20891
VALUE ADDED TAX  zero-rating — intra-Community trade — Sixth Directive, art 28c(A), VAT Regs 1995, reg 134, Public Notice 725 para 4.3 — failure to show customer’s VAT no on invoices — inadequate evidence of removal from UK — purchaser failing to account for tax — Appellant innocent party — whether entitled to zero-rate supplies — precautions taken inadequate —Teleos and IDT Card Services considered — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

	APPLEYARD VEHICLE CONTRACTS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR			HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Colin Bishopp (Chairman)

Sitting in public in Manchester on 28 July 2008

Oliver Jarratt, of Deloitte & Touche LLP, for the Appellant
James Puzey, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
1.	This is an appeal by Appleyard Vehicle Contracts Limited (“Appleyard”) against an assessment dated 30 May 2006, in the sum of £193,873, by which the Commissioners seek to recover VAT for which, they say, Appleyard should have accounted when selling 256 motor vehicles in its accounting periods from 11/03 to 01/06. Appleyard’s business is the leasing and contract hire of motor vehicles; when the lease or contract comes to an end, the vehicle is sold at auction. Each of the 256 vehicles relevant to this appeal was sold to a business calling itself Rendon & Associates (“Rendon”), trading or purporting to trade from an address in Dublin. Appleyard zero-rated each of the sales; the Commissioners say that the conditions which must be satisfied if such sales are to be zero-rated were not satisfied, and that Appleyard must account for VAT at the standard rate. The arithmetic of the assessment was not in issue. 
2.	Appleyard was represented before me by Oliver Jarratt of Deloitte & Touche LLP, and the Commissioners by James Puzey of counsel. I heard the evidence of Appleyard’s financial director, David Mitcheson, its used vehicle disposal manager, Kenneth Alston, an Irish Revenue officer, Donal Costello, and two of the Commissioners’ officers, Mark Carroll and Willie Fraser. As there was little disagreement about the facts I do not intend to set out the evidence in detail, but to set out my findings, indicating within what follows which were the few contentious areas.
3.	Sales to Rendon began in August 2003, and ended in October 2005. Ordinarily Appleyard’s sales of its used vehicles were standard-rated, since input tax deduction had not been blocked on acquisition of the cars, and the margin scheme provided for by section 50A of the Value Added Tax Act 1994 did not apply. Although Appleyard had sold many vehicles by auction (I was told as many as 10,000 a year since 1992), it had not previously sold any to a trader in another member State of the European Union. Appleyard’s staff, particularly an accountant, Scot McHarg, then employed by it but who has since left the company, and from whom I had no evidence, understood that, provided the vehicles were transported to Ireland (as Rendon assured them would be the case) and Rendon’s VAT registration number was quoted on Appleyard’s invoices, the sales could properly be zero-rated.
4.	Mr Alston obtained from Rendon’s representatives, two men claiming to be brothers named O’Sullivan, details of Rendon’s address, telephone and fax numbers and Irish VAT registration. It was contended by Appleyard in its correspondence with the Respondents that it had checked by means of the Irish Revenue’s web site that the registration number given was valid, and that the check was repeated periodically, but the contentions were not borne out by the evidence available to me, which merely supported an assumption that Mr McHarg had done whatever he thought necessary. Mr Alston’s evidence was that Mr McHarg told him he had checked the number but, while I do not doubt Mr Alston’s evidence, I am not satisfied that Mr McHarg did in fact make any check, either once or repeatedly, in the relevant period. There was no documentary evidence, as one might have expected, of any such check; it would have been simplicity itself to print out the web page. Had a check been made the fact that the number was not valid would have been discovered immediately. In addition, the number Appleyard had could not have been valid as it had one digit too many. I imagine the extra digit was attributable to nothing more sinister than a clerical error, but had there been a check on the number the extra digit too would have been discovered, but there was nothing to suggest that it was. There was also no evidence of any check on Rendon’s claimed address, or indeed on any of the other information Rendon had provided. 
