[2010] UKFTT 631 (TC)

TC00870

Appeal number TC/2009/14258 

VALUE ADDED TAX – whether supplies made to customers outside the member States were eligible to be zero-rated under section 30(6) VATA – whether the applicable conditions having the force of law in Notice 703 relating to exports were satisfied – held they were in relation to supplies of goods made under two of the invoices in dispute – held they were not in relation to the other 8 invoices because HMRC had reasonably decided either that no evidence of export was obtained or that the evidence of export obtained did not clearly identify the export destination and/or the mode of transport and route of the export movement as required by paragraph 6.5 of Notice 703 – Appeal allowed in part

FIRST-TIER TRIBUNAL
TAX CHAMBER

	MICHAEL COHEN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	JOHN WALTERS QC
						JULIAN STAFFORD

Sitting in public in London on 29 September 2010

Mr. Faiyaz Nurmohamed, A.Z. & Partners, Accountants and Tax Advisors, for the Appellant 

Mrs. Gloria Orimoloye, Advocate, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Mr. Michael Cohen (“the Appellant”) appeals (by a Notice of Appeal dated 18 September 2009) against an assessment to VAT raised on 8 June 2008 in respect of the VAT periods 11/06, 02/07, 05/07, 08/07 and 02/08 in the total amount of £5,570.19.  (Interest has also been charged.) The Appellant is a manufacturing jeweller and the assessment is raised to charge output tax on 10 transactions which the Appellant claims should be zero-rated as being supplies of goods exported to places outside the member States (Jersey and Australia).  The Respondents (“HMRC”) contend that zero-rating treatment should not apply to the transactions because the necessary official or commercial evidence of export of the goods in question has not been provided by the Appellant.  The Appellant contends that he has supplied sufficient evidence of export of the goods in the form of letters from customers and proof of banking of sales proceeds.
2.	We received oral evidence from the Appellant and from Mr. Shehzaad Nunhuck, the officer of HMRC who raised the assessment.  Officer Nunhuck also made a Witness Statement.  In addition, a bundle of documents was in evidence. We find the following facts.
3.	Officer Nunhuck visited the Appellant’s place of business in Hatton Garden, London EC1 by appointment on 11 May 2009 for the purpose of checking the accuracy of the Appellant’s VAT returns. He met the Appellant and his accountant, Mr. Nurmohamed (who represented the Appellant at the hearing of the appeal). 
4.	The Appellant had been visited on 27 September 2005 by another officer, Miss Hydrie, who picked up the point that the Appellant exported goods and made him aware that he needed to keep proof of exports in accordance with the terms of Notice 703 (Export of goods from the United Kingdom), and specifically paragraph 7.5 of that Notice, which concerns postal exports.  She had asked, in a letter to the Appellant dated 10 October 2005 making these points, that he should in future staple the necessary evidence of postal export to the relevant invoice.
5.	Two days after Officer Nunhuck’s visit, on 13 May 2009, he wrote to the Appellant confirming ‘errors identified which were discussed with you and your accountant’.  He explained the conditions for zero-rating supplies of goods for export and identified the supplies in respect of which he would make an assessment for output tax by reason of his having been provided with no proof of export.  These were the supplies which were eventually the subject of the assessment appealed against, which Officer Nunhuck raised on 8 June 2009 and notice of which was issued on 11 June 2009.
