TRIBUNAL Jurisdiction VAT Tribunals Rules 1986 R 19(3) Whether Apt to Direct Payment Of

18127

VALUE ADDED TAX – input tax — “carousel” fraud alleged by Commissioners — appellant unwitting participant — appellant’s input tax claim “suspended” — subsequently part paid — whether appeals competent — whether “decision” to withhold balance — yes

TRIBUNAL — jurisdiction — VAT Tribunals Rules 1986 r 19(3) — whether apt to direct payment of withheld input tax claim — legitimate expectation — proportionality — interim relief — tribunal’s powers

HARDSHIP — whether established

MANCHESTER TRIBUNAL CENTRE

TRICELL UK LIMITED

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in Manchester on 11 March 2003

Michael Patchett-Joyce and Piers Gardner of counsel, instructed by Deloitte & Touche, for the appellant

Andrew MacNab of counsel, instructed by their solicitor’s office, for the respondents

© CROWN COPYRIGHT 2003

1

DECISION

Background

1. This decision relates to a number of applications made at an interlocutory stage of an appeal. In the ordinary way the applications were heard in private but the parties, through their respective counsel – Michael Patchett-Joyce and Piers Gardner for the appellant, Andrew MacNab for the respondents – have agreed that, as the applications raise matters of general interest, the decision should be published, and I so direct.
2. The appellant is a dealer in mobile telephones, buying and selling in bulk. For reasons immaterial to this application, it buys from an associated company which itself buys within the United Kingdom. The appellant’s sales are, almost exclusively, to traders in other European Union Member States. The appellant’s purchases are standard-rated and it thus pays VAT to its associated company supplier (the two companies, though associated, are not members of the same VAT group) and, in principle, acquires a right to claim input tax credit. Its sales to dealers in other Member States, however, are zero-rated and the amount of output tax for which the appellant must account is negligible, being limited to the tax charged on such sales as it makes within the United Kingdom. It makes monthly VAT returns, and claims a refund – that is, payment to it by the Commissioners of the excess of the input tax it has incurred over the output tax for which it must account – each month.
3. The Commissioners “suspended” (their own word) the repayment claimed by the appellant in its November 2002 return, amounting to £3,737,702.48. The reason they gave was that it appeared to them that some of the appellant’s supplies had come from what they described as a “non-legitimate” source. In January 2003, however, they made a payment of £3,316,833.43, without prejudice to enquiries they were pursuing. They have, so far, refused to pay the remaining £420,869.05. That sum represents the input tax incurred by the appellant in obtaining the telephones it sold in November 2002 (by three separate transactions) to a Dutch company, Paramax BV. Though accepting that there is no evidence of wrongdoing by the appellant or its associated company, the Commissioners maintain that the transactions are devoid of economic substance and are outside the scope of the VAT regime; in essence, they suspect that the transactions are part of what is commonly termed a “carousel” fraud. They have taken the same stance in relation to the appellant’s returns for December 2002 and January 2003, for which periods they have hitherto refused to pay £166,934.40 and £345,142.68 respectively, although in each case the bulk of the claim has been met. The appellant now appeals, by separate notices of appeal, against those three refusals.
4. The sequence of events relating to the appellant’s November 2002 claim was this: the return was submitted on or about 5 December; the Commissioners wrote to the appellant on 20 December saying that the entire repayment had been “suspended”; the appellant then instructed Deloitte & Touche, who made representations on its behalf; the Commissioners made a telephone call to Deloitte & Touche on 30 January 2003 but, in the absence of the person dealing with the matter, left a message that £3,316,833.43 was to be repaid and the balance withheld; there was a telephone conversation between those dealing with the matter for the appellant and the Commissioners respectively on the following day, when the figures were confirmed and reasons were given for the Commissioners’ decision to pay only part of the sum claimed at that stage; there was a meeting between the parties on 7 February when those reasons were debated at evident length; and there then followed further correspondence and exchanges of e-mails. Among the correspondence were two letters identified specifically in the grounds of appeal relating to the first appeal; the relevant parts of those letters are set out later in this decision.
5. According to the grounds of appeal served with the appellant’s various notices, the first appeal (dated 25 February 2003) has been made against “a decision of the Commissioners dated 30 January 2003, which decision was communicated to it verbally, through its advisors on said date and confirmed by letters of 14 and 21 February 2003”. The second (dated 4 March 2003) is against “a decision of the Commissioners dated 4 February 2003, which decision was communicated to it verbally, through its advisors on said date. Written evidence of this decision is a bank statement showing partial repayment on 10 February 2003 of the appellant’s entitlement to credit for input tax”. The third appeal (also dated 4 March 2003) is in identical terms, save that the dates of communication and repayment differ. Each notice of appeal contains a second paragraph:

“2The appellant contends that said decision is an assessment under section 73 of the Value Added Tax Act 1994, the Commissioners having decided that the appellant’s returns were incomplete or incorrect.”

The applications

1. I am asked to make a number of directions. First, the appellant asks that the three appeals be consolidated (although the word used in the applications is “conjoined”). That application is, in itself, uncontroversial, though whether it is appropriate to make such a direction is dependent upon the outcome of the respondents’ applications. It also seeks a direction that each appeal be entertained without deposit or payment of the tax in dispute. The respondents seek a direction that each of the appeals be struck out. A further, formal, application, that the various applications be heard together, was not opposed. It is convenient to deal with the respondents’ application first.

The strike-out application

1. Mr MacNab’s argument in support of the application that the appeals be struck out was, in essence, that the appellant could not identify its purported appeals with any of the different “matters” against which an appeal may be brought, set out in the various paragraphs of section 83 of the Value Added Tax Act 1994, the provision by which jurisdiction is conferred on these tribunals. Superficially, the appeals appeared to come within paragraph (c): “the amount of any input tax which may be credited to a person”; if Mr Patchett-Joyce’s argument (advanced in the context of the appellant’s own applications) that the refusals to pay amounted to assessments, within section 73(1) of the Act, were right, the appellant might bring itself within paragraph (p): “an assessment – (i) under section 73(1) … in respect of a period for which the appellant has made a return under this Act … ”. However, he said, whether one argued in favour of paragraph (c) or paragraph (p) was immaterial since an appeal could be brought only against a decision, and the respondents had as yet made no decision – although they had not yet paid the residual amounts of the claims, they had not said that they would not pay, merely that they were continuing with their enquiries.
2. Mr MacNab founded his argument primarily on a single sentence from the decision of the President of this tribunal in Marks & Spencer plc v Commissioners of Customs and Excise [1998] V & DR 93. At paragraph 9, after considering the competing arguments, he said: “Accordingly I interpret section 83 as requiring there to be a decision of the Commissioners as the necessary prerequisite to our jurisdiction.” That interpretation (which Mr Patchett-Joyce did not challenge) was adopted in Colaingrove Ltd v Commissioners of Customs and Excise (2000, Decision No 16981), in which the chairman went on to say (at paragraph 10): “What constitutes a decision is however inevitably a matter of fact and degree. Although almost inconceivable, total silence in response to a repayment claim must constitute a refusal. Equally, repeated refusals to give a straight answer will amount to a refusal. It would be surprising if a trader’s only remedy was to obtain an order from the High Court directing a formal decision. In my view such a refusal would amount to an appealable decision.”
3. The earlier (14 February) letter referred to in the first notice of appeal, addressed to Deloitte & Touche, deals with a matter not material for the purposes of this application and then continues:

“You go on to say that, in respect of [the appellant], the vast majority of the supplies to which the input tax relates are not in dispute. This is not accepted and [it] has not been communicated to you that the majority of input tax involved in this case is not in dispute. I can, however, now confirm that on 30 January 2003 the Commissioners authorised a repayment of £3,316,833.43 in respect of the November claim without prejudice to ongoing enquiries into the transactions, their nature and history.

