[2010] UKFTT 105 (TC)

			TC00417
					
Appeal number LON/2003/0860

Value Added Tax – Repayment supplement – VATA 1994 s.79 – Period between submission of return and repayment exceeding 30 days – Whether supplement due – Commissioners stated believed Appellant not involved in fraud – At time Commissioners wrongly believed any participant in a fraudulent chain could not reclaim input tax because no economic activity – Whether that belief showed that Commissioners’ enquiries not reasonable – appeal dismissed

FIRST-TIER TRIBUNAL
TAX CHAMBER
 
	MAJOR MICROS LIMITED (in Liquidation)	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS ( [type of tax])	Respondents

				TRIBUNAL: 	MISS J C GORT (Judge)
						G BARDWELL

Sitting in public in London on 14-15 December 2009

Lesley Allen, solicitor of Mazars LLP, for the Appellant 

Ben Collins of counsel, instructed by the Solicitors Office, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal against a decision dated 18 July 2003 to refuse a repayment supplement in respect of two VAT periods, 10/02 and 11/02.

2.	A Notice of Appeal was served on 4 September 2003, but thereafter the appeal appears to have become dormant.  On 11 September 2008 by a Direction of the High Court the Appellant (“the Company”) was wound up under the Insolvency Act 1986.  On 11 November 2009 an Amended Grounds of Appeal was filed, to which the Respondents (“the Commissioners”) made no objection, in reliance upon a representation by the company that there would be no challenge on the facts.

3.	The principal challenge to the decision was on the basis that the Commissioners had been investigating whether the Company’s claim to input tax was based upon a non-economic activity for which they found no evidence, and this was a premise which was subsequently found to be invalid by the European Court of Justice (“the ECJ”) in the case of Bond House Systems Ltd [2006] STC 419.  The decision was further challenged on the basis that the enquiries were not being made of the Company but of third parties and authorities who were outside the control of the Company.  Finally it was contended that only normal enquiries were being undertaken by one of the Commissioners’ officers, Smita Parikh (“Mrs Parikh”), and such enquiries were not sufficient to “stop the clock”.  

The law

4.	Section 79 VAT Act 1994 provides as follows:

79.  Repayment supplement in respect of certain delayed payments or refunds

(1)	In any case where – 

(a)	a person is entitled to a VAT credit, or 
(b)	a body which is registered and to which section 33 applies is entitled to a refund under that section, [or
(c)	a body which is registered and to which section 33A applies is entitled to a refund under that section,]

and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater.

(2)	The said conditions are – 

(a)	that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and
(b)	that a written instruction directing the making of the payment or refund is not issued by the Commissioners within [the relevant period], and
(c)	that the amount shown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250, whichever is the greater.

[(2A)	The relevant period in relation to a return or claim is the period of 30 days beginning with the later of – 

(a)	the day after the last day of the prescribed accounting period to which the return or claim relates, and
(b)	the date of the receipt by the Commissioners of the return or claim.]

(3)	Regulations may provide that, in computing the period of 30 days referred to in [subsection (2A)] above, there shall be left out of account periods determined in accordance with the regulations and referable to – 

(a)	the raising and answering of any reasonable inquiry relating to the requisite return or claim,
(b)	the correction by the Commissioners of any errors or omissions in that return or claim, and
(c)	in the case of a payment, the following matters, namely – 

(i)	any such continuing failure to submit returns as is referred to in section 25(5), and
(ii)	compliance with any such condition as is referred to in paragraph 4(1) of Schedule 11.

(4)	In determining for the purposes of regulations under subsection (3) above whether any period is referable to the raising and answering of such an inquiry as is mentioned in that subsection, there shall be taken to be so referable any period which – 

(a)	begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and
(b)	ends with the date on which the Commissioners – 

(i)	satisfy themselves that they have received a complete answer to the inquiry, or
(ii)	determine not to make the inquiry or, if they have made it, not to pursue it further,

but excluding so much of that period as may be prescribed, and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person.

Regulations 198 and 199 of the VAT regulations 1995 provide as follows:

198.	In computing the period of 30 days referred to in section 79(2)(b) of the Act, periods referable to the following matters shall be left out of account -

(a)	the raising and answering of any reasonable inquiry relating to the requisite return or claim …

199.	For the purpose of determining the duration of the periods referred to in regulation198, the following rules shall apply – 

(a)	in the case of the period mentioned in regulation 198(a), it shall be taken to have begun on the date when the Commissioners first raised the inquiry and it shall be taken to have ended on the date when they received a complete answer to their inquiry.