6.	On 9 June 2009, Mr. Nurmohamed wrote to HMRC making the following points:
As to invoice 1107, raised on 8 January 2007 in respect of a supply to D & G Diamonds (an Australian customer) of diamonds in the amount of US$ 23,900 (£12,578.95) on which output VAT of £1,873.46 had been assessed because Officer Nunhuck was not satisfied that there was proof of export, a copy of the invoice was enclosed together with a copy of the Appellant’s bank statement with HSBC for a US$ current account, showing the credit of US$ 29,400 on 15 December 2006 originating from De Heer F.P.B.L. Zweegers (a Dutch finance house).  [The copy invoice before the Tribunal noted the invoice amount (US$ 23,900) with the annotation: “Paid 29,400 US transfer – credit bal US$ 5,500”.]  Mr. Nurmohamed wrote that the Appellant had advised him that, from memory, he believed the stones were collected by a representative of the customer who happened to be in the UK at that time and that was why there was no proof of posting.  Another invoice to the same customer dated 6 December 2006, together with proof of shipment (as to which HMRC accept that zero-rating applies), was also enclosed.  
As to the other 9 invoices in issue, all issued to either P. Le Rossignol or Stott & Willgrass (both Jersey customers), copy letters from Peter Le Rossignol and Stott & Willgrass respectively confirming for the purposes of HMRC’s VAT inspection that they took delivery of goods in connection with those invoices.  The details are: Peter Le Rossignol confirmed delivery of goods in connection with invoices 1043, 1055, 1138, 1151 and 1177, while Stott & Willgrass confirmed delivery of goods in connection with invoices 1118, 1218, 1220 and 1227.
Mr. Nurmohamed added:
“We also enclose a schedule titled “Sales to Jersey” for the 11 quarters which were inspected by the VAT office from which you will see that our client has made a very good attempt in meeting HMRC requirements in terms of retaining proof of export.  We accept that in some instances, which are very small in number, our client fell short of the documentation required to satisfy [HMRC] but would also ask you to recognise the significant improvements he has made since HMRC’s last visit on 27 September 2005.  Nevertheless, we will ask our client to ensure that in future, FULL documentation of export is retained to satisfy the conditions of zero-rating supplies to Jersey.” 
7.	The invoices identified by number above are all the 10 invoices in issue in the appeal. The schedule of “Sales to Jersey” shows that in the VAT periods 08/06 to 02/09 inclusive 95 invoices for sales to Jersey had been issued, as to which proof of posting on 85 had been retained.
8.	Officer Nunhuck responded to this letter on 2 July 2009 stating that the evidence enclosed with the letter dated 9 June 2009 was unsatisfactory:
“because your client was indeed made aware on 10/10/05 by a previous officer that full documentation of export should always be retained to satisfy the conditions of zero-rating supplies for VAT purposes”
He stated that “in that respect” the assessment would be upheld. 
9.	A review was requested and on 19 August 2009 Officer Russon of the Appeals & Review Unit of HMRC wrote to the Appellant confirming Officer Nunhuck’s decision on the grounds that the appropriate official or commercial evidence of export as required by sections 6.2 and 6.3, and specifically section 7.5 of Notice 703 had not been provided.  Officer Russon’s letter stated that such provision was required by sections 3.3 and 3.4 of Notice 703, which have the force of law.
10.	In the Notice of Appeal Mr. Nurmohamed had stated that “We are still looking for loose postal receipts!!”. Two such were subsequently discovered and provided to HMRC (and the Tribunal).  One related to invoice 1118 (a supply to Stott & Willgrass on 11 February 2007).  The other related to invoice 1177 (a supply to P. Le Rossignol on 8 August 2007) – the special delivery docket was date-stamped by the Post Office at Farringdon Road, London, E.C. 1 on 9 August 2007.
11.	In evidence, Officer Nunhuck said that in relation to invoice 1177 he was prepared to ‘use best judgment’, disregard the time limit applicable for obtaining evidence of export and accept that the supply was eligible for zero-rating.  Mrs. Orimoloye confirmed in her submissions that HMRC accepted that this supply qualified for zero-rating.
12.	In relation to invoice 1118, he was not prepared to take the same approach because he had seen a copy only of the Post Office docket and could not see the Post Office date stamp.  The Tribunal, on the other hand, was able to discern from the copy docket that it had been date stamped by the Post Office on “12 FE” and we inferred that it had indeed been date stamped on 12 February 2007, the day after the invoice date. 
