DECISION

The Appeal

1. The Appellant was appealing against HMRC’s assessment dated 15 August 2007 in the sum of ₤855,330 plus default interest of ₤100,695.53 for VAT periods from 08/04 to 12/06.

The Dispute

2. The Appellant submitted that the Appeal raised a short but important point relating to the making of assessments by HMRC. The assessment concerned the Appellant’s VAT treatment of exports and removals of goods which were eligible for zero-rating provided specific legal requirements were met. A VAT inspection of the Appellant’s records showed that it did not have the necessary commercial evidence to demonstrate that the goods had left the United Kingdom. HMRC gave the Appellant time to gather the requisite evidence. On the follow-up inspection HMRC was satisfied that the commercial evidence obtained was sufficient to zero rate the disputed exports and removals. HMRC, however, assessed the Appellant for unpaid VAT and default interest for the periods when it did not have the requisite evidence. The amount assessed for unpaid VAT was cancelled out by an authorised adjustment to the Appellant’s VAT return which left outstanding default interest in the sum of ₤100,695.53.

3. The Appellant submitted that the assessment was invalid and not made to best judgment. According to the Appellant, there was no power to issue the assessment since it was made after satisfactory evidence of the export or removal had been produced, in which case no VAT remained outstanding to trigger the assessment. If the contention on invalidity did not find favour, the Appellant further submitted that the assessment for default interest was in the circumstances of this Appeal disproportionate and contrary to fiscal neutrality.

4. HMRC disagreed with the Appellant’s analysis. HMRC pointed out that if the Appellant did not have the necessary evidence within three months of the export or removal, it was required to treat the supplies as standard rated for VAT purposes. The fact that the Appellant obtained the necessary evidence after the three month time period did not invalidate the assessment or render the demand for default interest disproportionate. HMRC asserted that the Court of Appeal in C & E Commissioners v Musashi Autoparts Europe Limited [2004] STC 220 had already ruled against the Appellant on the issues in this Appeal. In HMRC’s view, the Appellant had a high hurdle to overcome, the Tribunal was bound by the decision in Musashi Autoparts Europe Limited.

5. The Appellant countered that the European Court of Justice decision in Collee v Finanzamt Limburg an der Lahn C-146/05 [2008] STC 757 which was made subsequent to Musashi had changed the landscape. According to the Appellant, the principles established by Collee supported its analysis of the legal position and that the judgment in Musashi had to be interpreted in the light of Collee. If it was not possible to reconcile Musashi with Collee, the Tribunal should consider a reference to the European Court of Justice. HMRC challenged the significance placed by the Appellant on Collee. HMRC contended that Musashi was distinguishable on the facts from Collee. Further the UK legislation was compatible with the principles enunciated in Collee.

The Facts

6. The parties did not call oral evidence. Their respective cases were based on submissions. The bundle of documents contained witness statements of Wyn Hutchinson for the Appellant and William John Devereaux for HMRC which were admitted in evidence. Mr Hutchinson was employed by the Appellant as a Plant Controller with specific financial responsibilities for the Swansea Plant. Mr Devereaux was the HMRC Officer who carried out the inspection of the Appellant’s VAT affairs and issued the disputed assessment.

7. The Appellant’s principal business was the recycling of valuable aluminium waste materials and the manufacture of aluminium products for sale to the aluminium (wrought and casting) industries within the United Kingdom, mainland Europe and elsewhere. The Appellant’s turnover was about ₤26 million at the end of 2006

8. The Appellant was VAT registered and had ceased to submit monthly VAT returns with effect from July 2006. The Appellant had rendered a return for the period 01 August 2006 to 30 September 2006 followed by quarterly returns thereafter. Following the change in reporting, Mr Devereaux of HMRC arranged a visit to the Appellant for the purposes of reviewing the Appellant’s VAT registration details, accounting records and trading activities, which took place on 14 February 2007.

