Musashi Autoparts Europe Ltd. v Customs & Excise

This is an appeal by Musashi Autoparts Europe Ltd (the appellants) from a decision of Lightman J dated 26^th February 2003 by which he allowed an appeal by the Commissioners of Customs and Excise (the
Commissioners) from a decision of London VAT and Duties Tribunal of 8 August 2002 on a preliminary issue. That issue is whether the appellant taxpayer remains liable to interest on an amount of Value Added Tax (VAT) assessed by the Commissioners in circumstances to be described where the amount of VAT assessed has subsequently ceased to be due and payable on the ground that the supply was zero-rated.

The circumstances are those of a supply of goods from the United Kingdom and their acquisition in another member state of the European Community by a person liable for VAT on the acquisition in accordance with the law of that member state. The appellants manufacture and supply component parts for motor vehicles and trade from premises in Gwent. They are registered for VAT. They had important customers in other member states to whom they supplied goods. On a visit to their premises in May and June 1999, officers of the Commissioners took the view that the appellants did not hold sufficient evidence that the goods had been removed from the United Kingdom and, for that reason, were not entitled to zero rate the supplies.

On 7 July 1999, the Commissioners raised an assessment under section 73 (1) of the Value Added Tax Act 1994 (“the Act”) for VAT in a sum later reduced to £800,626 and for interest thereon in the sum of £55,084.09. The appellants subsequently supplied further evidence to the Commissioners who then accepted that the goods had been removed and the supplies were zero-rated. The Commissioners wrote to the appellants stating that they could make the necessary adjustment in respect of the assessment for VAT in their 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 appellants appealed to the tribunal against the assessment with a view to challenging the assessment in respect of interest.

The Act is accepted, for present purposes, to comply with the Sixth Council Directive of 17 May 1977 (77/388/EEC) dealing with turnover and taxes. Section 4 (1) of the Act imposes a charge on the supply of goods and services made in the United Kingdom. Section 30 makes provision for zero-rating:

Section 73 of the Act provides that the Commissioners may make assessments where there is default in making returns or keeping supporting documents:

Section 74 of the Act provides:

The expression “reckonable date” is defined in section 74(5). For present purposes it may be taken to be the date on which a return is required to be made for the prescribed accounting period to which the amount assessed relates.

Section 76 provides, insofar as is material:

The Value Added Tax Regulations 1995 (SI No.1995/2518) provide, at Regulation 31, that every taxable person shall, for the purpose of accounting for VAT, keep a series of records. These include:

Regulation 32 provides, insofar as is material:

Regulation 39 provides:

Regulation 40 provides:

It is Regulation 134 which provides for the zero-rating of supplies under section 30(8):

In exercising their powers under the Act, the Commissioners also issue Notices. VAT Notice 703 (November 1996), with the Regulations, lays down the conditions which must be met in full for a removal of goods to another member State to be zero-rated. Paragraph 8.4 provides:

you obtain and show on your VAT sales invoice your customer’s EC VAT registration number, including the 2-letter country code prefix (see Appendix A(2)); and

the goods are sent or transported out of the UK to a destination in another EC Member State; and

within three months of the date of supply, you obtain and keep valid commercial documentary evidence that the goods have been removed from the UK (see paragraph 8.7).

Paragraph 9.4:

Section 63 of the Act enables a penalty for misdeclaration of VAT to be imposed in certain circumstances.

The Tribunal’s reasoning is set out at paragraph 40 of the decision:

The judge set out the reasoning by which he reached a different conclusion at paragraph 22 of his judgment:

For the appellants, Mr Baldry seeks to uphold the decision and reasoning of the tribunal whereas Mr Beal, for the Commissioners, seeks to uphold that of Lightman J. Mr Baldry accepts that the Commissioners’ assessment, when initially raised, was valid. From the time the information required under the Notice is provided, the supply is, by virtue of paragraph 9.4 of the Notice, zero-rated. No VAT is due in respect of the supply and any outstanding assessment made by the respondents must be withdrawn or reduced to nil. Upon such action, there is no liability for interest on the amount assessed because interest in only due when there is an amount of VAT due and payable under an assessment. Liability to interest assumes that VAT is due and payable and, upon a zero-rated supply, it is not. Moreover, there is no “payment” of VAT within the meaning of section 74(3) and there can be no liability to interest under the section. Section 74 contemplates a true payment or alternatively a true set-off of an amount due (as in P and O Steam Navigation Company v The Commissioners of Customs and Excise [1991] VATTR 327) and not a mere adjustment. If VAT on the supply ceases to be due, no liability to interest remains. A charge to interest could have been made a condition, in present circumstances, for the zero rating of supplies, under section 30 (9) but it was not. A sanction against poor record-keeping appears in section 63 of the Act, it is submitted, and the Act should not be construed with a view to providing a sanction by way of interest.

Mr Baldry seeks to rely on the decision of this court in Mellham Ltd v Burton (Collector of Taxes) [2003] STC 441 as providing support for his submission that a “payment” within the meaning of section 74 does not extend to a set-off. Section 87 of the Taxes Management Act 1970 provides that tax shall carry interest from the date when the tax becomes due and payable until payment. The case turned on its facts. Corporation Tax of £100,000 was due but was not paid and interest was claimed by the Revenue. It was argued that, had the money been paid, it would immediately have been repaid or set-off under other statutory provisions. Buxton LJ stated, at 447 G:

Counsel does not seek to challenge the decision of the London Tribunal, Judge Medd QC presiding, in the P and O Steam case where, in successive returns, the taxpayer first overstated and then understated an entitlement to input tax. Mr Baldry accepts that the set-off constituted a “payment” under what is now section 74 of the Act so that liability to pay interest for the period between returns arose (this finding was not challenged in this Court (1994 STC 259)). He submits, however, that the decision does not help upon the present issue because the adjustment procedure now under consideration does not involve a set-off.

The proposition is that, if eventually there is 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. That proposition has an obvious attraction but in my judgment it does not survive an analysis of the procedure provided by the statutory scheme.

Regulation 134 provides for the zero rating of supplies under Section 30 (8) of the Act. Conditions may, however, be imposed on the ability to zero-rate either by regulations or by the Commissioners (section 30 (8)(b)). By virtue of paragraph 8.4 of the Commissioners’ Notice 703, obtaining, within three months, and keeping valid commercial documentary evidence that the goods have been removed from the UK is a condition of zero-rating the supply. Relevant documentation is required by Regulation 31 and is specified in paragraph 8.7. If the conditions have not been met within three months of the date of supply, the registered person’s records must be amended and VAT accounted for, on the invoiced amount or consideration received, in the return for the period in which the three month time limit expires (paragraph 9.4 of the Notice).

The keeping of the records is required by Regulation 31 and the keeping of a VAT account by Regulation 32. An account is required for each prescribed accounting period. Regulations 39 and 40 make further provision for the contents of the return required for each prescribed accounting period and impose an obligation to pay. The taxpayer is clearly under an obligation to keep records and make periodic returns for specific periods. The obligations are specified in detail.

The combined effect of sections 73 and 74 of the Act is that the Commissioners may assess the amount of VAT due in the circumstances set out in Section 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.

Paragraph 9.4 of the Notice permits taxpayers who were unable to meet conditions imposed in paragraph 8.4 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 of Notice 703 the tax was due.

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 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.

In R (Cardiff City Council) v Commissioners for Customs and Excise [2003] EWCA Civ.1456, it was the word ‘paid’ in section 80 of the Act which fell to be construed. The facts were quite different from the present case. Scott Baker LJ referred to Spargo’s case ((1873) 8 Ch App 407) and stated that it was a matter of “looking at the reality of what has occurred ….Paid should be given a practical and commercial meaning rather than a narrow one.” I find that approach appropriate to the different facts of the present case. The P and O case points away from a narrow construction though I would accept it does not cover the present situation.

In the context of this statutory scheme, the adjustment permitted does come within the meaning of “payment” in Section 74 (3). Accounts are required for specific periods with “VAT payable” and “VAT allowable” portions and aggregate entries required on returns to the Controller under both headings. I conclude that the entries, by which the effect of zero-rating has been achieved, constitute a payment. In the context of the periodic returns and netting-off contemplated by the regulations, the word should be given a broad meaning.

I am pleased to have been able to reach a conclusion which gives an incentive to the keeping of good records; zero-rating from the start, which good records permits, will prevent the liability to interest which arose in this case.

I would dismiss this appeal.

I agree that this appeal should be dismissed. In setting out the reasons which have led me to that conclusion, I gratefully adopt the account of the facts and the exposition of the statutory framework contained in the judgment of Lord Justice Pill.

The issue which the VAT and Duties Tribunal was invited to determine was whether the Commissioners of Customs and Excise were entitled to charge and recover interest on the amount of an assessment to Value Added Tax made on the appellant (as the taxable person) in respect of a supply of goods to a person in another Member State in the circumstances that (i) the assessment had been made on the basis that the appellant did not have the necessary evidence, within three months of the date of supply, that the goods had been removed from the United Kingdom, but (ii) the appellant was later able to establish that the goods had in fact been removed from the United Kingdom. To put that issue in context, it is necessary to have in mind the provisions of regulation 134 of the Value Added Tax Regulations 1995 (SI 1995/2518) and paragraphs 8.4 and 9.4 of VAT Notice 703 (November 1996), which Lord Justice Pill has set out in his judgment.

There can be no doubt – and it is not in dispute – that, if (as was accepted for the purposes of the issue which the Tribunal was asked to determine) the appellant 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 was required to account for Value Added Tax (VAT) on the basis that the supply was standard rated; as, but for regulation 134, it would be. The obligation to account for VAT in those circumstances is imposed by regulation 40(1) of the 1995 Regulations, read in conjunction with regulations 25 (“Making of returns”) and 39 (“Calculation of returns”). The position is explained in paragraph 9.4 of VAT Notice 703:

The obligation to make a return in respect of each VAT accounting period (regulation 25) and to account in that return for output tax (regulation 40(1)) is supplemented by an obligation on the person making the return to pay to Customs and Excise “such amount of VAT as is payable by him in respect of the period to which the return relates” – regulation 40(2). Payment is to be made not later than the last day on which the taxable person is required to make the return (ibid).

The Tribunal found (at paragraph 8 of its decision dated 8 August 2002) that, between April 1998 and May 1999, the appellant had sold automotive components to customers in Member States other than the United Kingdom. On the basis that the appellant 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 appellant was required, under proviso (a) to regulation 25(1) of the 1995 Regulations, to make monthly returns (Footnote: ¹). So, if supplies were made in each month between April 1998 and May 1999 (both inclusive), the appellant ought to have included an amount of VAT at the standard rate in respect of the supplies in the return for 07/98, and for each month thereafter up to and including 08/99. It had not done so. In those circumstances the Commissioners were entitled to take the view, in July 1999, that the appellant’s returns for each of the accounting periods 07/98 to 05/99 were incomplete or incorrect; and were entitled to assess the amount of the VAT due in respect of each of those periods (Footnote: ²) on the basis that those supplies were standard rated – section 73(1) of the Value Added Tax Act 1994.

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

Section 76(1) of the Act empowers the Commissioners to assess the amount due from a taxable person by way of interest under section 74. An assessment of interest under section 74 in respect of an amount of VAT assessed to be due under section 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” – section 76(3). Where a person is assessed under section 76 to an amount due by way of interest, and is also assessed under section 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 – section 76(5). But the interest element must be separately identified in the notice (ibid).

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 appellant 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.

The right of appeal to the VAT and Duties Tribunal is conferred by section 83 of the 1994 Act – read in conjunction with section 82 and schedule 12. An appeal lies with respect to (amongst other matters) – “(p) an assessment . . . under section 73(1) in respect of a period for which the appellant has made a return under this Act . . . or the amount of such assessment” and “(q) the amount of . . . any interest . . . specified in an assessment under section 76”. As I have sought to point out, the assessments made in the present case, set out in the notice dated 7 July 1999, were required to be (and were) assessments in respect of particular VAT accounting periods; that is to say, in respect of each of the VAT accounting periods from 07/98 (Footnote: ³). The question for the tribunal was whether the assessments in respect of any of the monthly accounting periods (up to 05/99) ought to be reduced or discharged.

The submission that those assessments ought to be discharged was founded on section 30(1) of the 1994 Act, read with section 30(8) of the Act and regulation 134 of the 1995 Regulations. Section 30(1) provides that, where a taxable person supplies goods or services and the supply is zero-rated, no VAT shall be charged on the supply. Section 30(8) provides for regulations to be made for the zero-rating of supplies of goods where (a) the Commissioners are satisfied that the supply involves the removal of the goods from the United Kingdom and their acquisition in another Member State by a person who is liable for VAT in that State and (b) “such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled”. Regulation 134 of the 1995 Regulations is made under the power conferred by section 30(8) of the Act. Paragraphs (a) and (b) of regulation 134 reflect the requirements in section 30(8)(a) of the Act. Paragraphs (c) and (d) impose the additional requirements that the goods have been removed to another Member State and that the taxable person has not opted to be taxed in accordance with a margin scheme. If the requirements of those four paragraphs are met, then “the supply, subject to such conditions as [the Commissioners] may impose, shall be zero-rated”.

It is plain, therefore, that the provision in section 30(1) of the Act – that no VAT is to be treated as charged on the supply – depends on the supply being zero-rated; and that whether or not a supply is zero-rated depends (in part, at least) on compliance with conditions imposed by the Commissioners. It is in that context that paragraph 8.4 (“Conditions for zero-rating of supplies to other EC Member States”) of VAT Notice 703 (“Exports and Removals of Goods from the United Kingdom”) has effect. And it is for that reason that (as that paragraph, itself, declares) a supply in the United Kingdom to a customer who is registered for VAT in another EC Member State may be zero-rated if, but only if, the three conditions set out in paragraph 8.4 are met The point is made explicit by the words which appear in bold type at the end of paragraph 8.4:

Paragraph 9 of Notice 703, as its cross-heading suggests, is concerned with “Records and accounts”. It should be read in conjunction with Part V (“Accounting, Payment and Records”) of the 1995 Regulations. In particular, paragraph 9.4 (“Supplies to VAT registered customers in other EC Member States”) must be read in conjunction with regulations 32 (“The VAT account”) and 39 (“Calculation of returns”), which Lord Justice Pill has set out and I need not rehearse save to note that regulation 32(1) and (2) requires every taxable person to maintain, as part of his records, a VAT account divided into separate parts each relating to one of his VAT accounting periods.

Paragraph 9.4 comprises three distinct elements. The paragraph begins with a statement of the correct accounting treatment in a case where, at the time of the supply, the conditions set out in paragraph 8.4 are met:

Paragraph 9.4 then goes on to provide, in the passage which I have already set out, for the correct accounting treatment in a case where the conditions in paragraph 8.4 have not been met within three months of the date of supply. The assumption on which that part of the paragraph is based is that either there will have been no entry made in the VAT payable portion of the VAT account at the time of the supply, or that there will have been an entry made at that time which shows the output tax in respect of that supply as nil. In either case, the taxable person is required (in a case where not all of the conditions set out in paragraph 8.4 have been met - for example, where he has not obtained and kept, within three months of the supply, valid commercial documentary evidence that the goods have been removed from the United Kingdom) to make an entry in VAT payable portion of the VAT account equal to the taxable proportion of the consideration received for the supply. The amount of the output tax to be shown in that entry will be determined by the rate applicable to a supply to a United Kingdom customer. The entry must be made in the VAT payable portion of that part of the VAT account which relates to the VAT accounting period in which the three month time limit expires. That will be an accounting period which is later than the accounting period in which the supply was made.

The third element in paragraph 9.4 provides for the correct accounting treatment where, after the three month limitation has expired, the taxable person is in a position to meet each of the conditions set out in paragraph 8.4. It is in these terms:

In a case where the adjustment permitted by the third element in paragraph 9.4 of Notice 703 falls to be made in a VAT accounting period which is later than the accounting period in respect of which the obligation to account for VAT on the basis that the supply was not zero-rated arose, there is nothing in that paragraph to suggest that the obligation is, in some way, rescinded or otherwise extinguished. The obligation arose in the circumstances that, at the time when it arose, the conditions for zero-rating were not met. Nothing which occurs subsequent to the VAT accounting period in respect of which the obligation arose affects the fact that VAT was payable in respect of the supply in that accounting period; nor that it should have been accounted for in (and paid with) the return for that accounting period.. The scheme of the Act and the Regulations, read with Notice 703, is that the obligation to account in one VAT accounting period (when the conditions are not met) on the basis that VAT was payable in respect of the supply is matched by a reduction in the amount of VAT payable in a subsequent accounting period (when the conditions are met).

Where a taxable person has made a supply to a customer in another EC Member State and does not have the necessary evidence, within three months of the date of supply, that the goods have been removed from the United Kingdom, he is required by the statutory scheme to pay VAT on that supply at the time that he makes his return for the VAT accounting period within which the three month time limit expires. The scheme does not provide for repayment of the amount paid – a fortiori, it does not provide for repayment of that amount with interest. When, in a subsequent VAT accounting period, the taxable person obtains the necessary evidence, he is able to recoup the amount of the VAT which he has paid in respect of the earlier accounting period, indirectly, by paying less VAT (or by making a repayment claim) in respect of that subsequent period. There is, as it seems to me, no reason why the position should differ, in principle, in a case where the taxable person has not done what he was required to do under the statutory scheme – that is to say, where he has not paid the VAT which he should have paid at the time that he makes his return for the VAT accounting period within which the three month time limit expired. In such a case, for the reasons which I have sought to explain, the Commissioners are entitled to make an assessment in respect of the VAT which he ought to have paid, and for interest from the date when he ought to have paid it. When, in a subsequent VAT accounting period, the taxable person obtains the necessary evidence, he can recoup an amount equal to the amount of the VAT which he is obliged to pay under the assessment, indirectly, by paying less VAT (or by making a repayment claim) in respect of that subsequent period. But there is no provision which enables him to recoup the interest which has been the subject of a valid assessment.

Nor can it make any difference whether or not, at the time that the taxable person obtains the necessary evidence, he has paid the amount of the VAT which he is obliged to pay under the assessment. If he has not paid, he remains liable to pay. Absent any agreement he may make with the Commissioners, he remains liable to pay under the assessment notwithstanding that he can recoup the amount for which he is liable, indirectly, by paying less VAT in respect of a subsequent period. And, again, it can make no difference that, instead of insisting on payment under the assessment, the Commissioners are content for the liability to be satisfied by a notional set off of an amount equal to the amount which the taxable person would be otherwise be entitled to recoup.

Lord Justice Thomas: I agree with both judgments.