The High Court upheld a decision of the VAT tribunal ([2007] BVC 4,047) that the taxpayer was not entitled to zero-rate supplies of goods to a company based in Gibraltar which was not registered for VAT, since the taxpayer was unable to show the customer's VAT registration number on its VAT sales invoice as required by Notice 725.

Facts

Electronic goods were sold by the taxpayer to a customer in Gibraltar but, at the customer's request, the goods had been delivered to an address in Belgium. The customer was not VAT registered in Belgium as it should have been since it carried on business there. The taxpayer treated the supplies as zero-rated exports, but Customs took the view that there was no entitlement to zero-rating, because the customer's VAT number had not been shown on the invoice, and adjusted the taxpayer's VAT return to collect tax of £75,979.

The taxpayer appealed, basing its case for zero-rating on art. 28C of Council Directive 77/388 (‘the sixth directive’).

The VAT tribunal held that the conditions imposed by Notice 725 were consistent with the article and that the taxpayer had failed to satisfy the requirements for its supplies to be zero-rated ( [2007] BVC 4,047; Decision No. 19,904). The taxpayer appealed arguing that the customer was a taxable person within art. 28C(A) with an enforceable right to zero-rating in the circumstances and that the condition imposed by Notice 725 was contrary to the Community law principles of proportionality and effectiveness. Customs submitted, inter alia, that ‘taxable person’ in art. 28C meant taxable person who was registered for VAT.

Issue

Whether Customs were entitled to impose, as a condition for the entitlement under art. 28C of the sixth directive to a zero-rate of VAT on the supply of goods to a trader carrying on business in another member state, a requirement that the UK trader first obtain and show on its VAT sales invoice its customer's VAT registration number.

Decision

Briggs J dismissed the appeal.

Taxable person

There was a natural assumption on the part of the draftsman of art. 28 that acquirers or customers in relation to intra-Community supplies of goods and services would be registered for VAT since, as taxable persons within art. 4, they could reasonably be supposed to comply with their legal obligation to register for VAT.

However, the machinery of art. 28 was not unworkable in the case of a taxable person who was not registered for VAT. In each case where reference to the member state which issued the person's VAT identification number triggered a deeming provision, there was a default provision which did not so depend. A tax liability on the acquirer, and a tax exemption for the supplier, were both intended to apply wherever there was an intra-Community acquisition as defined, provided that, as both art. 28A and art. 28C required, both parties were taxable persons within art. 4. The fact that one or the other or both might, in particular cases, seek to evade, avoid or abuse that legal framework by failing to register for VAT was, as a matter of construction of the framework which both imposed acquisition tax and created the relevant exemption, irrelevant. It was also irrelevant that the acquirer or customer might be suggested to hinder the correct and straightforward application of the exemptions within art. 28C by failing to register for VAT in the member state where the acquisition occurred. Those considerations arose, if at all, when considering the legitimacy of conditions imposed pursuant to the opening words of art. 28C, not in relation to the question whether the acquirer or customer was a taxable person. It followed that the Gibraltar company was a ‘taxable person’ within art. 28C.

Notice 725

The condition in Notice 725 clearly tended to ensure the correct and straightforward application of the scheme constituted by art. 28 as a whole, by applying the exemption or zero-rating in the supplier's member state only where the customer was not merely liable as a taxable person, but also, by virtue of being registered, was in a position properly to account to the tax authority of his member state for that tax, and subsequently to collect and pay VAT on any relevant on-sale of the goods in question. A purposive construction of art. 28C(A) permitted a broader interpretation of the phrase ‘correct and straightforward application of the exemptions’ than its strictly literal meaning, so as to extend to other aspects of the application of the scheme of which the exemption formed part, such as the accounting for tax by the customer. It was no abuse of the language of the directive to suggest that the correct and straightforward application of the supplier's exemption was ensured by a condition which tended to maximise the prospect that the interconnected acquisition received the appropriate VAT treatment in the customer's member state.

The condition also plainly tended to prevent evasion or avoidance of the VAT obligations of participants in an intra-Community transaction under art. 28 by encouraging UK suppliers to ensure, before making supplies to taxable persons in other member states, that they were VAT registered. Therefore, the condition in Notice 725 prima facie qualified as a legitimate condition under both limbs of the category of conditions referred to in the opening words of art. 28C(A).

Proportionality

The condition in question did not offend the principle of proportionality. A supplier who zero-rated a supply of goods to be delivered to a customer in another member state could hardly be said to have taken every reasonable measure in his power to ensure that the transaction in which he was participating did not lead to evasion, if he failed to ascertain whether his customer was registered for VAT. 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. The condition required no more, nor less, than that and it was, therefore, not disproportionate (R (on the application of Teleos plc & Ors) v C & E Commrs (Case C-409/04) 27 September 2007 considered).

Effectiveness

The principle of effectiveness was not engaged on the present facts. The purpose of the condition was not adventitiously to swell the coffers of the UK Customs, but to ensure that UK suppliers carried out their qualifying intra-Community transactions with properly VAT registered customers. The effectiveness of the condition lay in its deterrent effect, rather than its operation, where an incautious supplier failed to apprise himself of the relevant rules (Marks & Spencer plc v C & E Commrs (Case C-62/00) [2002] BTC 5,477; [2002] ECR I-6325 considered).

Chancery Division.
Judgment delivered 26 October 2007.