However, these regulations (which were originally enacted in 1988) were superseded by the enactment of section 79(4) by section 15 of the Finance 9No.2) Act 1992.  The rules for counting time in terms of periods to be left out of account under section 79 are governed by section 79(4), not regulation 199.  thus time will not run from the date on which the Commissioners first consider it necessary to make such an inquiry, until the date on which the Commissioners satisfy themselves that they have received a complete answer or decide not to pursue it further.

The evidence and the facts

5.	Mrs Parikh’s witness statement was not challenged by the Company. Mr Peter Birchfield, at the relevant time the Regional Co-ordinator of the Intra Community Missing Trader Fraud (“MTIC”) Strategy for the London region, gave evidence before the Tribunal.  An agreed bundle of documents was provided.

6.	The Company was a supplier of mobile telephones, computer chips and, from September 2002 onwards, other hardware and software products to customers mainly in the European Community (“EC”) from suppliers that were mainly in the United Kingdom.  It was on monthly VAT returns.

7.	In June 2002 a verification exercise was carried out by the Commissioners.  As a result of this exercise, it was learned that the Company had traded in Yesomite Tape, a software product, and consequently, in September 2002, the Company was asked to inform the Commissioners before it concluded a deal for any new product.  On 28 October 2002 the Company’s record-keeper, Mr Manier, informed Mrs Parikh that he had bought new products, Flexion X300 Phone Servers and 3 Com 8100 routers.  Officers at Heathrow were asked to visit the freight forwarder to examine the goods and details were recorded.

8.	On 4 November 2002 the Company’s return for 10/02 was filed, it was a repayment return in the sum of £2,353,603.26.  On the same day Mrs Parikh contacted the Company regarding the two new products which they had bought.  Independently other officers of the Commissioners selected the return for verification because of the high value of the claim and the high incidence of MTIC fraud in the trade sector.  The job of carrying out the verification was allocated to Mrs Parikh.

9.	Mrs Parikh and Mr Birchfield held regular meetings throughout November.  On 11 November Mrs Parikh completed deal references for the period 10/02 which she forwarded to the officer concerned with one of the Company’s suppliers and requested information from the officer dealing with another supplier.  She conducted further enquiries in respect of expert evidence and frequently tried to contact the manufacturer of the new products.  She instigated checks on the Police National computer.  As a consequence of the results of these checks she carried out internet checks on the vehicles involved in transporting the goods.  On 2 December she was able to speak to the manager of 3 Com Technologies Ltd (the manufacturers of the 3 Com 8100 routers) and was informed that the routers in question had not been manufactured for three years and the last remaining stock had been sold in July 2001.

10.	On 4 December Mr Parikh and Mr Birchfield visited the Company as arranged previously with Mr Manier.  Mr Manier was informed by Mr Birchfield both that further enquiries would be made and that he did not believe that the Company was involved in any fraud.  That remained Mr Birchfield’s opinion at the time of the appeal hearing, but he also still considered that it was possible that further evidence might come to light which showed otherwise.

11.	Following this meting further checks were carried out on both the export evidence and a freight forwarder in the Netherlands. On 9 December it was confirmed by an officer there that the goods in question had come back to the United Kingdom and the relevant paperwork would be sent on.  Further enquiries were conducted throughout December, including of a company in Belgium.  The return for 11/02 was also being investigated at this time, and a change in the Company’s trading pattern was revealed which necessitated reconciling all the invoices and spreadsheets, and verifying them.

12.	On 13 December Mrs Parikh commenced verification of the 11/02 claim by requesting Mr Manier to provide all sales invoices for November 2002.  She made further enquiries of one freight forwarder and on 18 December she visited the address given her by Manier of another freight forwarder, Crestview Logistic Ltd (“Crestview”) which turned out to be an accommodation address only.  After further contact with Mr Manier, a Mr Mark Horne of Crestview rang her from Belgium.  

13.	By 24 December 2002 Mrs Parikh had completed an analysis of the Appellant’s November trading which revealed a change in its trading pattern, it not having done any back to back deals in November.  This necessitated all the invoices and the spreadsheet being reconciled before the 11/02 claim could be verified.  By 2 January 2003 Mr Parikh had completed all references for 10/02 and 11/02 and had forwarded them to the relevant department for verification.

14.	In January 2003 further contact was made with Crestview and Mr Horne was asked to provide a copy of the certificate of shipment from Italy or Belgium to the UK.  A VAT consultant acting on behalf of the Appellant contacted Mrs Parikh and was informed that the Commissioners were not happy with the export evidence, and were awaiting the outcome of a visit to the freight forwarders to verify the transactions.  Evidence was received from the officer concerned with the Appellant’s supplier which enabled Mrs Parikh to complete the verification deal log.  On 7 January Mr Horne faxed the Community Movement Record (“CMR”) document for the Appellant’s customer but this did not show who had bought the goods in the UK.  On the same day Mrs Parikh made an urgent request of officers at Heathrow Airport that they obtained information from the freight forwarder concerned with two of the Appellant’s customers.  She also raised an urgent reference to verify the transactions of one of the Appellant’s suppliers.