9. Mr Devereaux investigated, amongst other matters, the accounting systems in place for zero-rated invoices which had been raised for exports and removals of goods. Mr Devereaux found that the Appellant held detailed records and documentation in respect of sale of goods and their removal from the site but held no documentation or records to support the removal of the goods from the United Kingdom and their subsequent receipt abroad. Mr Devereaux’s finding corresponded with information supplied by the Appellant in an earlier business questionnaire dated 16 May 2006 sent to HMRC. At paragraph 2.5 of the questionnaire the Appellant responded to a question about whether it held commercial evidence of export/removal for all consignments:

“Have evidence that goods have left site but not left country. Aluminium is sold ex-works the buyer organises the freight”.

10. Mr Devereaux concluded that the Appellant did not hold any of the required documentation to support zero rating. Further the Appellant had no systems in place to ensure that the required documentation was obtained within the designated time period. The Appellant had not allocated responsibility to a specific individual to obtain the necessary documentation. Finally the Appellant performed no management checks to verify that the conditions for zero rating had been met.

11. Mr Devereaux explained to the Appellant’s members of staff the requirements for documentary evidence as set out in HMRC Notices 703 & 725. He advised them to obtain the necessary evidence for a sample six month period between March 2006 and September 2006.

12. On 28 and 29 March 2007 Mr Devereaux revisited the Appellant’s premises. In the meantime the Appellant had obtained the requisite documentary evidence in respect of those supplies which had been exported outside the European Community or removed to another Member state. Following inspection of that documentation Mr Devereaux was satisfied that the disputed supplies met the conditions for zero rating. He informed the Appellant that he intended to issue an assessment for the VAT that should have been accounted for on those supplies but that the Appellant could make an adjustment to its VAT account in the appropriate period to reflect the fact that the supplies could at that point be treated as zero rated.

13. On 5 April 2007 Mr Devereaux issued an assessment for VAT dated 2 April 2007 in the sum of ₤876,717 plus default interest of ₤102,947.44 in respect of the accounting periods from 04/04 to 09/06. After representations from the Appellant’s professional advisers, Mr Devereaux accepted that the 2 April 2007 assessment did not take into account the fact that the Appellant had three months in which to obtain the documentary evidence of the export or removal. Mr Devereaux, therefore, replaced the 2 April 2007 assessment with one dated 9 July 2007 in the sum of ₤855,330 plus default interest of ₤100,695.33 for periods from 08/04 to 12/06. The default interest was charged for the period 21 October 2004 to 27 April 2007. The net effect of the assessment was that the amount for undeclared VAT was cancelled out by the adjustment leaving outstanding the default interest of ₤100,695.33.

14. Mr Devereaux’s grounds for the assessment were that the Appellant had accounted for various supplies on the basis that they were zero-rated when in fact they did not qualify for zero rating as the Appellant had not obtained evidence of their removal or export from the United Kingdom within the requisite time limits. In the absence of that evidence, those supplies were liable to VAT at the standard rate which should have been declared, at the latest, in the periods following those in which the supplies were made. Although he was satisfied subsequently that the disputed supplies had been exported or removed, the Appellant was still liable to account for VAT at the standard rate up until the conditions for zero rating were met. At which point the Appellant was entitled to a balancing credit on the output tax but still liable for default interest which had accrued during the period it had not accounted for VAT at the standard rate.

15. Mr Hutchinson stated that the Appellant was very surprised and confused with the 9 July 2007 assessment. The Appellant had produced satisfactory evidence to establish the zero rating which meant that no VAT was due to HMRC. The Appellant also mentioned that a prior VAT inspection in 2002 had not identified any flaws with its record keeping.

16. Although the facts were not in dispute, the parties differed in their emphasis of specific aspects of the factual matrix. The most significant was that the Appellant asserted that they held some records of the exports or removals at the time of Mr Devereaux’s first inspection. HMRC, on the other hand, stressed the Appellant’s non-compliance with the requirement to retain commercial evidence of the exports or removals. In HMRC’s view the Appellant had no excuse for not complying with the requirement. This was not a case where it had misunderstood the conditions for zero-rating. The Appellant had got the legal requirements wrong.

