removals of goods to other Member States - evidential requirements: Impact of the ECJ decision in Teleos PLC
Summary of the Teleos decision
This case involved the purported removal of mobile phones to a VAT registered customer in Spain. Teleos treated all their supplies as zero-rated intra-EC transactions. To support their claim for zero rating they relied on commercial road transport documents as proof that the goods had been removed to another Member State. The documents subsequently proved to be false so HMRC disallowed zero rating and assessed.
The European Court of Justice (ECJ) gave its judgement in this case (reference C-409/04) on 27 September 2007. The key points in the decision are
- goods must physically leave the territory of the Member State of supply to qualify for zero rating
- if a supplier
- acts in good faith and submits evidence establishing a right to zero rate an intra Community transaction and
- has no involvement in tax evasion and takes every reasonable measure in their power to ensure that the transaction did not lead to their participation in tax evasion,
then the Member State cannot hold the supplier to account for the VAT on those goods if the information relied on subsequently proves to be false.
Evidence accepted in good faith
The ECJ ruling on good faith does not mean that vague assertions that a supplier acted in good faith remove the right to assess. Indeed, the judgement makes it clear that it is not contrary to Community law to require the supplier to take every step which could be reasonably required of them to satisfy themselves that the transaction which they are effecting does not result in their participation in tax evasion. The judgement is therefore consistent with the line of ECJ cases which underpin HMRC’s approach to MTIC fraud and underlines that rights under EU VAT law cannot routinely be enjoyed where the taxpayer in question knew or could have known that they were participating in tax evasion.
The Court’s decision does, however, limit the Commissioners’ ability to assess the supplier to disallow zero rating in some limited circumstances, where a case is on fours with Teleos.
A case will be on all fours with Teleos if
- the supplier submits in good faith, evidence establishing, at first sight the right to zero rate an alleged dispatch of goods, and
- we accept that the supplier had taken every reasonable measure to ensure that his supply did not lead to his participation in evasion.
When must the Teleos decision be considered?
The following table summarises the circumstances in which officers will need to make a judgement about the application of the Teleos decision. If, of course, the trader holds no evidence of removal then clearly they have not met a key condition for zero rating. There can be no good faith argument in these circumstances and the case is unaffected by Teleos.
|Scenario||Is assessment action appropriate?|
|1||Pre payment verification of a return. You accept that, at first sight, evidence of export/removal is consistent with requirements set out in Notice 725 or Notice 703 and you are satisfied that the trader has taken every reasonable measure to ensure that their supply did not lead to their participation in evasion. They have zero rated their supply in good faith.||No|
|2||Pre or post payment verification. You accept that, at first sight, evidence of export/removal is consistent with requirements set of in Notice 725 or Notice 703 but you are not satisfied that the trader has taken all reasonable steps to ensure they are not party to a fraud. The trader cannot claim to have acted in good faith.||Yes|
|3||Post payment verification of a return. The trader has zero rated a supply on the basis that they have met the conditions for zero rating as set out in public notice 703 or 725. During a subsequent audit, enquiries cast doubt on the true movement of the goods. However, the trader holds evidence of export/removal as required in a notice and there is no reason to doubt that the trader has taken every reasonable measure to ensure that their supply did not lead to their participation in evasion.||No|
Determining whether a supplier acted in “good faith” and took reasonable measures
The question of whether a supplier took all reasonable steps is, in principle, subject to the same approach that has been applied when considering knowledge or means of knowledge in relation to entitlement to recover input tax. For example in the DragonFutures appeal, the Tribunal said (at paragraph 85) -
“The tribunal sees no inherent excessive difficulty in a taxable person establishing what it did or did not know at a particular time, and the steps that it took before and at that time to ensure it met to the required standard the obligation put on it to enquire.”
In short, the onus is on the trader to demonstrate that in all the circumstances his checks on the paperwork and on his customer’s integrity were reasonable.
There is no definitive list of tests the supplier must complete to evidence good faith.This is not an exhaustive list, but points to consider are:
- Is there any evidence to show that the supplier (ie the person claiming the zero rating) is party to a fraud? Did he know that the goods had not left the UK? Clearly if there is evidence of an intention to defraud or knowledge that, despite the documentation, the goods did not leave the UK, any claim to have acted in good faith or taken reasonable steps to ascertain the validity of the zero rate is undermined.
- Is the documentation relied on to evidence the zero rating clearly incoherent or inconsistent? Documentation with key details missing or with implausible or transparently absurd details is documentation which should have put the trader on alert to make more enquiries. Through these enquiries the trader should have obtained satisfactory explanations for the inconsistencies, or else they should not have proceeded with the transactions.
- Has the supplier tested the authenticity of the evidence of export/removal? For example:
- are there irregularities with the weights shown on the transport evidence e.g. the weight shown is unrealistic in comparison with the number of units shown on sales invoices/customers orders?
- Does the trader hold details of the name and address of the haulier collecting the goods – including the registration number of the vehicle and signature of the driver? Are these details supported by the transport evidence of removal?
- If the trader never takes possession of the goods, what checks have been undertaken on the transport arrangements?
- Is there a full audit trail of the transport arrangements? For example if goods are transferred to another vehicle is this reflected in instructions from the customer? Has the trader undertaken any checks on the credibility of the purported forwarding agents?
- Is the transport evidence signed by the sender of the goods, the forwarding agent and the overseas recipient? Is there any reason to doubt the authenticity of the signatures?
- If transport evidence shows dates and times of the purported movement of goods, are these details credible?
- NOTE: It is not a precondition of the zero rate that the supplier obtains this evidence. But if the supplier is attempting to demonstrate that he took all reasonable steps, the more of the above that are present, the greater will be the evidence that he has done so and hence that he may be able to rely on the Teleos judgement.
- Has the supplier made serious and detailed enquiries as to the legitimacy of their suppliers and customers? For example, have they made thorough checks on the VAT registered status of a customer in another Member State and on the seriousness of his customer’s activities along the lines suggested in Notice 726 - Joint and Several Liability in the Supply of Specified Goods?
- Could any evidence additional to that relied on reasonably have been obtained? For example, a trader may rely only on a single transport document such as a CMR to support their claim for zero rating. Could they have reasonably been expected to obtain other documents from an independent 3rd party as proof of removal e.g. evidence of ferry crossings? If they do provide such evidence, has it been authenticated by the issuer?
- If the trader has purportedly exported the goods to a destination outside the EU, has an export entry been made to CHIEF (see VEXP40200) and does that entry coincide with the trader’s accounts?
You need to make a rounded judgment about the reasonableness of the action at the time, and without the benefit of hindsight. Cases of doubt should be discussed with a peer orline manager or referred to the policy team with details and a recommendation. If in doubt, please contact the policy team (see VEXP10600).