about ₤26 million at the end of 2006

8. The Appellant was VAT registered and had ceased to submit monthly VAT returns with effect from July 2006. The Appellant had rendered a return for the period 01 August 2006 to 30 September 2006 followed by quarterly returns thereafter. Following the change in reporting, Mr Devereaux of HMRC arranged a visit to the Appellant for the purposes of reviewing the Appellant’s VAT registration details, accounting records and trading activities, which took place on 14 February 2007.

9. Mr Devereaux investigated, amongst other matters, the accounting systems in place for zero-rated invoices which had been raised for exports and removals of goods. Mr Devereaux found that the Appellant held detailed records and documentation in respect of sale of goods and their removal from the site but held no documentation or records to support the removal of the goods from the United Kingdom and their subsequent receipt abroad. Mr Devereaux’s finding corresponded with information supplied by the Appellant in an earlier business questionnaire dated 16 May 2006 sent to HMRC. At paragraph 2.5 of the questionnaire the Appellant responded to a question about whether it held commercial evidence of export/removal for all consignments:

“Have evidence that goods have left site but not left country. Aluminium is sold ex-works the buyer organises the freight”.

10. Mr Devereaux concluded that the Appellant did not hold any of the required documentation to support zero rating. Further the Appellant had no systems in place to ensure that the required documentation was obtained within the designated time period. The Appellant had not allocated responsibility to a specific individual to obtain the necessary documentation. Finally the Appellant performed no management checks to verify that the conditions for zero rating had been met.

11. Mr Devereaux explained to the Appellant’s members of staff the requirements for documentary evidence as set out in HMRC Notices 703 & 725. He advised them to obtain the necessary evidence for a sample six month period between March 2006 and September 2006.

12. On 28 and 29 March 2007 Mr Devereaux revisited the Appellant’s premises. In the meantime the Appellant had obtained the requisite documentary evidence in respect of those supplies which had been exported outside the European Community or removed to another Member state. Following inspection of that documentation Mr Devereaux was satisfied that the disputed supplies met the conditions for zero rating. He informed the Appellant that he intended to issue an assessment for the VAT that should have been accounted for on those supplies but that the Appellant could make an adjustment to its VAT account in the appropriate period to reflect the fact that the supplies could at that point be treated as zero rated.

13. On 5 April 2007 Mr Devereaux issued an assessment for VAT dated 2 April 2007 in the sum of ₤876,717 plus default interest of ₤102,947.44 in respect of the accounting periods from 04/04 to 09/06. After representations from the Appellant’s professional advisers, Mr Devereaux accepted that the 2 April 2007 assessment did not take into account the fact that the Appellant had three months in which to obtain the documentary evidence of the export or removal. Mr Devereaux, therefore, replaced the 2 April 2007 assessment with one dated 9 July 2007 in the sum of ₤855,330 plus default interest of ₤100,695.33 for periods from 08/04 to 12/06. The default interest was charged for the period 21 October 2004 to 27 April 2007. The net effect of the assessment was that the amount for undeclared VAT was cancelled out by the adjustment leaving outstanding the default interest of ₤100,695.33.

14. Mr Devereaux’s grounds for the assessment were that the Appellant had accounted for various supplies on the basis that they were zero-rated when in fact they did not qualify for zero rating as the Appellant had not obtained evidence of their removal or export from the United Kingdom within the requisite time limits. In the absence of that evidence, those supplies were liable to VAT at the standard rate which should have been declared, at the latest, in the periods following those in which the supplies were made. Although he was satisfied subsequently that the disputed supplies had been exported or removed, the Appellant was still liable to account for VAT at the standard rate up until the conditions for zero rating were met. At which point the Appellant was entitled to a balancing credit on the output tax but still liable for default interest which had accrued during the period it had not accounted for VAT at the standard rate.

15. Mr Hutchinson stated that the Appellant was very surprised and confused with the 9 July 2007 assessment. The Appellant had produced satisfactory evidence to establish the zero rating which meant that no VAT was due to HMRC. The Appellant also mentioned that a prior VAT inspection in 2002 had not identified any flaws with its record keeping.

16. Although the facts were not in dispute, the parties differed in their emphasis of specific aspects of the factual matrix. The most significant was that the Appellant asserted that they held some records of the exports or removals at the time of Mr Devereaux’s first inspection. HMRC, on the other hand, stressed the Appellant’s non-compliance with the requirement to retain commercial evidence of the exports or removals. In HMRC’s view the Appellant had no excuse for not complying with the requirement. This was not a case where it had misunderstood the conditions for zero-rating. The Appellant had got the legal requirements wrong.