17. The Tribunal agrees with HMRC’s assessment of the factual matrix. The Appellant was a major and experienced trader which frequently exported and despatched goods overseas. The Appellant should have known the legal requirements for zero rating. Mr Devereaux’s conclusion that the Appellant had no management systems in place to ensure that its supplies were correctly zero-rated was particularly telling, and upon which the Tribunal placed weight.

Consideration

18. The Appellant has presented the Appeal on the basis of two distinct arguments: the validity of 9 July 2007 assessment, and the disproportionate nature of the default interest. After hearing the parties’ oral submissions the Tribunal considered the correct approach to deal with the dispute was to examine whether the facts of this Appeal were caught by the Court of Appeal decision in Musashi followed by an analysis of the effect of the Court of Justice decision in Collee.

19. The facts of Musashi were that the company manufactured and supplied component parts for motor vehicles from premises in Gwent. The company was registered for VAT. It had important customers in other Member States to whom they supplied goods. On a visit to its premises in May and June 1999, HMRC officers took the view that the company did not hold sufficient evidence that the goods had been removed from the United Kingdom and, for that reason, was not entitled to zero rate the supplies. On 7 July 1999 HMRC raised an assessment for VAT in a sum later reduced to £800,626 and for interest thereon in the sum of £55,084.09. The company subsequently supplied further evidence to HMRC which then accepted that the goods had been removed and the supplies were zero-rated. HMRC wrote to the Company stating that it could make the necessary adjustment in respect of the assessment for VAT in its accounts for the period in which the evidence was received but no such adjustment could be made in respect of the assessment for interest. The company appealed to the VAT & Duties Tribunal against the assessment with a view to challenging the assessment in respect of interest.

20. The Tribunal found in favour of the company, holding that

“We were impressed by the logic of Mr Baldry's submissions [for the company]. His first proposition was, where no tax is due no interest can be due. That is unassailable. But it must be remembered that at one point of time there was an amount of tax due, namely when the assessment was raised, and until the proof of removal was furnished to the Commissioners, that is, until the Commissioners were satisfied that the conditions had been met. At that point, the supplies concerned were zero-rated supplies whatever they may have been before. In our view, from that moment no tax was due from the Appellant in respect of the relevant supplies. As we have already said above, it would therefore be absurd to hold that the assessment was still valid, still in existence, and had not been reduced to nil. In our judgment, the effect of the Commissioners being satisfied must have been that the assessment was reduced to nil. Again, in our judgment it would be absurd to hold that where there was no liability for tax in respect of a supply there should nonetheless be a liability to pay interest upon a non-existent sum of tax. It is the supply that is taxable, either at the standard rate or zero-rate, and that supply took place at a point of time which was substantially earlier. It seems to follow that if the supply is zero-rated, then it must always have been zero-rated, rather than that it was apparently treated as zero-rated, then became standard-rated and then once again became, though not from the moment of supply, zero-rated. Again, we are reinforced in the view that the interest is not payable by the fact that there is no express provision that it should be. It seems to us that for interest to be payable where there is no primary liability there ought to be express words. There are no express words”.

21. HMRC appealed to the High Court which found in its favour. The company then Appealed to the Court of Appeal with a view to restoring the decision of the Tribunal. Before examining the Court of Appeal decision the Tribunal sets out below the statutory framework which applied equally to the facts of this Appeal as it did for Musashi.

22. Article 28c(A)(a) of the Sixth Directive(77/388/EEC)[1] provides that where goods are supplied by a taxpayer in one Member State to a taxpayer in another Member State that supply is exempt from VAT. Article 15(1) gives the exemption for exports. These exemptions are expressly subject to conditions which Member States may lay down for the purpose of ensuring their correct and straightforward application and preventing any evasion, avoidance and abuse. The domestic legislation under section 30(8) of the 1994 Act enables regulations to be made setting out the conditions that must be complied with in order to zero rate goods. Regulation 134 of the VAT Regulations 1995 provides for the zero rating of removal of goods under section 30(8) as follows:

“Where the commissioners are satisfied that--

(a) a supply of goods by a taxable person involves their removal from the United Kingdom.

(b) the supply is to a person taxable in another member State,

(d) the goods are not goods in relation to whose supply the taxable person has opted, pursuant to section 50A of the Act, for VAT to be charged by reference to the profit margin on the supply,

the supply, subject to such conditions as they may impose, shall be zero-rated”.