5.	I accept Appleyard’s evidence, which was not challenged on this point, that Rendon paid promptly for each car by banker’s draft, though it seems to me that the very fact of prompt payment led Appleyard to accept the O’Sullivan brothers at their word. The auctions were conducted by Appleyard’s receiving bids, by telephone or in person, for the cars on a given day and identifying on the following day which of the bids was the highest; that bid was then accepted, and the purchaser invited to pay and to collect the car. The cars for which it had bid successfully were collected by Rendon from Appleyard’s premises, immediately following the handing over of a banker’s draft in payment of the price, and taken, or purportedly taken, to Ireland by Rendon; Appleyard had no involvement in their transport following the sales. It did not ask for, and did not receive, any evidence that the vehicles had arrived in Ireland.
6.	It is now common ground that Rendon (which was, or had been, a legitimate Irish business) was not registered for VAT in Ireland in the relevant period: it had been registered, but its registration was cancelled in 2001 (a fact which would almost certainly have been discovered had the claimed checks of the Irish Revenue’s web site been undertaken). The brothers (if indeed they are brothers), had, it seems, “borrowed” its name and former VAT registration number. It is also common ground that they, or Rendon, have failed to account to the Irish authorities for the VAT which, if Appleyard’s case is right, would have been due on the sales of the cars to purchasers in the Irish Republic. One man named Hughes but who is known to have used the alias of O’Sullivan and is believed by the Irish Revenue to have done so on this occasion is being sought by the Irish authorities in order that he may be prosecuted for alleged VAT fraud as a consequence of that failure.
7.	There is no dispute that Appleyard was completely unaware of the fact that Rendon was not what it appeared to be, or that it was not accounting correctly for its VAT liabilities, until November 2005 when, for unconnected reasons, Appleyard did make an enquiry of the Irish Revenue’s web site which revealed that Rendon’s purported VAT number was obsolete. Appleyard attempted to contact Rendon in order to investigate what it realised was a significant problem, but it soon became apparent that Rendon, or the brothers, were avoiding it and Appleyard contacted the Commissioners at their local office. It is accepted by the Commissioners that Appleyard has since provided all the information on which, ultimately, the assessment is based, that it made a voluntary disclosure in respect of 33 vehicles of whose removal to the Irish Republic was no evidence at all could be found, and that it has cooperated fully with both the UK and the Irish authorities.
8.	The assessment is based on Appleyard’s failure to comply with what the Commissioners contend are the essential requirements which must be met if sales of goods to a trader in another member State are to be zero-rated. First, the Commissioners say, Appleyard failed to include its customer’s VAT registration number on its invoices; second, even if the number with which it was provided had been included, it would have been incorrect; and, third, it failed to obtain acceptable evidence that the cars had in fact been removed to Ireland. They also point to Appleyard’s failure to file EC sales lists or make Intrastat declarations. The latter failure is not claimed to be a reason, in itself, for refusing zero-rating of the cars; rather, the Commissioners say that, had EC sales lists been filed, the fact that Rendon’s claimed VAT registration number was invalid would have been revealed much earlier. The failure to file the lists and declarations is, they say, evidence of a lack of proper care.
9.	The formal requirements are set out in the Commissioners’ Public Notice 725, the current version of which (in materially the same terms as earlier editions—the paragraph number has changed from one edition to another) contains the following, at paragraph 4.3:
When can a supply of goods be zero-rated?
The text in this box has the force of law
A supply from the UK to a customer in another EC Member State is liable to the zero rate where:
• 	you obtain and show on your VAT sales invoice your customer’s EC VAT registration number, including the 2-letter country prefix code; and
• 	the goods are sent or transported out of the UK to a destination in another EC Member State; and
• 	you obtain and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out at paragraph 4.4.
10.	The Commissioners have, and exercise, a discretion to allow claims for zero-rating which do not meet all those requirements. The circumstances in which they will do so are set out in paragraphs 4.10 to 4.12 of the Public Notice, which are (and at the material time were) in these terms:
“4.10 	Will I have to account for VAT if my customer’s VAT number turns out to be invalid?
