REPAYMENT SUPPLEMENT – Time limit for repayment – Delay due to Commissioners' inquiry – Calculation of period of inquiry – Finance Act 1994 s.79(4) – Value Added Tax General Regulations 1995 regs 198 and 199
LONDON TRIBUNAL CENTRE
PURPLE INTERNATIONAL LTD Appellant
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: STEPHEN OLIVER QC (Chairman)
TONY RING CTA (Fellow)
Sitting in public in London on 14 and 15 July 2003
Conrad McDonnell, counsel, instructed by Deloitte & Touche, chartered accountants, for the Appellant
Neil Sheldon, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents
© CROWN COPYRIGHT 2003
DECISION
- Purple International ("Purple") appeals against a decision of the Commissioners in a letter dated 4 October 2002 refusing to pay a repayment supplement in respect of VAT periods 6/02 and 7/02.
- Purple's business consisted of buying mobile telephones in the UK (standard rated purchases) and exporting them (zero-rated) to taxable persons in other Member States (not a UK supply). Accordingly Purple normally became entitled to a repayment of VAT credit each month.
- The repayment supplement regime is contained in VAT Act 1994 section 79 (as amended). A 5% repayment supplement is to be paid by the Commissioners when certain conditions in section 79(2) are satisfied. First, the taxable person's claim must have been received in time; that was satisfied here. Second, "a written instrument directing the making of the payment or refund is not issued by the Commissioners within the relevant period"; whether that condition was satisfied is the issue here. Third, the amount claimed must not exceed the amount actually due for refund by more than 5%; this condition was satisfied because in both cases the repayment of VAT credit was made in full in the precise amount shown in the return. Relevant to the second condition is the definition of "the relevant period". Section 79(2A) provides that:
"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."
The "period of 30 days" is specifically dealt with by section 79(3). This provides that-
"(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."
Regulation 198 of the Value Added Tax Regulations duly provides, so far as is relevant, that in computing the period of 30 days periods referable to "(a) the raising and answering of any reasonable inquiry relating to the requisite return or claim" shall be left out of account.
- This appeal requires us to determine which periods were referable to the raising and answering of an admitted inquiry by the Commissioners. This brings us to the statutory provisions dealing with this exercise. Regulation 199 is the earlier; its origin was SI 1988/1343. It reads as follows:
"199. For the purpose of determining the duration of the periods referred to in regulation 198, 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; …"
Following the decision of the High Court in Customs and Excise Commissioners v Rowland & Co (Retail) Ltd, [1992] STC 647, section 79(4) was introduced as section 20(3A) of Finance Act 1985 and inserted by section 15 of Finance (No.2) Act 1992 section 15 with effect from 16 July 1992. Section 79(4) reads:
"(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 any authorized person or of some other person."
An issue in this appeal is whether, as is contended for Purple, the period described in regulation 199 remains the proper period for the purposes of the present inquiry. We shall revert to this.
Purple's business
- Evidence of Purple's business was provided by Camilla Daubenay who, at the relevant time, was employed by Purple; her job title was "finance director" and compliance was one of her responsibilities. Based on her evidence we make the following findings about Purple's business.
- Purple trades as principal in buying and selling mobile telephone handsets and accessories for mobile telephones in wholesale quantities. It specializes in exporting these from the United Kingdom to customers in France, Italy, the Netherlands, Spain and Hong Kong. All Purple's purchases are from other mobile telephone traders in the UK, but not from factories. Camilla Daubenay described Purple as a dealer in the "grey market" which, for example, involves buying excess stock of larger distributors or from dealers in chains of traders operating in that grey market. Dealers in the grey market, she said, make every effort to keep the identity of their customers and their sources of supply confidential in order to avoid being by-passed. Purple manages its cashflow on the basis that its purchases and sales are in rapid succession. It ensures that it holds no stock for more than a day or two and it aims to secure that its VAT repayments are received within 30 days of making a claim. The aim is for Purple's purchases to match Purple's sales. It normally enters into between 1 and 4 such transactions a day. Goods purchased by Purple are taken to a secure warehouse belonging to a freight forwarder. Once the goods have been received and inspected, Purple instructs the freight forwarder to freight the goods to the customer's warehouse where they are held until Purple authorizes their release once it gets full payment.