23. Regulation 129 makes similar provisions in respect of exports to persons outside the Member States.

24. Additional conditions for zero-rating are found in HMRC Notices 725 (removals) and 703 (exports) which have the force of law. Paragraph 4.3 of Notice 725 provides that

“A supply from the UK to a customer in another 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

· Send or transport the goods out of the UK to a destination in another EC Member State; and

· Obtain and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out in paragraph 18.6”.

25. Paragraph 4.4 specifies a time limit of three months for the obtaining of commercial evidence that the goods have been removed from the United Kingdom. Paragraph 16.10 advises the trader to charge the supply for VAT at the appropriate rate if all the conditions in Notice 725 have not been met. Paragraph 16.11 permits the trader to treat the supply as zero rated if evidence of removal is obtained after the three months, in which case the trader is entitled to amend its VAT account for the period in which the evidence was obtained. Notice 703 which deals with exports contains similar provisions.

26. Section 73 of the 1994 Act enables HMRC to raise assessments for VAT, section 73(1) provides that

“Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him”.

27. Section 74 of the 1994 Act deals with the power to charge interest on VAT which is the subject of an assessment. Section 74(1) and (2) provides:

“(1) Subject to section 76(8), where an assessment is made under any provision of section 73 and, in the case of an assessment under section 73(1) at least one of the following conditions is fulfilled, namely--

(a) the assessment relates to a prescribed accounting period in respect of which either-

(i) a return has previously been made, or

(ii) an earlier assessment has already been notified to the person concerned, ...

(b) not relevant

(c) the whole of the amount assessed shall, subject to subsection (3) below, carry interest at the rate applicable under section 197 of the Finance Act 1996 from the reckonable date until payment.'

(2) In any case where –

(a) the circumstances are such that an assessment falling within subsection (1) above could have been made, but

(b) before such an assessment was made the VAT due or other amount concerned was paid (so that no such assessment was necessary)

the whole of the amount paid shall subject to subsection (3) below, carry interest [at the rate applicable under section 197of the Finance Act 1996] from the reckonable date until the date on which it was paid”.

28. With this statutory background in mind the Court of Appeal in Musashi considered the company’s proposition that if eventually there was no liability for tax in respect of a zero-rated supply, there can be no liability to pay interest upon a non-existent sum of tax. Pill LJ acknowledged that the proposition had obvious attraction but in his view it did not survive an analysis of the procedure provided by the statutory scheme: At [25] to [27] Pill LJ decided that

“[25] The combined effect of section 73 and 74 of the 1994 Act is that the commissioners may assess the amount of VAT due in the circumstances set out in s 73(1) which are admitted to have been present in this case when the assessment was raised. The amount correctly assessed by the commissioners relates to a prescribed accounting period and is deemed to be an amount of VAT due. The whole of the amount assessed shall carry interest.

[26] Paragraph 9.4 of the Notice (now 16.11) permits taxpayers who were unable to meet conditions imposed in paragraph 8.4 (now 4.4) within three months of the date of supply subsequently to zero-rate the supply if they are able to meet the conditions later. They may 'adjust' their VAT account for the period in which the conditions were met. Until that adjustment is performed in the manner provided by paragraph 9.4 (now 16.10) of Notice 703 (now Notice 725) the tax was due.

[27] The commissioners have power to make an assessment, which carries interest, and that power was validly exercised. In these circumstances, I see no basis for holding that the assessment loses its validity by reason of the subsequent meeting of prescribed conditions by the taxpayer. It remains a valid assessment under the 1994 Act. Meeting the conditions has the effect that the taxpayer can adjust his account, in accordance with the Notice, for the period in which the conditions are met. It does not affect the accuracy or validity of the assessment with respect to the period for which it was made or remove the obligation to pay the interest assessed for the earlier period”.