15.	On 9-11 January Mr Parikh made enquiries of the tax authorities in the Netherlands concerning one of the relevant freight forwarders and was promised relevant documents, she also completed various deal logs and received more information.  On 14 January following a review of the case, a decision to release part payment of £65,000 to the Appellant relating to expenses was made by Mr Birchfield, the funds being released on 17 January.  Various enquiries continued to be made, and on 24 January evidence received in relation to Crestview received from the Netherlands indicated the possibility of circularity of movement of goods.  Mrs Parikh continued to receive evidence in respect of the Appellant’s suppliers and to make enquiries in the EU.  Solicitors acting on behalf of the Appellant faxed a letter to the Commissioners on 10 February and a meeting was arranged with the Commissioners’ solicitor on 12 February.  At that meeting a review of the case showed the following:

(1)	October 2002 – 11 transactions verified

	7 transactions traced to deregistered trader
3 transactions traced to trader whose VAT registration number was being used without authority of the trader (a hijacked number)
1 transaction – Mrs Parikh still awaiting for information from the bottom of the chain

(2)	November 2002 – 21 transactions verified

6 transactions traced to a hijacked number
9 transactions traced to deregistered traders
6 transactions traced but further information still awaited

None of the transactions for either 10/02 or 11/02 could be traced back to a UK trader who had correctly declared and paid the VAT due on the initial UK sale.  At the meeting it was decided that it was necessary to await replies from the EU re stock movements and serial numbers to establish circularity beyond reasonable doubt.

16.	On 17 February Mrs Parikh made enquiries about progress but was told that no reply had yet been received from the fiscal authorities in Italy.  It was therefore decided on 19 February to release payment by CHAPS in respect of periods 10/02, 11/02 and 12/02 without prejudice.  Mr Birchfield described the focus of the investigation as being to establish whether a carousel fraud was present with full circularity (that is to say the goods were bought and sold by a series of VAT registered traders until they returned to a UK supplier by whom they had previously been sold).  In addition however it was necessary to consider all of the following:

(a)	The validity of the evidence of despatch to support zero-rating of the sales;
(b)	Whether the goods had in fact been despatched to a VAT registered trader in another Member State;
(c)	Whether the Appellant’s purchase invoices accurately reflected what was bought or sold to support deduction of the input tax being claimed under VAT Regulations 1995 reg 14(1)(g);
(d)	Whether the goods actually existed at all;
(e)	Whether the transaction chains were circular and/or contained a VAT fraud to support denial of input tax on the grounds of non-economic activity;
(f)	Whether if a fraud is established the Appellant had sufficient knowledge of that fraud to warrant being considered for criminal investigation/prosecution.

At that time the Joint and Several Liability legislation was not in force and the European Court of Justice had not issued a decision in the case of Bond House or Kittel.

17.	Mr Birchfield made the decision to release the funds to the Appellant on 14 February 2003, possibly after receiving a call from the Appellant’s representative, and made the decision that the sum should be paid by CHAPS rather than BACS as it would be quicker.  The funds were paid out on 19 February.

The Appellant’s case

18.	Mr Allen chiefly relied on a passage in Mr Birchfield’s witness statement where, in respect of the visit to Mr Manier on 4 December, he recorded that he had discussed with Mr Manier inter alia “the broad outline of our arguments relating to non-economic activity”.  Mr Birchfield specifically stated that on that date he was not of the opinion that Mr Manier was directly involved in the fraud, and therefore the fact that Mr Birchfield at the time had wrongly believed that the existence of fraud anywhere in the chain meant that there had been no economic activity on the part of the Company, showed that there was no legal basis for refusing repayment within 30 days.

19.	Mr Allen submitted that the inquiries in the present case were no more than was usual in the circumstances of the Appellant and therefore should not have exceeded the normal time limit.  The officers were not looking at Mr Manier’s intent and the likelihood is that they were indulging in a fishing exercise.  It was necessary for the Tribunal to look at Mr Birchfield’s state of mind because he was the person with the authority to make the relevant decision.