- The personnel at Purple, i.e. a principal trader and managing director (Nils Wager), his assistant and Camilla Daubenay, were aware that dealings in the mobile telephone sector were sometimes parts of VAT "missing trader" and "carousel" frauds. Purple's steps to avoid unwittingly dealing with persons who might be engaged in fraudulent activities were to conduct, what Camilla Daubenay described as "due diligence" reports on new suppliers. It uses the services of a Mr Mark Fowler, a solicitor of "AMS Law". The report, Camilla Daubenay said, includes checking the supplier's identity and its credit reference. Purple checks out the VAT registration numbers of its intended suppliers and customers with Customs and Excise. Each month Purple provides Customs with details, including documents, records, names and prices relating to every relevant trader; it provided a "deal log" summarizing all the 20-30 transactions of that month.
- Camilla Daubenay was questioned about the methods actually employed by Purple for checking people with whom Purple did business. She asserted that Mark Fowler of AMS Law checked that the person's business was genuinely being carried on from the address that that person had given and made a site inspection. She asserted that Mark Fowler ascertained the length of time that the person in question had been in business and been at the address provided. She said that she had not been involved in the checking procedure herself and that she did not know whether any one conducted site inspections when the site was that of a new overseas purchaser. We were provided with an example of an AMS Law report dated 11 May 2001 on a company to which we will refer as L Ltd. L Ltd, the report said, had been incorporated in August 2000 and had had three registered offices since then. The report named two current directors. A third had resigned in April 2001; she had been described as a solicitor and the report says – "I would be most surprised if she would have associated herself with anything other than a proper company". The report confirmed that L Ltd was registered for VAT and was on monthly returns which indicated that it was "in a repayment position". The report concludes that the writer does "not believe on the basis available that this is a missing trader". Accompanying the report is a business information schedule produced by a "search" company. This is the source of all the information in the AMS Law report. Nothing in the report gives any credit ratings. Camilla Daubenay did not know if L Ltd had been visited by Mr Wager or by anybody else.
- The AMS Law report barely supports Camilla Daubenay's assertions about Purple's "due diligence" procedure. Above all there appear to have been no effective checks on the genuineness of the business of the person in question and there is no firm evidence of any site inspections.
The events relating to the present issue
- On 1 July 2002 Customs and Excise received Purple's 6/02 return. This showed sales for the month as being about £11.2 million and tax recoverable of £1,745,017. At that time a national verification exercise was being carried out by the Commissioners to verify the entitlements to refund of some 50 traders in the mobile telephone and computer chip trade sections. Purple had been chosen as one of the traders in the sector with the highest level of repayment. Purple's return was, following its receipt, selected for verification by the VAT Central Unit at Liverpool because a repayment inhibit had been set and had taken effect on 5 July. On 11 July Purple was informed by the Commissioners that repayment was to be withheld pending further inquiries.
- An officer of the Commissioners, Mr Kwame Ofori, contacted Purple on 17 July to request a visit. Camilla Daubenay claimed that the visit had been fixed for the same day and that Mr Ofori had not arrived. Mr Ofori's evidence was that the visit had been fixed for 19 July. He never, he said, booked a visit for the same day as first making contact. Camilla Daubenay claimed that when Mr Ofori and two other officers did come on 19 July, none of them had what she referred to as "official Customs identification" and only one had a business card. Mr Ofori said that he did not recall being asked and, in any event, he always carried one (and he had one at the hearing). To the extent that these points matter (and we cannot see that they do) we prefer Mr Ofori's evidence. Our general impression of her evidence has been that Camilla Daubenay had little recollection of what had been going on in Purple's business and, although described as a finance director, she had little knowledge of the most rudimentary of Purple's business methods and of its financing and accounting procedures.
- When Mr Ofori visited Purple on 19 July his object had been to verify the transactions to which the repayment claim related. Fourteen of these were without shipping documents. These were needed for the purposes of, among other things, ensuring that export had actually taken place. Mr Ofori asked for these and on 25 July they were made available for him to take away and inspect. Another visiting officer, Mr Jakob, an accountant, was unable to obtain satisfactory explanations from Camilla Daubenay about the accounting methods, books and records. Many of these, he was told, were with Purple's accountants in Leigh, Lancashire. (The visiting officers were not provided with the AMS Law report referred to in paragraph above.) On 29 July Mr Ofori completed his compilation of a spreadsheet of the 14 transactions to be checked and he sent this to "Central Co-ordination Team" by e-mail.