29. Chadwick LJ at [36] to [40] explained the legal justification for the validity of the assessment under section 73(1) of the 1994 Act despite the concession made by the company’s representative:

“[36] The tribunal found (at paragraph 8 of its decision) that, between April 1998 and May 1999, the company had sold automotive components to customers in Member States other than the United Kingdom. On the basis that the company had failed within three months of date of supply to obtain and keep valid commercial documentary evidence that the goods had been removed from the United Kingdom, it ought to have included an amount of VAT at the standard rate on those supplies in its returns for each of the VAT accounting periods in which a three month time limit expired. It appears that the company was required, under proviso (a) to regulation 25(1) of the 1995 regulations, to make monthly returns. So, if supplies were made in each month between April 1998 and May 1999 (both inclusive), the company ought to have included an amount of VAT at the standard rate in respect of the supplies in the return for July 1998, and for each month thereafter up to and including August 1999. It had not done so. In those circumstances the commissioners were entitled to take the view, in July 1999, that the company's returns for each of the accounting periods July 1998 to May 1999 were incomplete or incorrect; and were entitled to assess the amount of the VAT due in respect of each of those periods on the basis that those supplies were standard rated--s 73(1) of the Value Added Tax Act 1994 (the 1994 Act).

[37] Section 74(1) of the 1994 Act makes provision for the amount assessed under s 73(1) to carry interest. So far as material in the present context, the section is in these terms:

'... where an assessment is made under ... section 73(1) [and] at least one of the following conditions is fulfilled, namely--

(a) the assessment relates to a prescribed accounting period in respect of which ... a return has previously been made ...

the whole of the amount assessed shall, ... carry interest ... from the reckonable date until payment.'

In the present context the 'reckonable date' is 'the latest date on which (in accordance with [the 1995 regulations]) a return is required to be made for the prescribed accounting period to which the amount assessed ... relates'--s 74(5)(b). So, by way of example, to the extent that the amount assessed by the commissioners under s 73(1) of the 1994 Act (in July 1999) was an amount for which the appellant ought to have accounted in the return for the VAT accounting period July 1998, interest under s 74(1) would run from the last day of August 1998--regulation 25(1) of the 1995 regulations.

[38] Section 76(1) of the 1994 Act empowers the commissioners to assess the amount due from a taxable person by way of interest under s 74. An assessment of interest under s 74 in respect of an amount of VAT assessed to be due under s 73(1) is 'an assessment ... of an amount due in respect of the prescribed accounting period ... in respect of which the VAT (or amount assessed as VAT) was due'--s 76(3). Where a person is assessed under s 76 to an amount due by way of interest, and is also assessed under s 73(1) for the VAT accounting period in respect of which the VAT was due, the assessments may be combined and notified to the taxable person as one assessment--s 76(5). But the interest element must be separately identified in the notice.

[39] In the light of those provisions--and on the basis (accepted for the purposes of the issue which the tribunal was asked to determine) that the company had failed within three months of the date of supply to obtain and keep valid commercial documentary evidence that the goods had been removed from the United Kingdom--it could not be said that the assessment made by the commissioners on 7 July 1999 was an assessment which the commissioners were not then entitled to make”.

30. In this Appeal the Appellant’s argument that the 7 July 2007 assessment was invalid had strong resonance with the view of the Tribunal in Musashi (recorded at paragraph 20 above). Essentially the Appellant contended that the disputed assessment was invalid because it purported to assess the Appellant for a sum, which was not outstanding at the time of the assessment. In the Appellant’s view, HMRC’s acceptance of the documentary evidence outside the three month time limit meant that the disputed exports or removals were zero-rated supplies from the time when the supplies were made. This line of reasoning was the same as that of the Tribunal in Musashi, when it stated that if the supply is zero-rated, then it must always have been zero-rated. In view of the Court of Appeal’s rejection of this line of reasoning, the Appellant’s argument would appear to have no foundation.

