The European Court of Justice ruled that, having regard to the term ‘despatched’ in art. 28A(3) and art. 28C(A)(a) of the sixth council directive, the intra-Community acquisition of goods was effected and the exemption of the intra-Community supply of goods became applicable only when the right to dispose of the goods as owner had been transferred to the purchaser and the supplier established that those goods had been dispatched or transported to another member state and that, as a result of that dispatch or that transport, they had physically left the territory of the member state of supply. The first subparagraph of art. 28C(A)(a) precluded the competent authorities of the member state of supply from requiring a supplier, who acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for VAT on those goods where that evidence was found to be false, without the supplier's involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion.

Facts

In 2002, the taxpayers sold mobile telephones to a Spanish company (‘TT’). According to the sales contracts, the goods’ destination was, in general, in France and, in certain cases, in Spain. In nearly every case, the contracts were concluded on the basis of one of the international commercial terms (‘Incoterms 2000’) established by the International Chamber of Commerce, namely ‘ex-works’ or ‘EXW’, which meant that the taxpayers were required only to place the goods at TT's disposal at a warehouse in the UK, TT being responsible for arranging their transport to the specified member state. The warehouse belonged to ECL, a bonded warehousing and distribution company.

For each transaction, the taxpayers received from TT, a few days after the sale, the stamped and signed original of the CMR consignment note, describing the goods and stating the delivery address, the carrier's name and the vehicle's registration number. Such notes, which were signed by TT, afforded evidence that the mobile telephones had reached the specified destination.

Initially, Customs accepted those documents as evidence that the goods had been exported from the UK, so that those supplies were exempt from VAT, by virtue of zero-rating, and the taxpayers were entitled to be refunded the input tax paid. However, on subsequent checks, Customs discovered that, in certain cases, the destination stated on the CMR notes was false. They concluded that the mobile telephones had never left the UK and therefore assessed the taxpayers to VAT on those supplies, whilst fully acknowledging that they were in no way involved in any fraud. The taxpayers brought proceedings before the UK administrative court challenging Customs’ decisions assessing them to VAT, on the ground that there was no basis for the assessments under Council Directive 77/388 (‘the sixth directive’). The court concluded that, in essence, the taxpayers had accused Customs of failing properly to implement the provisions of art. 28C(A)(a) into domestic legislation and that issues as to legal certainty, proportionality and legitimate expectation turned on the correct interpretation of art. 28. The primary legislation had to be interpreted in accordance with the true meaning of the directive under art. 28C(A)(a). Accordingly, it was necessary for the correct interpretation of the provisions of art. 28 to be referred to the European Court of Justice to put that provision in its proper context and provide an interpretation of uniform application throughout the Community ([2005] BTC 5,062).

Issue

Whether, on a proper interpretation of art. 28A(3) and 28C(A)(a) of the sixth directive, there was any basis on which Customs could raise the assessments in question.

Decision

The European Court of Justice (Third Chamber) (ruling accordingly) said that requiring the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional cases, to the objective character of the transaction concerned. Consequently, it was necessary that the classification of intra-Community supplies and acquisitions be made on the basis of objective matters, such as the physical movement of the goods concerned between member states.

In the light of those considerations, the first subparagraph of art. 28A(3) and the first subparagraph of art. 28C(A)(a) were to be interpreted as meaning that the intra-Community acquisition of goods was effected and the exemption of the intra-Community supply of goods became applicable only when the right to dispose of the goods as owner has been transferred to the purchaser and the supplier established that those goods had been dispatched or transported to another member state and that, as a result, they had physically left the territory of the member state of supply.

Even if the intra-Community supply and acquisition of goods were subject to the objective condition of physical transfer of the goods out of the member state of supply, it was difficult for the tax authorities, because of the abolition of frontier checks between the member states, to satisfy themselves that the goods had or had not physically left the territory of that member state. It was principally on the basis of the evidence provided by taxable persons and of their statements that the tax authorities could so satisfy themselves.

It was for the member states to lay down the conditions for the application of the exemption of intra-Community supplies of goods. However, they had to comply with the general principles of law which formed part of the Community legal order, in particular, the principles of legal certainty and proportionality. Furthermore, the principle of fiscal neutrality precluded treating similar supplies of services, which were thus in competition with each other, differently for VAT purposes. If the suppliers were themselves required to account for the VAT after the event, that principle would be infringed, since suppliers who effected transactions within a country were never liable to pay output tax, which was an indirect tax on consumption. Therefore, taxable persons effecting an intra-Community transaction would be in a less advantageous position than taxable persons effecting an internal transaction.

Under art. 22(8) of the sixth directive, the member states might impose the obligations deemed necessary for the correct collection of the tax and the prevention of evasion, provided that such obligations did not, in trade between member states, give rise to formalities connected with the crossing of frontiers. Moreover, it would not be contrary to Community law to require the supplier to take every reasonable step to satisfy himself that the transaction which he was effecting did not result in his participation in tax evasion. The fact that the supplier acted in good faith, that he took every reasonable measure in his power and that his participation in fraud was excluded were important points in deciding whether that supplier could be obliged to account for the VAT after the event.

By contrast, once the supplier had fulfilled his obligations relating to evidence of an intra-Community supply, where the contractual obligation to dispatch or transport the goods out of the member state of supply had not been satisfied by the purchaser, it was the latter who should be held liable for the VAT in that member state. Therefore the first subparagraph of art. 28C(A)(a) precluded the competent authorities of the member state of supply from requiring a supplier, who acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for VAT on those goods where that evidence was found to be false, without the supplier's involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead his participation in such evasion.

Finally, even if presentation by the purchaser of a tax return relating to an intra-Community acquisition might be evidence of the actual transfer of the goods out of the member state of supply, such a return did not constitute conclusive evidence of an exempt intra-Community supply of goods. The fact that the purchaser made a declaration concerning intra-Community acquisition to the tax authorities of the member state of destination might constitute additional evidence tending to establish that the goods had actually left the territory of the member state of supply. However, it did not constitute conclusive proof for the purposes of the exemption from VAT of an intra-Community supply.

European Court of Justice (Third Chamber).
Judgment delivered 27 September 2007.