- Purple's accountants in Leigh, Lancashire, were visited on 30 July 2002 by Mr Jakob. He wrote a report the same day.
- 1 August 2002 marked the start of an examination of 14 transactions selected by Mr Ofori. Customs officers were sent to visit the UK suppliers. Details of EU customers were referred to the fiscal authorities of the relevant Member States. The officers and the EU authorities were given the task of verifying that the transactions had taken place and of obtaining relevant details.
- On 2 August Purple's 7/02 VAT return was received by the Commissioners; this claimed repayment of £2, 398,470 of tax.
- Reports on visits to UK suppliers were made to the Central Co-ordination Team and relayed on to Mr Ofori on 5, 16 and 19 August. This completed checks on the UK end of 3 of the 14 transactions to which the claim for repayment in the 6/02 return related. These showed that the goods traded in these transaction chains had been "sourced" from two missing traders and in one case to a "hijacked" VAT registration.
- Peter Birchfield, the regional co-ordinator of the Intra Community Missing Trader Fraud Strategy for the London Region of Customs and Excise gave evidence. On receipt of the information referred to in paragraph 16, he visited the Central Co-ordination Team (on 22 August) to review progress on the 14 transactions. On 29 August Mr Birchfield called a meeting to review the decision to withhold payment in respect of the 6/02 claim and to decide what to do about the 7/02 claim. The next day he instructed Mr Ofori to contact Purple and to arrange a visit to investigate the 7/02 claim.
- At that time the Commissioners were conducting a full investigation into the affairs of a trader called Bond House Systems Ltd. It occurred to Mr Birchfield that there could be similarities between the financing of Purple and that of Bond House Systems which appeared to have received loans from competitor companies. (Bond House Systems unsuccessfully appealed to the VAT & Duties Tribunals in Manchester in January 2003 (unreported).) On 30 August Mr Birchfield forwarded relevant material to a Mr John Burrows, trade sector consultant, asking for his opinion. Mr Burrows responded on 2 September informing Mr Birchfield that there was no clear evidence of impropriety at that stage.
- On 2 September 2002, following receipt of that response, Mr Birchfield authorized immediate repayment of both repayment claims. A week later Purple wrote to the Commissioners requesting a repayment supplement. This was refused by the Commissioners on 4 October and on 31 October 2002 Purple appealed.
- For convenience the parties have divided the period relating to the 6/02 claim into three phases. Phase 1 ends on 30 July, i.e. after Mr Jakob's visit to Purple's accountants. Phase 2 starts on 1 August when the Customs Co-ordination Team started to investigate the 14 transactions selected by Mr Ofori by sending out details to VAT offices in the UK and to the fiscal authorities of the Member States. Phase 3 starts on 30 August when Mr Burrows, the trade sector consultant for banking, was asked to check out the similarities, if any, between the Purple transactions and the Bond House Systems set up.
Conclusions
- The case for Purple is that the "reasonable inquiry" in relation to the 6/02 return (to use the words of section 79(3) and regulation 198(a)) started on19 July when the Customs officers visited Purple's premises and spoke to Camilla Daubenay and ended with the conclusion of Phase 1; until 19 July they had raised no inquiries of Purple. By the end of 30 July their inquiries had received a complete answer. Before going further with Purple's contentions we observe that their case so far is at its strongest if they are correct in their argument that the words of regulation 199(a) have not been displaced by what is now section 79(4). The position here is that regulation 199 starts the period of the reasonable inquiry "when the Commissioners first raised the inquiry" and the regulation ends the period "when they (have) received a complete answer to their inquiry". Section 74(4) by contrast starts the period "when they Commissioners first consider it necessary to make such an inquiry"; it sends on the date on which they "satisfy themselves that they have received a complete answer to the inquiry".
- Mr McDonnell for Purple argued that section 74(4) does not technically achieve what it sets out to do. It provides "for the purposes of the regulations" an extended definition of "the period referable to the raising and answering of such an inquiry as is mentioned in that subsection". The subsection did not, he emphasized, affect the authorizing legislation, section 79(3); instead its provisions apply for the purposes of the regulations under that section, that is regulation 198 and regulation 199. Accordingly, in regulation 198(a) taken alone, the period of inquiry specified is the longer section 79(4) period. However, regulation 199 overrides what might otherwise be the meaning of regulation 198(a) by providing a "rule" to determine the duration of the period referred to. That rule directs that the period shall be taken to have begun when the Commissioners first raised the inquiry and that it should be taken to have ended on the date when they have received the complete answer to their inquiry. The inquiry here was first raised on 19 July and the complete answer to the inquiry of Purple was received by the Commissioners on 30 July.