13.	We were told (and accept) that the Appellant does suffer from a medical condition that impairs his ability to organise his paperwork, but that he is making real efforts to counteract his condition by trying to implement systems designed to make him more organised. We were also told (and accept) that Officer Nunhuck knew nothing of the Appellant’s medical condition, when dealing with the case. Officer Nunhuck said in evidence that such knowledge would not in any case have made any difference to his approach to the record-keeping requirements, but it would probably have led to him giving the Appellant more time to produce evidence of export before the assessment was raised. 
14.	We were also told that the Appellant and Mr. Nurmohamed felt that HMRC’s position put the Appellant’s integrity in question and they found this offensive.  We were assured by Mrs. Orimoloye that HMRC were not casting any doubts on the Appellant’s integrity.  She said that she accepted that the Appellant had made the exports: her case was that he had not retained the paper evidence necessary for zero-rating. 
15.	With regard to invoice 1107, the supply to the Australian customer D & G Diamonds, the Appellant confirmed in oral evidence that this was his second sale to this customer.  The first had been exported by him and acceptable proof of export had been provided.  The stones sold in the second transaction had been collected personally by the customer in London and it did not occur to the Appellant that he needed paperwork to prove the customer’s export of the goods.  He had been paid from Antwerp as the HSBC statement indicated.  He said that the credit balance of US$ 5,500 referred to had been sent to Antwerp.
16.	Officer Nunhuck said in evidence that the Appellant and Mr. Nurmohamed at the meeting on 11 May 2009 had been provided only with invoices in respect of the supplies in dispute, with nothing attached (in the form of proof of export) to justify zero-rating. 
17.	Officer Nunhuck was not prepared to accept the letters from Peter Le Rossignol and Stott & Willgrass in the absence of formal evidence that the Appellant had exported the goods, as evidence justifying zero-rating treatment.  He required at least to see proofs of postage (a document issued by the Post Office) to evidence the fact that the goods had left the member States.  He maintained that this was a common approach applied to all traders.
18.	Officer Nunhuck was always prepared to exercise ‘best judgment’ in cases where Notice 703 was not scrupulously complied with and he said that if the letters from Peter Le Rossignol and Stott & Willgrass had been shown to him at the time of the inspection visit on 11 May 2009, he would have accepted them as ‘supplementary evidence’ to justify zero-rating. This was a reference to the requirement to hold sufficient supplementary evidence to prove that a transaction has taken place – see: paragraph 6.4 of Notice 703.
19.	However Officer Nunhuck in cross-examination said that although he had seen evidence of payment for the supplies having been banked by the Appellant, this did not assist because HMRC accepted that the transactions had taken place but their point was that there was not sufficient proof of the export of the goods to entitle the Appellant to zero-rating.
20.	Mr. Nurmohamed had suggested at the visit meeting on 11 May 2009 that since there was proof of export for most of the other supplies, such as to satisfy HMRC that they were eligible for zero-rating, the Appellant should not be required to produce evidence of export for 100% of his supplies outside the member States.  Officer Nunhuck had resisted this approach, referring the Appellant and Mr. Nurmohamed to sections 3.3 and 3.4 of Notice 703.
21.	 We turn now to the applicable law. 
22.	The relevant zero-rating provision in domestic law is section 30(6) VAT Act 1994 (“VATA”), which relevantly provides as follows:
“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 to a place outside the member States; or
(b)	...
and in either case if such other conditions, if any, as may be specified in regulations or the Commissioners may impose are fulfilled.”
23.	Section 30(6) VATA and the relevant regulations were enacted in implementation of article 15 of the Sixth VAT Directive (77/388/EEC) which provides for a mandatory exemption for supplies of goods exported from the Community ‘under conditions which [the Member States] shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse’.  