No. But only if you:
• 	have taken all reasonable steps to ensure that your customer is registered for VAT in the EC;
• 	have obtained and shown your customer’s EC VAT number on your VAT sales invoice; and
• 	hold valid documentary evidence that the goods have left the UK.
4.11 What is meant by ‘reasonable steps’?
We will not regard you as having taken reasonable steps, as mentioned at paragraph 4.10, to ensure your customer is VAT registered in the EC if, for example:
• 	the VAT number you quote does not conform to the published format for your customer’s Member State …; or
• 	you use a VAT number which we have informed you is invalid; or
• 	you use a VAT number which you know does not belong to your customer.
4.12 Will VAT be chargeable if reasonable steps are not considered to have been taken?
Yes. You will have to account for VAT at the appropriate rate on the goods in the UK.”
11.	The authority for the statements in the box at paragraph 4.3 (and for the further statement that they have the force of law) was, at the relevant time, article 28c(A) of the Sixth VAT Directive (77/388/EEC), now replaced by article 131 of Directive 2006/112, which provided that
“Without prejudice to other Community provisions and subject to conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse, Member States shall exempt:
(a)	supplies of goods … dispatched or transported by or on behalf of the vendor or the person acquiring the goods out of [that Member State] but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods …” 
12.	Article 28c(A) of the Sixth Directive and its successor (I shall hereafter refer only to the Sixth Directive, as the legislation in force at the time) are implemented, or are intended to be implemented, in the United Kingdom by section 30(8) of the Value Added Tax Act 1994 and regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518). Nothing turns on those provisions, save that regulation 134 authorises the Commissioners to impose the conditions envisaged by article 28c(A), and it is a necessary inference that the conditions imposed by Public Notice 725, so far as they are consistent with article 28c(A), must have the force of law. So much is undisputed; Mr Jarratt’s argument was that regulation 134 and the conditions imposed by the notice are not consistent with the article because they have regard to the formalities rather than the substance of the transaction. If the UK’s implementation of the article is defective, regard may be had, he said, only to the terms of the article itself.
13.	He additionally argued that there was in fact sufficient evidence that the cars (save for the 33 in respect of which the voluntary disclosure had been made) had been removed to the Irish Republic and that the Commissioners should have accepted that this fact alone was sufficient to warrant zero-rating of the sales. The Commissioners had granted themselves a discretion (at paragraph 4.10 of the Public Notice) to accept evidence less than that prescribed by paragraph 4.3; and even if the conditions set out in paragraph 4.3 were validly imposed, they should have exercised that discretion in favour of a wholly innocent trader, as Appleyard was.
14.	I shall deal with the factual arguments first.
15.	Appleyard accepts that it did not include Rendon’s VAT registration number, or purported number, on its invoices. I saw an exchange between members of its staff of emails in which the need to do so was discussed but, unfortunately, it appears that Appleyard’s computer system could not accommodate to entering on these invoices information which was not required on its invoices to UK customers. Appleyard’s case is that the omission of the registration number is no more than a technical failing which the Commissioners could and should have excused. Mr Puzey’s response was that, had the omission of the VAT registration number been the only error, the Commissioners would almost certainly have allowed zero-rating. He relied more heavily on the other factors, arguing no more than that the omission of the registration number was further evidence of a lack of care; even if the other conditions prescribed by paragraph 4.3 had been met, Appleyard could not bring itself within paragraph 4.11, and could not expect the Commissioners to exercise their discretion in its favour.
16.	Mr Jarratt did not suggest that Rendon’s former VAT registration number, even after correction of what I have assumed to be a clerical error, was valid and tacitly accepted that the second of Mr Puzey’s arguments was right.
17.	The evidence supporting the contention that the cars had in fact been transported to the Irish Republic did not consist, as would be usual, of direct evidence of export, including (which would be most convincing) evidence of payment of acquisition VAT in Ireland, but of information provided by the Driver and Vehicle Licensing Authority (DVLA) and H P Information Ltd (HPI) in the UK, recording that cars previously registered in the UK had been re-registered in Ireland. That, said Mr Jarratt, was sufficient evidence that the cars had been dispatched to Ireland. Mr Puzey’s response was that registration in Ireland was not evidence that the car was physically present there, nor was it evidence that it had been taken there by Rendon (or, more accurately, those purporting to be Rendon). It was a condition of zero-rating that the purchaser from the trader claiming the right to zero-rated be a taxable trader in another member State, and that the transfer from one member State to the other be made as an element of that, rather than some other, transaction.
