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HMRC internal manual

VAT Export and Removal of Goods from the UK

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Basic principles: High Court decision in JP Commodities Ltd

In the case of JP Commodities Ltd [2008] STC 816, the Court considered the meaning of taxable person in the context of Article 138 of the Principal VAT Directive, and whether the Commissioners’ view, that an entitlement to zero-rate is dependent upon the customer being VAT registered in another Member State, is reasonable.

JP Commodities (JP) zero-rated supplies of high value electronic goods to its customer (B), a company established in Gibraltar. The goods were dispatched to Belgium at B’s request. B was not registered for VAT in any EC Member state, although it was agreed that the company was liable to be registered in Belgium. The supplies failed to meet one of our basic conditions for zero-rating – that the supplier must show a valid EC VAT number on the sales invoice. Consequently zero-rating was disallowed and output tax was assessed.

JP contended that their supplies were within Article 138(1) because B was a taxable person. They further contended that our condition, requiring suppliers to quote a valid EC VAT number, prevents the correct application of article 138, and this offends the principle of effectiveness. The tribunal rejected these contentions and JP lodged an appeal to the High Court. The appeal was dismissed.

Mr Justice Briggs concluded that, for the purpose of article 138, “taxable person” must be the definition given in article 9 that is, any person who independently carries out in any place any economic activity; taxable person cannot be construed as meaning a person registered for VAT. Nevertheless, the condition imposed by the Commissioners that the supplier must show on the VAT sales invoice the customer’s EC VAT number, is a legitimate condition authorised by article 131, which requires Member States to lay down conditions to ensure the correct and straightforward application of the zero-rate, whilst preventing evasion, avoidance or abuse.

The Court also ruled that the condition is proportionate because it is reasonable to expect a supplier to take steps to satisfy himself that his customer is VAT registered in order to ensure that the intra-community supply he is effecting does not lead to his participation in evasion or avoidance.

Finally, the Court confirmed that the condition does not offend the principle of effectiveness because it does not make it virtually impossible or excessively difficult for a supplier to exercise the right to zero-rate. That right is conferred because the inter-connectedness of the transaction makes tax payable in the Member State of acquisition. It is not an objective to facilitate the exercise of the right to zero-rate in circumstances where the corresponding VAT obligations of the customer are likely to be flouted because they are not VAT registered. The requirement to provide the customer’s EC VAT number is a simple mechanism to ensure that the right to zero-rate is correctly conferred.