24.	Regulation 129 of the VAT Regulations 1995 is relevant.  It provides as follows:
“Where the Commissioners are satisfied that–
(a)	goods intended for export to a place outside the member States have been supplied otherwise than to a taxable person, to–
(i)	a person not resident in the United Kingdom,
(ii)	a trader who has no business establishment in the United Kingdom from which taxable supplies are made, or
(iii)	an overseas authority, and
(b)	the goods were exported to a place outside the member States,
the supply, subject to such conditions as they may impose, shall be zero-rated.”
25.	Conditions have been imposed by Notice 703, some parts of which are stated to have ‘the force of law’.  Relevant passages of Notice 703 which are stated to have ‘the force of law’ include:
“Paragraph 3.3 : Conditions for zero-rating direct exports 
A supply of goods sent to a destination outside the EC is liable to the zero rate as a direct export where you:
•	ensure that the goods are exported from the EC within the specified time limits (see paragraph 3.5)
•	obtain official or commercial evidence of export as appropriate (see paragraphs 6.2 and 6.3) within the specified time limits
•	keep supplementary evidence of the export transaction (see paragraph 6.4), and
•	comply with the law and the conditions of this notice.”
and
“Paragraph 3.4 : Conditions for zero-rating indirect exports
A supply of goods to an overseas customer (see paragraph 2.4) sent to a destination outside the EC is liable to the zero rate as an indirect export where:
your overseas customer:
•	exports the goods from the EC within the specified time limits (see paragraph 3.5), and 
•	obtains and gives you valid official or commercial evidence of export as appropriate (see paragraphs 6.2 and 6.3) within the specified time limits,
and you:
•	keep supplementary evidence of export transactions (see paragraph 6.4), and
•	comply with the law and conditions of this notice,
and the goods are not used between the time of leaving your premises and export, except where specifically authorised elsewhere in this notice or any other VAT notice.”
26.	As indicated above, paragraph 3.5 contains text having ‘the force of law’ in relation to time limits for exporting goods and time limits for obtaining evidence.  These are usually 3 months but in some cases are 6 months. Paragraph 6 deals with ‘Proof of Export’. Sub-paragraphs 6.2, 6.3 and 6.4, which do not have ‘the force of law’, deal (by way of explanation) respectively with official evidence, commercial transport evidence and ‘what supplementary evidence is available?’.  
27.	 Paragraph 6.5, which contains text which does have ‘the force of law’, deals with what must be shown on export evidence.  The text having ‘the force of law’ is as follows:
“The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:
•	the supplier
•	the consignor (where different from the supplier)
•	the customer
•	the goods
•	an accurate value
•	the export destination and
•	the mode of transport and route of export movement.”
28.	The other text in sub-paragraph 6.5 states that vague descriptions of goods, quantities or values are not acceptable and contains the warning (in bold type) that if the evidence is found to be unsatisfactory “you as the supplier will become liable for the VAT due”.
29.	Paragraph 7 contains information not having ‘the force of law’ about proof of export for zero-rating in certain specific circumstances.  One subparagraph, 7.5, was particularly brought to our attention.  It deals with postal exports and relevantly states as follows:
“Goods exported by post may be zero-rated if they are direct exports and you hold the necessary evidence of posting to an address outside the EC.
(a)	Evidence of posting for letter post or airmail (packages up to 2kg)
A fully completed certificate of posting form, presented with the goods for export, and stamped by the Post Office will be your evidence of export.  Acceptable forms are:
•	Form C&E 132 for single or multiple packages taken to the Post Office.  …
•	Form P326 available from the Post Office and used for single packages taken to the Post Office.
Also acceptable is:
•	A Certificate of Posting for International Mail, or a Royal Mail Collection Manifest, available from a Royal Mail sales advisor, for use by customers using their Business Collections Service, where the Royal Mail collection driver signs the certificate. “
The submissions
30.	Mr. Nurmohamed submits that the Appellant has proved adequately – to the extent that would satisfy a fair and reasonable person – that the goods supplied by the supplies in issue have been exported to a place outside the member States and that they therefore qualify to be zero-rated.
31.	Insofar as the requirements of Notice 703 have not been complied with fully, he submits that HMRC, through Officer Nunhuck, have been harsh, showing no understanding of the Appellant’s medical condition or of his efforts to be more organised in his paperwork.  
32.	Mrs. Orimoloye insists that the provisions of Notice 703 having ‘the force of law’ must be complied with before an export supply of goods can be zero-rated.  This requires the provision within the applicable time limits of proof of export of the goods supplied and also supplementary evidence to prove that a transaction has taken place.
33.	She submits that (apart from the supply covered by invoice 1177, which she accepts ought to be zero-rated) in relation to the supplies in issue, the Appellant has produced some supplementary evidence, proving that the transactions in issue have taken place, but no proof of export.  HMRC, through Officer Nunhuck, have not been satisfied that the goods have been exported and the question for the Tribunal is whether or not HMRC’s position is a reasonable one for them to adopt.  She submits it is.
34.	She reminds us that the Appellant had been warned by Officer Hydrie in 2005 of the need to obtain and retain the necessary evidence. She takes no point on the evidence relating to the Appellant’s medical condition. 
Discussion and Decision
35.	Supplies of goods exported from the UK outside the member States do not automatically qualify to be zero-rated.  Although that is the principle laid down by the applicable VAT Directives, it is qualified by the requirement that conditions laid down by the member States (here, the UK) for the purpose of ensuring the correct and straightforward application of the zero-rating provision and preventing evasion, avoidance and abuse are satisfied.
36.	By regulation 129 of the VAT Regulations 1995 and Notice 703, the UK has laid down such conditions.  Clearly the conditions are designed to prevent evasion, avoidance and abuse and it has not been suggested that they are not fully enforceable.  Thus they constitute legal conditions which must be satisfied (in addition to the requirement that goods supplied must be exported to a non-taxable person outside the member States) before a supply can be zero-rated.  If a supply has been made and cannot be zero-rated because of a failure to comply with the conditions laid down by Notice 703, then it must be standard-rated.  There is no suggestion in this case that the supplies concerned have not been made. Therefore the assessment must stand unless the Appellant has been able to prove that the goods have been exported and that the conditions laid down by Notice 703 have been complied with.
37.	In relation to the goods supplied under invoice 1177, HMRC accepts that the Appellant has satisfied the obligation.  That supply ought therefore to be zero-rated.
38.	In relation to the goods supplied under invoice 1118, HMRC’s objection is that only a copy of the applicable Post Office docket has been provided. The question for us is whether that copy ought reasonably to constitute ‘official or commercial proof of export’ for the purposes of paragraph 6.5 of Notice 703.
39.	The part of paragraph 6.5 which has ‘the force of law’ states as follows:
“The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:
•	the supplier
•	the consignor (where different from the supplier)
•	the customer
•	the goods
•	an accurate value
•	the export destination and
•	the mode of transport and route of the export movement.”
40.	 We consider copy invoice 1118, together with the copy of the applicable Post Office docket (a special delivery docket), to see whether they satisfy the requirements of paragraph 6.5.  We find that the invoice and the docket were copied within the applicable time limit and do together satisfy the requirements of paragraph 6.5.  The fact that the Post Office docket is a copy and not the original does not in our view signify in a case where, expressly, HMRC do not put the Appellant’s honesty or bona fides in issue.  We consider that Officer Nunhuck’s objection that he could not see the Post Office date stamp on the docket was implausible.  As indicated above, the date stamp could easily be adequately discerned.  We hold that the supply under invoice 1118 therefore ought to be zero-rated and that HMRC’s objections to the documentary proof of evidence provided were unreasonable.
41.	In relation to invoice 1107, which covered the supply to the Australian customer, D & G Diamonds, we consider that while the Appellant has proved that the supply took place, he has not provided adequate proof of export of the goods.  The goods were handed over to the Appellant’s customer (or its representative) in the UK, therefore if the supply was an export at all, it was an indirect export to which paragraph 3.4 of Notice 703 applies. 
42.	Paragraph 3.4 (which has ‘the force of law’) requires the trader (the Appellant) to obtain from his customer valid official or commercial evidence of export as appropriate, and that evidence must satisfy the requirements of paragraph 6.5 (also having ‘the force of law’) as set out above. With reference to paragraph 6.5, the Appellant has provided no evidence of the export destination or of the mode of transport and route of the export movement.  All he has provided is evidence that the goods were sold (in the UK) to an Australian customer and that they were paid for from a Dutch or Belgian source.  We therefore hold that HMRC’s refusal to zero-rate this transaction was reasonable and we uphold the assessment in relation to it.
43.	In relation to the other invoices, 1043, 1055, 1138, 1151 (supplies to P. De Rossignol of Jersey) and 1218, 1220 and 1227 (supplies to Stott & Willgrass of Jersey), the Appellant has provided letters from P. De Rossignol and Stott & Willgrass confirming that they respectively ‘took delivery of the goods’.  Officer Nunhuck would have regarded them as supplementary evidence to prove that the transactions had taken place if they had been produced at the time of his visit.  Again, given the fact that the bona fides of the Appellant is not in issue, we consider he should have regarded them as supplementary evidence in any event. 
44.	The difficulty for the Appellant, however, is that although these letters might be regarded as commercial evidence of export, with the invoices themselves being the necessary supplementary evidence, the letters do not go far enough to satisfy the requirements of paragraph 6.5.  That paragraph, which has ‘the force of law’ lays down that commercial evidence must clearly identify, amongst other things, the export destination and the mode of transportation and route of the export movement.  The letters do neither.  It is a matter of inference that the goods were exported to Jersey.  That fact is not clearly identified.  All that is said is that the customers, with Jersey addresses, ‘took delivery of the goods’.  That language is quite consistent with their having taken delivery of the goods in the UK and not exported them.  Even if we were prepared to overlook this point and conclude that the letters were evidence which clearly identified the export destination (Jersey), there is nothing in the letters (or any other evidence which we, or HMRC, have seen) which identifies the mode of transport and route of the export movement. 
45.	We bear in mind that the conditions imposed by Notice 703 are imposed for the purpose of ensuring the correct and straightforward application of the zero-rating provisions relative to exports outside the member States and of preventing any evasion, avoidance or abuse.  It is therefore entirely rational and proportionate for HMRC to impose and enforce provisions of the notice which ‘have the force of law’, because not to do so would facilitate evasion or avoidance of VAT by abuse of the zero-rating provisions relative to such exports.
46.	We take full account of the Appellant’s medical condition and of the efforts which he is making to counteract it.  We also have sympathy with him because there is no real doubt that all the goods in issue have been exported outside the member States as he claims. However, we consider that Officer Nunhuck reasonably required to see a documentary connection between the goods invoiced by the Appellant and the export and this was not apparent on the face of any documents produced.
47.	In these circumstances, we hold that HMRC reasonably refused to accept the documentation produced by the Appellant as satisfactory evidence of export of the goods supplied under invoices 1043, 1055, 1107, 1138, 1151, 1218, 1220 and 1227 and uphold the assessment in relation to those supplies.  We allow the appeal in relation to the goods supplied under invoices 1118 and 1177.  In the result the assessment stands to be reduced to charge VAT of £ 4,702.80 and the interest charged must be recalculated accordingly.
48.	 The appeal is therefore allowed in part as indicated above. 
      Right to apply for permission to appeal
49.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN WALTERS QC
JUDGE OF THE FIRST-TIER TRIBUNAL
RELEASE DATE: 8 December 2010

© CROWN COPYRIGHT 2010