31. The Appellant, however, distinguished the facts of this Appeal from those in Musashi. The Appellant pointed out that the assessment in this Appeal was issued notwithstanding that satisfactory evidence of export or removal had already been provided to HMRC. In Musashi the assessment was made before the required commercial evidence was supplied to HMRC. This Tribunal, however, is not convinced of the significance of the distinction. The critical fact in this Appeal which determined the validity of the assessment was that the Appellant failed to obtain the necessary commercial evidence for the disputed exports or removals within the required period of three months as laid down by Notices 703 and 725. In those circumstances Notice 703 and 725 required the Appellant to treat the supplies as standard rated and account for VAT on them in the relevant VAT return. The Appellant accepted that it did not do this. The Appellant’s failure triggered HMRC’s power under section 73(1) to raise an assessment for incorrect or incomplete returns for the prescribed VAT periods in which the Appellant should have treated the disputed supplies as standard rated. The fact that the evidence was eventually supplied outside the three month period did not render the treatment of the exports or removals as standard rated supplies in the prescribed accounting periods and the subsequent assessment invalid. The provision of satisfactory evidence simply enabled the Appellant to make an adjustment to its VAT account. This view is supported by the legal analysis of Pill LJ at [27] of Musashi, who saw no basis for holding that the assessment lost its validity by reason of the subsequent meeting of prescribed conditions by the taxpayer. It remained a valid assessment under the 1994 Act.

32. The Appellant’s protestation that an award of interest was not appropriate in circumstances where there has been a delay in producing the necessary commercial evidence was equally without legal foundation. The Court of Appeal in Musashi made it clear that the subsequent production of evidence did not remove the obligation to pay the interest assessed for the earlier period. HMRC was entitled to levy interest under section 74 in conjunction with an assessment under section 73 (see Chadwick LJ at paragraph 29 [37] and [38] above). Pill LJ in Musashi at [30] was pleased to reach a conclusion which gave an incentive to the keeping of good records for zero-rating from the start.

33. Finally the Tribunal did not consider the Appellant’s other argument on validity had merit. Essentially the Appellant suggested that even if HMRC’s general position was correct, the appropriate way for HMRC to recover the relevant interest would be to make an interest-only assessment under section 74(2) of the 1994 Act. If HMRC had taken this route the Appellant would have had a potential windfall. The Appellant adjusted its VAT account in the 03/07 return to reflect the fact that it had now obtained satisfactory evidence of zero-rating. This meant that it was entitled to a repayment of the VAT that should have been declared in the earlier VAT returns. The issue of the assessment was necessary to ensure a corresponding and balancing liability in the Appellant’s VAT account.

34. The Tribunal concludes that the facts of this Appeal were not materially different from those in Musashi and that the legal analysis employed by the Court of Appeal in that case had equal application to this Appeal. Thus the Tribunal decides that the 7 July 2007 assessment for output tax and default interest was valid in accordance with domestic legislation. The requirements of section 73 of the 1994 Act were met, in that the Appellant had submitted incorrect or incomplete returns for the VAT periods from 08/04 to 12/06 when it should have accounted for VAT on the exports and removals for which no commercial evidence had been obtained within the requisite three month period. Further the charging of default interest was justified under section 74(1)(a) in that an assessment had been made for VAT relating to a prescribed accounting period in respect of which a return had previously been rendered. The Appellant did not challenge the quantum of the assessment. In those circumstances the Tribunal was satisfied that Mr Devereaux exercised best judgment in the making of the assessment.

35. The question that now arises is whether the legal analysis in Musashi was compatible with the ruling of the European Court of Justice in Collee. The Appellant suggested that in the light of the Collee decision the Musashi decision was wrongly decided and that there was doubt about the compatibility of the domestic legislation with the Sixth Directive. If its submissions on Collee did not find favour with the Tribunal, the Appellant asserted that in any event the assessment for default interest was disproportionate and contrary to the principles of fiscal neutrality.

36. The question before the Court of Justice in Collee relevant to the circumstances of this Appeal was:

“whether a tax authority was entitled to refuse to allow an intra-Community supply, which undoubtedly occurred, to be exempt from tax solely on the ground that the taxable person did not produce the prescribed accounting evidence in good time” ?