- We do not think that that conclusion is sustainable. Section 79(4) redefines the beginning and ending dates of the period referable to the raising and answering of the inquiry. It goes further to say that it is immaterial whether any inquiry is in fact made or at whom the particular question has been directed. The clear purpose of Parliament had been to broaden the narrow interpretation of the predecessor of regulation 199(a) by the High Court in the Rowland & Co, supra, decision. The opening words of section 79(4) lead, we think, quite naturally to that reading; the subsection applies in its entirety to determining for the purposes of all the regulations referred to in subsection 2A, i.e. regulations 198 and 199. To the extent that the periods prescribed by the regulations standing alone start earlier or end later than those identified by use of section 79(4), the latter prevails. On that basis it seems to us clear that the period referable to the raising and answering of the inquiry applicable to the 6/02 return started on 11 July when Purple was informed by the Commissioners of their further inquiries. That period does not necessarily end on 30 July (when Phase 1 closed), which is the point we now address, because all depends on when the Commissioners have satisfied themselves that they have received a complete answer to the inquiry (see section 79(4)(b)(i)).
- The Phase 2 inquiries did not, it was argued for Purple, amount to "a reasonable inquiry". The inquiries, it was said produced responses on 5, 16 and 19 August that related either to Purple's sources of supply or to suppliers further back in the chain; in 3 cases out of the 14 transactions investigated there was either a missing trader or a hijacked registration. Despite those discoveries, the Commissioners still made repayment to Purple; that, it was argued, demonstrated that the inquiries could not have been relevant to the question of whether Purple was entitled to a VAT credit. Developing this point, Mr McDonnell argued that, while an inquiry could reasonably be directed at verifying (when the goods were said to have been sold for export) shipping documents and actual shipment and (as regards supplies to the claimant) that invoices were held and that the goods corresponded to those invoices, the present inquiries that purported to explore the links in the chain of supply did not constitute a reasonable inquiry as explained in the Rowland & Co decision.
- In response the Commissioners argued that those UK inquiries and the information sought from the EU fiscal authorities were continuing parts of a reasonable inquiry. The Commissioners accepted that their investigations in Phase 2 required no direct input or assistance from Purple and argued that the fact that Purple was unaware of the nature of these was immaterial. Without those Phase 2 inquiries the Commissioners could not, it was said, satisfy themselves that they had received a complete answer.
- On page 655h-656a of Rowland & Co, Auld J said of the word "inquiry" in its present context that:
"The inquiry contemplated by these words is not a general one in the sense of a general investigation. It is an inquiry relating to a particular return in respect of which a supplement may be payable if the claim in it for repayment is not dealt with promptly. The combination of the words "the raising and answering of any … inquiry" also indicates that the word "inquiry" is used in the sense of a question or questions put to the taxpayer for him to answer, not an inquiry 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 inquiry or question to, or making an inquiry of, the taxpayer about his claim for repayment. … It certainly does not fit readily into the notion of a decision by a body remote from the taxpayer, like the Value Added Tax Central Unit, to instigate an inquiry in the sense of an investigation, as the commissioners contend."
Here the "inquiry" was designed to verify 14 of the transactions that were ingredients in the claim for the 6/02 period. They had been identified by Mr Ofori as needing further investigation. We would not regard the investigation work carried out by the Commissioners during Phase 2 as a "general investigation" in the sense that that expression as used by Auld J in Rowland & Co. It was claim-specific. It started with an examination of the 6/02 claim, then it followed up 14 of the transactions whose tax was comprised in the claim in order to satisfy the Commissioners that the transactions had not been part of a suspect claim. It remained claim-specific notwithstanding the fact that the Commissioners were carrying out a wider investigation, i.e. the national verification exercise referred to in paragraph 10 above and that the investigation into Purple arose from this. The continuing investigation by the Commissioners following a receipt of this information at the end of Phase 1 shows that they still needed to be satisfied that they had received a complete answer to their inquiries so far (see section 79(4)(b)(i)); and the fact that the Phase 2 inquiries were made of persons other than the claimant (Purple) is, by reason of the concluding words of section 79(4), immaterial.