The Respondents’ case

20.	The Respondents’ case was that the Appellant’s argument was flawed since the inquiries made by the officers were made in order to investigate a number of issues, as set out above, and not just to investigate whether there was any economic activity.  Such inquiries were reasonable, and the Tribunal was referred to the case of Bell Rowland & Co (Retail) Ltd [1992] STC 647 where Auld J said:

“It is an enquiry relating to a particular return in respect of which a supplement may be payable if the claim to repayment is not dealt with promptly.  The combination of the words ‘the raising and answering of any … enquiry’ also indicates that the word ‘enquiry’ is used in the sense of a question or questions put to the taxpayer for him to answer, not an enquiry in the sense of an investigation concluded by a report.  The word ‘raising’ itself in this context is clearly used in its ordinary and natural meaning of putting an enquiry or question to, or making an enquiry of, the taxpayer about his claim for repayment.”

Mr Collins submitted that the introduction of subsection 79(4) of the Act was specifically to broaden that definition, the specific changes being that:

(i)	Time stops when the Commissioners first consider it necessary to make an enquiry, rather than when they actually make it; and
(ii)	Enquiries need not be made only of the taxpayer.

The word “enquiry” referred to the raising of questions, and the 30 day period falls to be assessed in relation to the above.  In the present case the Commissioners were under a duty to investigate in general, and were particularly required to investigate cases which suggested an MTIC fraud.  

Reasons for decision

21.	In this case the relevant start date, being the date on which the Commissioners first consider it necessary to make an enquiry, for the period 10/02 was 4 November 2002, the date on which it received the return.  The start date for the period 11/02 was 4 December 2002, again the date on which it was filed.  It follows from section 79 of the VATA that a repayment supplement is normally due in circumstances where a repayment is not made within a period of 30 days after the return is received.  In counting for 30 days, the section provides for certain periods to be left out.  Relevant for the purposes of this appeal is section 79(3)(a), which provides that time will not run during the raising and answering of any reasonable enquiry relating to the claim.  That date is defined in section 79(4)(b) as being either the date on which the Commissioners  - 

(i)	Satisfy themselves that they have received a complete answer to the enquiry, or 
(ii)	Determine not to make the enquiry or, if they have made it, not to pursue it further.

22.	The fact that at the time of these investigations the Commissioners were under a misapprehension as to the law regarding the principle of economic activity, as was subsequently shown by the European Court in the case of Bond House, does not of itself render the enquiries made by them unreasonable.  It was not challenged by Mr Allen that the Commissioners were under a duty to investigate repayment claims, nor did he suggest, as in an earlier notice of appeal it had been suggested on behalf of the Appellant, that enquiries made of third parties could not ‘stop the clock’.  The question he raises is whether, Mr Birchfield, having decided in December that the Appellant was not itself a party to any fraud, it was unreasonable for him nonetheless to withhold payment at that time.  We accept Mr Birchfield’s evidence that it was not just a matter of investigating the Appellant’s participation in the fraud.  He was under a duty to ascertain whether there was a fraud, and the nature of that fraud, and to do so he had to investigate whether the goods existed and had been properly described on the relevant invoices, a factor which would also debar the Company from recovering its input tax.  These are not simple enquiries, and in our judgment the length of time taken by the Commissioners to investigate whether or not there was fraud in transactions in which the Appellant was involved was reasonable in the circumstances.  Their investigations did uncover a degree of non-compliance by various traders with whom the Appellant was doing business.  It was incumbent on the Commissioners to make enquiries in Europe, and the length of time which it took to obtain replies was not within the Commissioners’ control.  There is no period during which the Commissioners were idle.  Even when awaiting responses from the various parties of whom enquiries were made, Mrs Parikh was continuing with other enquiries.  Mr Birchfield was evidently anxious to avoid delay and specifically authorised an interim payment of £65,000 in January 2003 and in February 2003 he ordered the full payment to be made by CHAPS in order that it might reach the Appellant sooner than if the payment had been by BACS, as would have been normal.  The Appellant was contacted regularly by Mrs Parikh and also by Mr Birchfield, and his lawyers were also kept informed.  At no stage was there any unnecessary delay by the Commissioners in pursuing enquiries which we consider to be entirely reasonable in the circumstances of a potential MTIC fraud.

23.	In the present case at no stage had the Commissioners received a complete answer to the enquiries which they were in our judgment legitimately making in respect of both periods, and at no stage did they decide not to pursue the enquiries further, the case being still open seven years later.  They did however decide that despite the inconclusiveness of some of their enquiries they would nevertheless make repayment to the Appellant.

24.	For the above reasons this appeal is dismissed and there is no order for costs.

MISS J C GORT
TRIBUNAL JUDGE
RELEASE DATE: 10 March 2010

A party wishing to appeal this decision to the Upper Tribunal must seek permission by making an application in writing to the Tribunal within 56 days of being provided with these full written reasons for the decision.  An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.