37. The Court held that it was not permissible to withhold exemption of a supply which had taken place from tax solely on the ground that the taxable person did not produce the prescribed accounting evidence in good time. At [29] the Court emphasised that formal obligations should not take precedence over the substantive nature of the transaction:

“As regards, first, the question whether the tax authority can refuse to allow an intra-Community supply to be exempt from VAT solely on the ground that the accounting evidence of that supply was belatedly produced, it should be noted that a national measure which, in essence, makes the right of exemption in respect of an intra-Community supply subject to compliance with formal obligations, without any account being taken of the substantive requirements and, in particular, without any consideration being given as to whether those requirements have been satisfied, goes further than is necessary to ensure the correct levying and collection of the tax”.

38. At first blush the Collee decision appeared to support the Appellant’s propositions. However, before reaching a definite conclusion it is necessary to consider the context for the Collee decision, and then apply the principles established by the Court of Justice to the United Kingdom legislation.

39. Collee concerned the legal requirements in Germany for evidencing exports or removals of goods. Essentially under German jurisdiction the accounting evidence for exports or a removals relied upon by a tax payer had to be updated regularly and immediately after a transaction. If the tax payer failed to do this, the German authorities refused to exempt the supply. Further this evidential requirement did not emanate from German legislation but from case law. The Court of Justice considered that the German requirements for documentary evidence contravened the principle of legal certainty in that the case law did not specify a time limit for the production of documents. Finally the arrangements under German law did not permit a subsequent amendment to the accounts to recognise a genuine intra-community supply.

40. The Court of Justice in Collee noted that article 28c(A)(a) of the Sixth Directive required Member States to exempt supplies of goods despatched to a taxable person in another Member State. The arrangement under the Sixth Directive of exempting intra-community supplies in the Member State of departure of the goods and an intra-community acquisition of the goods in the Member State of arrival that was taxed avoided infringement of the principle of fiscal neutrality inherent in the common system of VAT.

41. The Court of Justice observed that the Sixth Directive did not define the nature of the evidence required by a taxable persons to support an exemption from VAT. The first part of the first sentence of art 28c(A) of the Sixth Directive merely provided for the Member States to lay down the conditions subject to which they would exempt intra-Community supplies of goods. Article 22 of the Sixth Directive, however, imposed a number of formal obligations on those liable to pay tax relating to accounts, invoicing, returns and the submission of recapitulative statements to the tax authority. Article 22(8) gave Member States the power to impose other obligations which they deemed necessary for the correct levying and collection of the tax and for the prevention of tax evasion.

42. Under the Sixth Directive Member States, however, enjoyed a relatively wide discretion in implementing specific provisions of the Sixth Directive provided they met the aims of the Directive and the measures adopted to implement those aims were proportionate, in that they must go no further than was necessary to attain such aims.

43. Unlike Germany, the United Kingdom specified in legislation the conditions for exempting intra-community supplies. Section 30(8) of the 1994 Act enabled regulations to be made prescribing the conditions for exemption. The requirements for obtaining and keeping of valid commercial evidence of the removal of goods from the United Kingdom were found in tertiary legislation in the form of HMRC Notices.

44. In contrast to Germany, the United Kingdom tertiary legislation specified a time limit of three months for the obtaining of valid commercial evidence. Also under United Kingdom legislation a tax-payer was entitled to claim zero-rating if he obtained valid commercial evidence after the three month time period.

45. In the Tribunal’s view the concerns expressed by the Court of Justice in Collee about the German arrangements for exempting intra-community supplies did not apply to the situation in the United Kingdom. The United Kingdom legislation complied with the principles of legal certainty by establishing time limits for the obtaining of commercial evidence. Second, the United Kingdom legislation allowed for the accounts of the taxable person to be adjusted to reflect the zero-rated status of the supply if valid evidence was produced after the time limit. Further the adjustment related back to the date of supply, so that any VAT hitherto accounted for on the supply was cancelled out, which preserved the principle of fiscal neutrality. Finally the United Kingdom legislation was geared to establishing the substantive requirement for exemption, namely the removal of goods from the United Kingdom. The requirement of commercial evidence under HMRC Notices was not an end in itself but a means of demonstrating that the goods in question had left the United Kingdom. In contrast, under the German arrangements the failure by a tax payer to update the accounting records regularly and immediately after the transaction prohibited his claim for exemption regardless of whether he was able to establish at some later date the removal of goods to another Member State.