“This leaves an outstanding balance of £420,869.05. In this regard the Case Officer is meeting with our legal advisors today and we should be able to write to you very early next week as to whether that sum is still to be retained pending ongoing enquiries.”

1. The later (21 February) letter, also addressed to Deloitte & Touche, excised of the irrelevant, reads:

“Following legal advice Customs consider that it remains appropriate for them to continue with their enquiries in relation to the transactions which formed the basis of, and which led to, your clients’ November return. Such enquiries relate both to the amount already paid to your clients and the outstanding balance.

“Whilst there is no suggestion of fraud on the part of your clients, we are properly looking at the chain of transactions to determine whether they fall within the meaning of the 6th Directive as ‘economic activity’ …”.

Then, after describing the Commissioners’ suspicions, the letter continues:

“… Taken as a whole we consider that the transactions do not appear to have the characteristics of a trading pattern within the scope of the Value Added Tax Act 1994.

“In order to progress the matter Customs is seeking further material within the UK and Europe to further clarify the nature of the series of the transactions which have occurred and the movement of specific goods. We hope to have obtained the relevant material my 20 March 2003, and intend to make a decision in relation to the outstanding balance on the November return, by 28 March 2003. However, any decision will be without prejudice to any ongoing enquiries to verify the VAT credit claimed in your clients’ November return, and any ensuing action which may be considered appropriate.”

1. The dates mentioned in the last of those paragraphs fell after these applications were heard (on 11 March) and I do not know what, if any, decision has been made and communicated; I have not been asked to deal with the matter otherwise than in relation to the position as it was at the time of the hearing.
2. As the second and third notices of appeal indicate, there was no comparable correspondence relating to the December and January claims. It was not suggested by Mr MacNab that different considerations applied to those claims and Mr Patchett-Joyce asked me to treat the payment of part only of the claim as evidence of a decision not to pay the remainder, despite the absence of supporting letters.
3. Mr MacNab contended that neither of the letters could properly be considered to contain a decision, and that no decision could be inferred from the mere fact that some, but not all, of a repayment claim had been met. He referred me to the decision of Otton J in R v Commissioners of Customs and Excise, ex parte Strangewood Ltd [1987] STC 502. In that case, the taxpayer sought a repayment of input tax (or, more accurately, what it maintained was input tax) which the Commissioners withheld pending their enquiries into the genuineness of the exports which the taxpayer claimed to have made, and which formed the basis of the input tax repayment it sought. The taxpayer’s claim that the supply, if genuine, was zero-rated depended on section 16(6) of the Value Added Tax Act 1983, which provided that :

“A supply of goods is zero-rated by virtue of this subsection if the Commissioners are satisfied that the person supplying the goods–

(a) has exported them … ”

1. At [1987] STC 502 at 505 the judge said:

“It is abundantly clear to me from [a Customs officer’s] affidavit that the commissioners are not yet satisfied that the goods in question have been exported. It follows that unless and until the commissioners are so satisfied the goods cannot be zero-rated. … Thus the … condition is not fulfilled.”

1. The position was the same here: the Commissioners had not yet determined whether the input tax claimed truly was input tax; and until they had done so, and had come to a firm conclusion, it could not be said that they had made a decision, properly so-called. All that they had done, so far as the November claim was concerned, was to indicate that they were making their enquiries and would come to a decision in due course, while they had done even less in respect of the December and January claims. It did not advance the matter to claim that the Commissioners had made an assessment; since the making of an assessment necessarily involved the making of a decision – section 73 requires an exercise of judgment – the question remained whether the Commissioners had made a decision. For this purpose it was immaterial whether the appeals potentially came within paragraph (p) rather than paragraph (c).
2. Mr Patchett-Joyce argued that the mere fact that partial payments had been made necessarily implied a decision – that some of the amount claimed should be paid, and some not. That fact should be considered against the background of the legislation: Articles 17 and 18(4) of the Sixth VAT Directive (77/388/EEC) and section 25(2) and (3) of the 1994 Act. Those subsections provided that a taxable person “is entitled” to offset his input tax against his output tax, and that, if the input tax exceeds the output tax, “the amount of the excess shall be paid to the taxable person by the Commissioners”. Those provisions were mandatory, and while he was willing to acknowledge that the Commissioners were entitled to make reasonable enquiries and to refuse to meet claims which were not genuine, the simple fact that they had complied with section 25(3) only in respect of part of the amount claimed necessarily meant that a decision to comply only to a certain extent had been taken.
3. Mr Gardner supported that argument by reliance on Article 1 of the First Protocol to the European Convention on Human Rights, which prohibits the deprivation of a person of his rights – of which the right to an input tax repayment was one – save in defined circumstances. Those circumstances might or might not arise here (though he contended they did not) but in either case, the Commissioners had deprived the appellant of its right to prompt and full repayment and it must follow that they had made a decision to do so.
4. It seems to me that it is necessary, first, to break down the Commissioners’ approach into its two component parts; and, secondly, to analyse what the President said in Marks & Spencer plc in the context of section 83.
5. The Commissioners’ approach depends upon two propositions. There is, first, the issue of fact – the “nature of the series of transactions”, as it is put in their second letter. Secondly there is an issue of law – whether, if the Commissioners are correct in their suspicions about the nature of the transactions, they are also correct in their view that such transactions are not, as a matter of law, within the scope of the 1994 Act.
6. If the only question were the issue of fact the appellant would, I think, be in some difficulty. The Commissioners have made it clear that they are making enquiries into the factual background of the claim; on that point there seems to me to be little difference of substance between this case and ex parte Strangewood Ltd. Even though, there, the test was overtly subjective and here it is objective, the reality in each case is that it will be the Commissioners’ opinion of the facts which leads to their ultimate decision. Both Mr Patchett-Joyce and Mr Gardner commented that a failure, or refusal, to make a decision itself amounts to the making of a decision, if only a decision not to decide. That is, in essence, what was said in Colaingrove. Of course, the Commissioners must be allowed a reasonable time to make enquiries, and there is provision in the legislation for that eventuality, relieving the Commissioners of the obligation to pay repayment supplement in defined circumstances: see section 79(3) of the 1994 Act and the VAT Regulations 1995 (SI 1995/2518) regs 198,199). Given the nature of the enquiries described in the letter of 21 February, and the need to direct some of those enquiries to other Member States, it is difficult to say that a reasonable time for making those enquiries had expired by the time the first appeal was lodged only four days later. The argument is, plainly, stronger still in relation to the second and third appeals.
7. However, it is in my view clear that the Commissioners have come to a concluded view about the law. They are not proposing to ascertain the facts, and then consider the law; if the transactions are as they suspect, the input tax will be disallowed, and if not, it will be allowed. The question is therefore whether that is a sufficient decision for the purposes of section 83.
8. In the Marks & Spencer case to which I have already referred (in which the taxpayer sought repayment of incorrectly paid output tax), the President went on to say:

“A decision, in my view, is an official act by the customs authorities pertaining to VAT statutory provisions that gives a ruling in a particular case and has legal effect upon the person at whom it is directed. Here Marks & Spencer made formal claims to have the tax repaid to them. Until the claims were dealt with by acceptance or refusal the legal position of Marks & Spencer remained unchanged, save that they were entitled to have their claims resolved. Once the Commissioners have taken action by allowing or refusing the claim in question, Marks & Spencer’s position will have changed. In the former instance they become creditors of the Commissioners; in the latter situation they are denied the status of creditors and are left with the legal remedy of appealing.”