- We move on now to Phase 3. From 30 August to 2 September Mr Burrows, on Mr Birchfield's instigation, checked out the available material to see if evidence existed of inter-company loans that, on analogy with the Bond House Systems circumstances, showed that relationships between sellers and purchasers in the chain might take the supplies outside the scope of economic activities. This, argued Mr McDonnell for Purple, was not a reasonable inquiry; despite the Commissioners belief at the time, Purple's loan relationships cannot, it was argued, have been relevant to the question of whether or not a VAT credit was due. While conceding that loan relationships could make Purple and its suppliers "connected persons" thereby enabling the Commissioners to issue schedule 6 paragraph 1 notices directing that market values be substituted, the Bond House Systems circumstances involved a quite different line of attack, namely an attack on the circularity of the relevant transactions. There was therefore no reasonable basis for the Phase 3 inquiry. Alternatively, argued Mr McDonnell, the Phase 3 inquiry was a novel inquiry and separate from the inquiries in Phase 1. To treat the two inquiries as one involves treating all the Phases as comprised in an overall investigation and that, it was said, goes beyond the scope of inquiry as explained in Rowland & Co. On that basis the Phase 3 inquiry stopped the clock for four days; and if Purple were right in their earlier argument that the Phase 1 inquiry lasted for eleven days, it followed that the Commissioners made the repayment outside the 30 day period as prescribed in section 79.
- Mr Sheldon for the Commissioners reminded us that the inquiry of Mr Burrows was made at a time when replies had not been received from the other EU fiscal authorities. And in view of the nature of Purple's business and the prevalence of the sort of fraud that was being revealed by investigations into the Bond House Systems operations, it was entirely reasonable for Mr Birchfield to have referred the matter to Mr Burrows, the trade sector consultant. Bearing in mind the absence of full responses to the EU inquiries, the Commissioners could, so it was argued, have waited considerably longer before making the repayment.
- The evidence shows us that Purple had been taking steps to stay clear of missing traders and other suspect chains. But these precautions are far from convincing. Camilla Daubenay had no involvement in these; indeed her knowledge of the fiscal affairs of Purple was not one of her strong points. The information provided by AMS Law was not, we think, an effective safeguard. But in any event the degree of care taken by Purple is not material. Nor is the fact that Purple has maintained contact with the Commissioners by, for example, sending its day logs to the Commissioners at the same time as making its return. The statutory words require the Commissioners to satisfy themselves that a repayment is justified before it is made. And the concluding words of section 79(4) expressly state that the inquiry in question may be made of persons other than the claimant. Here, as we see the evidence, there was a single composite inquiry involving component parts of the inquiry being directed at different persons. The inquiry started and remained a reasonable inquiry. In particular the Phase 3 element was reasonable. The Commissioners would, we think, have been in dereliction of duty if they had not taken steps to check the transactions (i.e. those giving rise to the claim) out for fraud of the sort revealed in the Bond House Systems inquiries. It is not, we think, legitimate to limit the scope of such an inquiry by reference to one aspect, e.g. a connected person relationship enabling the Commissioners to issue a Schedule 6 paragraph 1 notice. Once the reasonable inquiry has started, the means adopted by the Commissioners in carrying it out cannot be questioned before this Tribunal.
- In conclusion on the claim for the 6/02 period, we are satisfied that the reasonable inquiry lasted from 11 July until 2 September. The clock was therefore stopped for 52 out of the 63 days from the receipt of the claim. It follows that the repayment was directed in writing within the 30 day period referred to in section79(2)(b).
- Turning now to the return for the 7/02 period, we think it was, for the same reasons as applied to the 6/02 period, reasonable to raise an inquiry concerning this repayment while the inquiry into the preceding return was still ongoing. The inquiry was made of the sector trade consultant, Mr Burrows, on 30 August. This stopped the clock for four days. So, when repayment was authorized in writing on 2 September, the written direction was made within the 30 day relevant period referred to in section 79(2)(b).
- We dismiss the appeal in relation to both claims.
STEPHEN OLIVER QC
CHAIRMAN
RELEASED:
LON/02/1139