17. The Tribunal agrees with HMRC’s assessment of the factual matrix. The Appellant was a major and experienced trader which frequently exported and despatched goods overseas. The Appellant should have known the legal requirements for zero rating. Mr Devereaux’s conclusion that the Appellant had no management systems in place to ensure that its supplies were correctly zero-rated was particularly telling, and upon which the Tribunal placed weight.

Consideration

18. The Appellant has presented the Appeal on the basis of two distinct arguments: the validity of 9 July 2007 assessment, and the disproportionate nature of the default interest. After hearing the parties’ oral submissions the Tribunal considered the correct approach to deal with the dispute was to examine whether the facts of this Appeal were caught by the Court of Appeal decision in Musashi followed by an analysis of the effect of the Court of Justice decision in Collee.

19. The facts of Musashi were that the company manufactured and supplied component parts for motor vehicles from premises in Gwent. The company was registered for VAT. It had important customers in other Member States to whom they supplied goods. On a visit to its premises in May and June 1999, HMRC officers took the view that the company did not hold sufficient evidence that the goods had been removed from the United Kingdom and, for that reason, was not entitled to zero rate the supplies. On 7 July 1999 HMRC raised an assessment for VAT in a sum later reduced to £800,626 and for interest thereon in the sum of £55,084.09. The company subsequently supplied further evidence to HMRC which then accepted that the goods had been removed and the supplies were zero-rated. HMRC wrote to the Company stating that it could make the necessary adjustment in respect of the assessment for VAT in its accounts for the period in which the evidence was received but no such adjustment could be made in respect of the assessment for interest. The company appealed to the VAT & Duties Tribunal against the assessment with a view to challenging the assessment in respect of interest.

20. The Tribunal found in favour of the company, holding that

“We were impressed by the logic of Mr Baldry's submissions [for the company]. His first proposition was, where no tax is due no interest can be due. That is unassailable. But it must be remembered that at one point of time there was an amount of tax due, namely when the assessment was raised, and until the proof of removal was furnished to the Commissioners, that is, until the Commissioners were satisfied that the conditions had been met. At that point, the supplies concerned were zero-rated supplies whatever they may have been before. In our view, from that moment no tax was due from the Appellant in respect of the relevant supplies. As we have already said above, it would therefore be absurd to hold that the assessment was still valid, still in existence, and had not been reduced to nil. In our judgment, the effect of the Commissioners being satisfied must have been that the assessment was reduced to nil. Again, in our judgment it would be absurd to hold that where there was no liability for tax in respect of a supply there should nonetheless be a liability to pay interest upon a non-existent sum of tax. It is the supply that is taxable, either at the standard rate or zero-rate, and that supply took place at a point of time which was substantially earlier. It seems to follow that if the supply is zero-rated, then it must always have been zero-rated, rather than that it was apparently treated as zero-rated, then became standard-rated and then once again became, though not from the moment of supply, zero-rated. Again, we are reinforced in the view that the interest is not payable by the fact that there is no express provision that it should be. It seems to us that for interest to be payable where there is no primary liability there ought to be express words. There are no express words”.

21. HMRC appealed to the High Court which found in its favour. The company then Appealed to the Court of Appeal with a view to restoring the decision of the Tribunal. Before examining the Court of Appeal decision the Tribunal sets out below the statutory framework which applied equally to the facts of this Appeal as it did for Musashi.

22. Article 28c(A)(a) of the Sixth Directive(77/388/EEC)[1] provides that where goods are supplied by a taxpayer in one Member State to a taxpayer in another Member State that supply is exempt from VAT. Article 15(1) gives the exemption for exports. These exemptions are expressly subject to conditions which Member States may lay down for the purpose of ensuring their correct and straightforward application and preventing any evasion, avoidance and abuse. The domestic legislation under section 30(8) of the 1994 Act enables regulations to be made setting out the conditions that must be complied with in order to zero rate goods. Regulation 134 of the VAT Regulations 1995 provides for the zero rating of removal of goods under section 30(8) as follows:

“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,

(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”.

23. Regulation 129 makes similar provisions in respect of exports to persons outside the Member States.

24. Additional conditions for zero-rating are found in HMRC Notices 725 (removals) and 703 (exports) which have the force of law. Paragraph 4.3 of Notice 725 provides that

“A supply from the UK to a customer in another 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
Send or transport the goods out of the UK to a destination in another EC Member State; and
Obtain and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out in paragraph 18.6”.

25. Paragraph 4.4 specifies a time limit of three months for the obtaining of commercial evidence that the goods have been removed from the United Kingdom. Paragraph 16.10 advises the trader to charge the supply for VAT at the appropriate rate if all the conditions in Notice 725 have not been met. Paragraph 16.11 permits the trader to treat the supply as zero rated if evidence of removal is obtained after the three months, in which case the trader is entitled to amend its VAT account for the period in which the evidence was obtained. Notice 703 which deals with exports contains similar provisions.