46. The Tribunal’s analysis supported HMRC’s contention that the circumstances of the Collee case were materially different from those present in this Appeal, and in any event the United Kingdom legislation was compatible with the principles established by the Court of Justice in Collee. Thus the Tribunal finds that the conditions including the accounting requirements imposed by the United Kingdom legislation in respect of the exemption of goods removed to another Member State or exported elsewhere were proportionate and consistent with the principle of fiscal neutrality. They complied with the Sixth Directive.

47. Turning specifically to the question of interest, the Appellant argued that in this Appeal the assessment for interest was disproportionate. The Appellant contended that it should not have been required to adjust its VAT account because it produced the required evidence albeit outside the three month time limit before the assessment was made. The Tribunal considers the Appellant’s argument contradictory and contrary to the principles established in the Collee case. The circumstances giving rise to the issue of the assessment in the Appellant’s case was its failure to obtain the required commercial evidence within the time limit of three months. The necessity for a time limit was emphasised in Collee in order to provide legal certainty. It follows from the imposition of a time limit that certain consequences must ensue for the tax payer. In the Appellant’s case its failure to meet the deadline resulted in an assessment for the output tax that should have been declared for the relevant accounting periods plus a sum for default interest. Despite its failure the Appellant was able to cancel out that part of the assessment relating to the output tax by an accounting adjustment once it produced the required commercial evidence. The facility to make an accounting adjustment in these circumstances was consistent with the principle of fiscal neutrality and with the judgment in Collee. The Appellant’s argument denied the necessity for a time limit, and overlooked the consequences that inevitably ensued from the imposition of a deadline.

48. The final issue is whether the consequences for the Appellant from the late production of the relevant commercial evidence were proportionate, in that they went no further than necessary to meet the aims of the Sixth Directive. As already found, the Appellant was permitted to cancel out that part of the assessment relating to the VAT on the disputed supplies, which in the Tribunal’s view addressed the principal issue in Collee. Thus the sole adverse consequence for the Appellant from the late production was the assessment for default interest. The Tribunal considers that under the Sixth Directive Member States enjoy a relatively wide discretion in implementing provisions of the Directive. Under article 22(8) Member States have the power to impose obligations which they deem necessary for the correct levying and collection of the tax. The facility to charge default interest pursued the legitimate aim of ensuring that tax payers kept good records for zero-rating from the start (see Pill LJ at [30] Musashi).

49. The Tribunal finds that the circumstances of the Appellant’s non-compliance with the evidential requirements merited an assessment for default interest. The Tribunal placed weight on Mr Devereaux’s conclusion that the Appellant had no management systems in place to ensure that its supplies were correctly zero-rated. This was not a case where the Appellant had a good reason for not obtaining the necessary commercial evidence. The Appellant was a major and experienced trader which frequently exported and despatched goods overseas. The evidence showed that the Appellant had not taken any steps to become familiar with the legal requirements for zero rating. Further it did not put in place systems to ensure compliance with those requirements. The Tribunal is satisfied that the HMRC was entitled to charge the Appellant with default interest and that the assessment for the interest was proportionate.

Decision

50. The Tribunal holds that

(1) The facts of this Appeal were not materially different from those in Musashi and that the legal analysis employed by the Court of Appeal in that case had equal application to this Appeal. The 7 July 2007 assessment for output tax and default interest was valid and made to best judgment.

(2) The conditions including the accounting requirements imposed by the United Kingdom legislation in respect of the exemption of goods removed to another Member State or exported elsewhere were proportionate and consistent with the principle of fiscal neutrality. They complied with the Sixth Directive. There were no grounds for a making a reference to the Court of Justice.

(3) HMRC was entitled to charge the Appellant with default interest.

(4) The assessment for default interest was proportionate.

51. In view of the above findings the Tribunal dismisses the Appeal.

52. 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.

MICHAEL TILDESLEY OBE

TRIBUNAL JUDGE

RELEASE DATE: 16 July 2010

[1] The Sixth directive was in force at the times material to this Appeal).

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents