VAT Input Tax Invoice Nature of Goods
[2010] UKFTT 159 (TC)
TC00464
Appeal number LON/2006/0874
VAT – Input tax – Invoice – Nature of goods
VAT – Input tax – Non compliant invoice – Discretion to permit deduction – Reg 29
VAT- Assessment – Section 73(2) – to recover VAT which should not have been repaid
FIRST-TIER TRIBUNAL
TAX CHAMBER
F I PROMOTIONS LIMITEDAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS(VAT)Respondents
TRIBUNAL: CHARLES HELLIER (Judge)
NIGEL COLLARD (Member)
Sitting in public in London on 9-13 and 16-20 November 2009
Andrew Young, counsel, instructed by Needleman Treon for the Appellant
Mario Angiolini, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2010
1
DECISION
I.Introduction
1.In 2005 FI Promotions entered into five separate transactions in memory cards. In each transaction it contends that it bought memory cards from a UK supplier and exported them. In each of those transactions the supplier gave FI Promotions an invoice. FI Promotions sought a deduction for the input VAT on that invoice. HMRC say that no deduction is available. In this appeal FI Promotions says that a deduction is due to it.
2.As we shall explain below, in order to qualify for credit for input tax there are two particular conditions which must be satisfied: (i) there must be a supply and (ii) either the trader must hold an invoice containing the required particulars of the supply – in particular of its nature and quantity – or the claimant must hold such other evidence of the input VAT charged as HMRC accept. In relation to these conditions the following issues arose:-
(i)was it proved that there was a supply to the Appellant? This was a question of fact.
(ii)if there was a supply was its nature and quantity detailed on the invoice. HMRC say it was not. This raised the legal question of what is meant by the “nature” of goods, and a factual question as to whether it was the case that the nature of the actual supply was adequately detailed on the invoice;
(iii)if there was a supply but the invoice held by the Appellant did not detail its nature, then “should” HMRC have accepted that the Appellant held appropriate evidence of the VAT charged.
We say “should” in the last paragraph because the test is whether HMRC’s refusal to accept was reasonable.
3.There is a further issue. It arises in this way. When FI Promotions submitted its VAT returns for the periods in which it entered into these transactions (we shall call them Deals 1, 2, 3, 4 and 5), it claimed input tax deduction. Because its export sales were zero-rated these amounted to claims for the repayment of input tax. After some initial investigation these claims were paid by HMRC, on a “without prejudice” basis. Then, at a later date, and in circumstances we shall explain, HMRC decided that input tax was not deductible, and issued assessments under section 73 VAT Act 1994 to recover the tax it had previously repaid. Mr Young contends that they were not entitled so to do.
4.The remainder of this decision is therefore structured as follows:-
II Legal Issues :(a)the conditions for deduction and the required
contents of an invoice: the nature of a supply
(b)the scope of HMRC’s discretion to accept other
evidence of VAT charged
(c)the tribunal’s jurisdiction in relation to (b)
(d)section 73
III The evidence and our findings of fact:-
(a)the Evidence
(b)the conduct of FI Promotions’ business and the five Deals
(c)Mr Katz’ knowledge of the memory card market
(d)inspection
(e)communications with Mr Atkin (HMRC)
(f)FI’s suppliers and customers
(g)SanDisk Products
(h)Lexar Products
(i)Mr Laing’s evidence
IV Evaluation
The Five Deals: did the invoices specify the quantity and nature of the supply?
V Discussion
(a) The Parties’ submissions
(b)The Invoices
(c)The assessments
(d)The exercise of the Commissioners’ discretion
(e)Counterfeit cards: would it make any difference?
VI Conclusions
IILegal Issues
(a)the conditions for deduction and the required contents of an invoice :the nature of the supply
5.Article 17 of the Sixth Directive provides for a right to deduct the input tax attributable to supplies to a trader used for his taxable transactions. (The Sixth Directive was the relevant Directive at the time of the transactions relevant to this appeal.) Art 18(1) provides that, in the circumstances of this appeal, in order to exercise that right the trader must hold an invoice complying with Art 22(3). But Art 18(3) provides a discretion which may enable a trader to exercise his right to deduct even if he has no compliant invoice:
“Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provision of paragraphs 1 and 2.”
6.In Terra Bauberdorf-Handel Gmbh v Finanzampt Osterholz-Scharmbeck [2004] ECR I-5553 (“Terra”) the ECJ found that the right to deduct must be exercised in the tax period in which the two conditions were satisfied: (i) that the supply had been made and (ii) that the trader held the invoice. Holding an invoice was seen as a condition for the right to deduct.
7.Until 2001, the requirements of Art 22 as regards the contents of invoices were relatively few. They were set out in Art 22(3) and limited to matters such as the price and the VAT: the old Art 22(3)(c) required Member States to lay down criteria which would determine whether a document was an invoice and Art 22(8) permitted Member States to “impose other obligations which they [deemed] necessary for the correct collection of the tax and the prevention of evasion”. There were limits on that discretion, but on its face Art 22(8) permitted member States both to augment the earlier requirements of Art 22 and to reduce them.
8.In 2001 Directive 2001/115 EEC (the “Invoice Directive”) changed this. Its first recital explained that the current conditions laid down for invoicing listed in Art 22(3) were relatively few in number, and thus left it to Member States to define the most important conditions. The second recital noted that a Commission report had recommended a study of what details should be required on an invoice for VAT purposes, and the fourth recital concluded that it was “therefore necessary, in order to ensure that the internal market functions properly, to draw up a list, harmonised at Community level, of the particulars that must appear on invoices for the purposes of value added tax.”
9.The Invoice Directive then proceeded to amend Art 22 in two significant respects. First it removed the general discretion given to Member States by Art 22(3)(c) and provided, in a replaced Article 22(3), a list of the details which were required in a VAT invoice under 14 headings. The one which is relevant to this appeal was the sixth:
“the quantity and nature of the goods supplied or the extent and nature of the services rendered”.
10.The second relevant amendment was to restrict the discretion previously afforded to member States under Article 22(8). That was done, first, in the new Art 22(3) by providing that “only” the details specified were required, and, second, by inserting at the end of Art 22(8) the extra words:
“The option provided for in the first subparagraph cannot be used to impose additional obligations over and above those laid down in paragraph 3.”
11.In the light of the fourth recital to the directive (“a list harmonised at Community Level”) it is clear to us that a Member State does not now have authority to impose in its requirements for a valid VAT invoice any obligation in relation to the description of the goods which is more onerous than “details [of] the quantity and nature of the goods”. It may impose lesser obligations but not greater ones.
12.Finally in relation to the Invoice Directive we note that it added a provision to Art 22(9) permitting specific relaxation of the list of requirements in Art 22(3) where the amount of the invoice was minor or where commercial administration or technical conditions made it difficult to comply with the full list of invoice content. But in such a case it provided that the invoices must contain, as a minimum, four pieces of information of which the third was:
“Identification of the type of goods supplied or services rendered.”
13.Since this is the only one of the four requirements which relates to the nature of the goods it cannot in our view be a greater requirement than that to detail the ‘nature’ of the goods.
14.The ECJ cases to which we were referred related only to the provisions of Art 22 before its amendment by the Invoice Directive. Some care is therefore needed in applying their reasoning in relation to the contents of invoices more widely. However, we found Finanzamt Gummersbach v Bockemühl [2004] ECR I-5583 (“Bockemuhl”) and Terra helpful in the following respects.
15.In Bockemühl one of the questions referred to the Court was whether a trader who was liable to pay VAT under a reverse charge type mechanism could deduct the VAT as input tax only if he held an invoice compliant with the (old) Art 22(3). It was held that such was the case. In so recommending, the Advocate General based his conclusion principally on the grounds that:
“47.If VAT is to be deducted, there must be proof that it has been incurred…
… It is the ‘ticket of admission’ to the right to deduct … The proper issuing and keeping of invoices is also of crucial importance for the checks carried out by the relevant tax administration to ensure compliance with the relevant VAT rules.”
16.The Advocate General in this case did refer to the new requirements of the Invoice Directive but did not directly opine on their meaning. However, in relation to the second question before the Court, which essentially related to whether a Member State could, in the exercise of its discretion under the (old) Art 22(3)(c), require details of the supplier’s name and address and the identification of the transaction, he said:-
“72.The significance of particulars such as those under examination, and their contribution to the proper functioning of the VAT system, in particular to ensuring the current collection of the tax and the prevention of evasion, are self evident and confirmed – if confirmation were needed – by their inclusion in the list of compulsory statements following [the Invoice Directive] …
74.[the] identification of the taxable transaction is clearly of great practical importance for determining what provisions are applicable. It is evident that … the taxable transaction must be defined correctly in accordance with the categories in the Directive, since a different qualification may trigger the application of different provisions of the Directive and possibly different tax rates. Definitions which are not accurate … may prejudice the application of the Directive and distort competition.”[our italics]
17.He went on to opine that under the old Art 22(3)(c) Member States could require that invoices identify accurately the nature of the supply since this was within the established restriction of that discretion for matters “necessary to ensure the correct levying of value added tax and permit supervision by the tax authorities.” [78].
18.Whilst the italicised passage in para [74] highlights the description of the nature of the goods as being important for determining the correct rate of VAT, it seems to us that in paras [72] and [78] the Advocate General attaches to that description a wider purpose than simply the verification of the rate of VAT: that purpose is the supervision or audit by the tax authorities of trader’s records. It is apparent that he sees that purpose in the new provisions of the Invoice Directive as much as in the older provisions of Art 22(3).
19.The Court came to a different conclusion from that of the Advocate General on the first question and did not therefore answer the later questions. But its reasoning did not in our view call into any question the Advocate General’s statement about the importance of the contents of an invoice generally, or the function of those contents in the context of the VAT system. Indeed at [51] it said that it was true that “an invoice has an important documentary function because it may contain verifiable data.”
20.In Terra the Court held (at [34]) that the trader must have received the supply and hold an invoice before the right to deduct arose. It then noted (at [36]) that such an interpretation was consistent with the principle of neutrality. (This principle is expressed in various forms, but we take as a basis the provisions of Article 2 of the first Directive that VAT is to be a tax on consumption proportional to the price, and unaffected by the number of transactions which take place before consumption, that that involves a supplier receiving credit for tax born at previous stages.) At [37] it considered the principle of proportionality (namely that exceptions to general principles should be framed or executed in a manner least detrimental to those principles) and said it was not infringed by requiring the holding of an invoice because:
“First, that requirement is consistent with one of the aims of the Sixth Directive, that of ensuring that VAT is levied and collected, under the supervision of the tax authorities,… and secondly [because payment] for delivery of goods or performance of services, and therefore payment of input VAT, is not normally made until the invoice has been received.”
Summary
21.From this survey of the legislation and from the cases to which we were referred we draw the following principles:-
(i)in order to deduct input tax it is a condition that a supply of goods or services has been received (Art 18/2), Commission v Netherlands [2001] ECR I-8265 (“Netherlands”) at [75], Terra [28]);
(ii)absent a lesser or different obligation permitted by a member under Art 18(3) it is also a necessary condition that the trader holds an invoice compliant with Art 22(3). (Art 18(1), Netherlands [75], Terra [38];
(iii)the maximum requirements which may be required in an invoice for it to qualify are those in Art 22(3)(b) or, in the case of minor etc supplies, those in Art 22(9). Member States cannot impose greater requirements;
(iv)those requirements include details of the “quantity and nature” of a supply of goods. (Art 22(3)(b));
(v)in determining what is required by “details of the quantity and nature” of the goods regard should be had to the purpose or aims of the directive;
(vi)those aims and purposes include the principles of neutrality and proportionality but also include the purpose of enabling the proper supervision or audit of the system. These specific purposes displace neutrality because the supervision by the tax authorities is one of the aims of the Directive. (Terra [37], Bockemühl A-J);
(vii)in relation to the requirements as to the “nature” of the goods it is relevant that “identification of the type of goods supplied” may be a lesser requirement but will not be a greater one;
(viii)the detailing of the nature of the goods is relevant to the audit of the tax rate applied to the goods but may also be of more general relevance to the supervision of the VAT system (see our conclusion in Bockemühl).
(ix)Art 18(3) provides for a discretion: in exercising any discretion provided for under the Directive the member States must have regard to the aims and purpose of the Directive (see Teleos v the Queen Case C-409/04 (“Teleos”)).
Discussion : “Quantity and Nature”
22.What is meant by the “nature “of goods? We did not find this an easy issue. We find no direct guidance in the decided cases on the extent of the meaning of “nature”. We looked at the English, French, Spanish, Portuguese and Italian versions of the Invoice Directive. Each used a word like ‘nature’.
23.Mr Young suggested that ‘nature’ must mean nature for VAT purposes ie a description sufficient to be able to tell which VAT rate should apply. He said that for example:
(i)an invoice for “trousers” would not be adequately detailed because “trousers” could be zero-rated children’s trousers or standard rated adults’ trousers, and
(ii)an invoice detailing “a CD player” would be adequately detailed: there is no need to say “a red Zanussi XY3 new boxed CD player” because CD players are all standard rated.
24.It seems to us that the requirement to specify the nature of the goods is wider than simply requiring a description sufficient to identify their VAT nature. That is because:-
(i)of the indication that ‘nature’ is more specific than “the type of the goods supplied”, and the latter phrase does not suggest simply “the VAT classification of the supply”;
(ii)of the conclusion that the purpose of the requirement is the audit of the supplier and the recipient by the tax authorities and our belief that more could be involved in such an audit than simply checking the VAT rate applied.
25.In relation to this last issue, revenue authorities might well wish (i) to check how accurate a trader’s stock control was by reference to purchases of specific goods, sales of those goods and stocktakes: that would require details sufficient to enable such tracing; (ii) to investigate the use of inputs in making the invoiced supply, or the use of the supply in making particular taxable or exempt outputs : that requires more detail than the taxable nature of the supply. The requirement in Art 22(3)(b) for quantity and unit price rather than simply total price reinforces the conclusion that the object of requiring the information is to enable such auditing.
26.But it might well be that a particular supplier’s records could be audited easily even if his invoices were fairly simple. A sand quarrying business invoicing “1 ton of our sand” would provide all that was necessary for its own audit. But if the recipient of that supply were a merchant selling sharp sand, washed sand, high silica sand and coarse sand, that invoice on its own would not be enough to trace its use.
27.In dealings between commercial enterprises the details of the nature of goods necessary to enable a proper audit (to trace the use and origin of the goods) will be those which the parties can objectively be seen to have agreed for the supply. Thus the terms of that agreement will determine the qualities which are relevant commercially, and which will always enable the source and use of the goods to be identified.