18.	The evidence favouring the conclusion that the cars did reach Ireland is substantial, even if circumstantial. The men calling themselves O’Sullivan had, Mr Alston said, Irish accents; they gave an address in Ireland; and most of the cars could be shown to have been re-registered in Ireland. I accept Mr Puzey’s point that registration is not conclusive of presence, but it seems to me probable that a retail purchaser—and it appears the cars were all destined ultimately for retail purchasers—will require a car registered in the country in which he intends to use it. I am persuaded that, on the balance of probabilities the cars (save for those in respect of which no evidence of destination was found) did reach Ireland. 
19.	That is not to say, however, that it was Rendon which removed them to Ireland—there may have been an intermediary—nor does it answer the Commissioners’ points that DVLA or HPI information about re-registration is not the “valid commercial evidence that the goods have been removed from the UK” envisaged by the Public Notice, and that the evidence was obtained beyond the time limit prescribed by paragraph 4.4, namely three months from the date of the supply: the information was obtained by Appleyard only after doubts about Rendon’s bona fides arose in late 2005, and some of it later still. There is good reason for the requirement that the supplier should obtain evidence of the transport of the goods from the UK since, as the directive itself indicates and as Mr Puzey rightly said, only a supplier who himself transports the goods or who sells to a purchaser who effects the transport is entitled to zero-rate the supply. In my judgment Appleyard has failed to discharge the burden of demonstrating that the cars were transported to Ireland by Rendon. It is beyond doubt that it has failed to provide “valid commercial evidence that the goods have been removed from the UK”—at best the DVLA and HPI information is evidence of presence in Ireland—and that it has failed to comply with the other requirements of paragraph 4.3 of the Public Notice.
20.	I come next to Mr Jarratt’s argument that United Kingdom law does not correctly implement the directive, is consequently invalid and cannot be used in order to deny zero-rating in a case such as this. The requirements of the directive—that the cars were sold to “another taxable person or a non-taxable legal person” in another member State and that they were transported to that other member State—were satisfied, and that was enough. In the event, I have reached a conclusion on the facts which makes the argument unsustainable, but I shall deal with it nevertheless.
21.	Mr Jarratt recognised that in order to advance the argument he must persuade me that the recent case of J P Commodities v Revenue and Customs Commissioners [2008] STC 816 was wrongly decided. There, the appellant trader sold goods to a company registered in Gibraltar, but delivered them to an address in Belgium. The purchaser was not registered for VAT in Belgium. The appellant argued that the requirement of what is now paragraph 4.3 of the Public Notice that the purchaser’s VAT registration number be quoted on its invoices, a requirement with which it was impossible to comply in that case, found no warrant in the directive and could not be enforced against it. That argument found little favour in the tribunal (as it happens, myself) or before Briggs J. In a passage beginning at [36] of his judgment, Briggs J dealt with the argument that the first of the conditions of what is now paragraph 4.3 was disproportionate, in that it went further than was permitted by the opening words of article 28c(A) of the directive, by analysing the judgment of the Court of Justice in R (Teleos) v Revenue and Customs Commissioners (Case C-409/04) [2008] STC 706, and concluded at [40]:
“Since it is only if the trader is a taxable person that the supplier may zero-rate his supply, it follows inevitably that a properly informed supplier, taking every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in evasion or avoidance, would take steps to satisfy himself that his customer was VAT registered. Condition 1 requires no more, nor less, than that. It is, therefore, not disproportionate.”
22.	I am unable to disregard such clear authority. It is directly in point, and is binding on me. But even if it were not, I should follow it because I respectfully agree with it. I also conclude, by parity of reasoning, that the third condition imposed by paragraph 4.3 is proportionate. Compliance with it is no more difficult than the obtaining of reliable evidence of a customer’s VAT registration. There can be no question of proportionality of the second condition (that the goods be transported from one member State to another) since that is essential if there is to be any right to zero-rate the supply at all. I accordingly reject Mr Jarratt’s argument that paragraph 4.3 is to be disregarded.
23.	I have mentioned Mr Puzey’s argument that Appleyard’s conduct showed a want of care, such that (even if, which I do not find to be the case, its failings were no more than technical) it was not entitled to the relief described in paragraph 4.10 of the Public Notice. Mr Jarratt was unable to argue that Appleyard had, in fact, taken reasonable care; he was forced to concede that its employees had taken insufficient steps to acquaint themselves with the relevant procedures and, as I have found, there was no, or no adequate, check on the VAT registration number Rendon had given it until after the supplies had taken place. It is also apparent from the passage from the judgment of Briggs J which I have set out above that a high standard is required. In my view that is fair and reasonable; a trader seeking the benefit of zero-rating his supplies should put himself into a position to satisfy the taxing authorities that he is entitled to that benefit. I am persuaded that these are not mere technical faults; I am driven to the conclusion that, had Appleyard taken more care, the loss of revenue which has apparently resulted from these transactions would probably not have occurred.
24.	That conclusion brings me to the last of Mr Jarratt’s arguments, that I should discharge the assessment because there was otherwise a risk of double taxation—Rendon might be found, and might be assessed to, and pay, the Irish tax for which it should have accounted. He relied, by analogy, on the decision of the Court of Appeal in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252, in which it decided that a transaction could be taxed in the United Kingdom if it would otherwise avoid taxation altogether; here, he said, the supplies should be zero-rated in the UK since the tax was properly payable in Ireland. Even if Rendon (or those purporting to be Rendon) was or were not VAT registered in Ireland, Rendon’s turnover, taking its purchases from Appleyard alone, exceeded the registration threshold in Ireland; thus it should have been registered, and was liable to account for acquisition VAT and, on a resale of the cars in Ireland, for output tax.
25.	The Commissioners accept that double taxation must be avoided, and I do not need to deal with the authorities on that point. They maintain that IDT Card Services  cannot be relied on by analogy because, Mr Puzey argued, it is implicit in the judgment of the Court of Justice in Teleos that a supplier may be liable to pay the tax if his customer defaults. The question at issue in that case was whether sellers of mobile phones whose purchasers were to arrange for their transport to other member States and who had been allowed by the Commissioners to zero-rate the supplies on the strength of evidence of export, provided by the purchasers, could be required to account for output tax when it was later discovered that that evidence was false.
26.	At paragraph 58 of its judgment the Court said that “the objective of preventing tax evasion sometimes justifies stringent requirements as regards suppliers’ obligations”; and at paragraph 65 it continued “it would not be contrary to Community law to require the supplier to take every step which could reasonably be required of him to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion”.
27.	It does not seem to me that IDT Card Services helps Appleyard. In that case there was a legislative lacuna, because of a difference between the Irish and UK treatment of the appellant’s supplies, and the court was required to decide how, consistently with Community law, that lacuna was to be addressed. That is not the position here: there is no lacuna, or difference of treatment in two member States, but a failure to comply with the law. If anything relevant to this appeal is to be derived from IDT Card Services it is that a pragmatic approach must be taken to the facts as they are.
28.	In my judgment Teleos clearly supports the approach taken by the Commissioners in this case. The Court has indicated that a supplier is expected to take precautions; the precautions the Commissioners require, held by Briggs J in JPS Commodities to be proportionate, seem to me incontrovertibly appropriate, directed as they are to demonstrating that the conditions for zero-rating of the supplies are met. As I have found, Appleyard failed to take the precautions and the consequence of that failure, that it must account for the tax, must follow. No doubt (subject to time limits) an adjustment could be made should Rendon eventually account for tax in Ireland but that is not the issue before me, which is simply whether Appleyard has satisfied the conditions for zero-rating its supplies. I am satisfied it has not and that the appeal must be dismissed.
29.	Mr Puzey did not seek a direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 8 December 2008
MAN/06/0576