This is yet another case of HMRC applying bizarre and blatantly incorrect logic to a VAT case and then doubling down on their error at the review stage, resulting in a tax tribunal being less than impressed.
Export VAT Tribunal: Background
This case revolves around whether or not VAT should be charged on exports. When a business exports goods, the sale can be zero rated on the basis that the business holds evidence of export. In this particular case, Pavan Ltd exported medical syringes to customers based in the USA.
Pavan Ltd is a niche exporter with only a modest turnover and the sole director would buy syringes from a UK supplier and repackage them at his home before posting them. Each package had an invoice and a CP72* export document, which was sent via the Post Office who provided a certificate of postings/tracking details. Despite holding this evidence, HMRC decided that Pavan Ltd had not complied with the law and issued an assessment for VAT on all of its sales to America.
Export VAT: The Law
VAT Notice 703 paragraph 3.3 states: A supply of goods sent to a destination outside the UK is liable to zero rate VAT providing you:
- Make sure that the goods are exported from the UK within the specified time limit
- Obtain official/commercial evidence of export within the specified time limits
- Keep supplementary evidence of the export transaction
These bullet points have the force of law, with paragraph 3.5 specifying that the time limit for exporting the goods and obtaining the necessary evidence is three months from the time of the supply. Also, Paragraph 6.1 sets out the evidence needed: “For VAT zero-rating purposes you must produce official evidence and/or commercial evidence. These must be supported by supplementary evidence to show that a transaction has taken place and that the transaction relates to the goods physically exported”.
Notice 703 also provides many examples of acceptable official/commercial evidence, such as bills of lading, customer orders, export invoices, consignment notes, postal receipts evidence of payment etc.
HMRC’s cack-handed approach
Pavan Ltd kept very good records and was able to produce both official and commercial evidence. There were a handful of anomalies in the paperwork, for example, not all payments from USA customers could be identified and deliveries were not always made to customers’ main/billing address, but overall, the tribunal were more than satisfied with the record keeping.
However, despite the good recordkeeping, the HMRC officer stated the main reason for assessment was the taxpayer had not supplied HMRC with the export evidence within three months. The officer told the tribunal that had the taxpayer given the evidence to HMRC within three months of each export, HMRC would have accepted the export evidence for zero rating purposes.
Just to make it clear, HMRC was saying the assessment was made even though Pavan Ltd had acceptable evidence of export but that the law required the taxpayer to physically give that paperwork to HMRC within three months of each and every export.
Export VAT Tribunal: The Tribunal
The Tribunal decided that HMRC had made two fundamental errors in law. Firstly, the three-month period for obtaining evidence doesn’t mean that the evidence has to be provided to HMRC within three months, it simply means the taxpayer must have obtained the evidence within three months of the transaction.
The second error was that HMRC was of the view that all the evidence of export must be contained within the CP72*, ignoring established case law and HMRC’s own guidance that a basket of evidence from a variety of sources is acceptable alternative evidence.
HMRC’s solicitor tried to argue that the three months are not just to “obtain” evidence but to also pass it to HMRC. Having been asked to review their decision, HMRC doubled-down and upheld the assessment because the evidence of export was not easily available. The judge commented that the officer had clearly confused the time limits set out in law.
The judge concluded by stating, “This error was started by Officer Bains, perpetuated by the nonsense written by the review officer, and then compounded by HMRC’s statement of case and skeleton argument. If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it and we have absolutely no hesitation in allowing this appeal.”
Tax Accountant’s view
I am amazed that HMRC could go so wrong on such a basic concept. But more concerning is that the reviewing officer also took the same illogical approach as the original HMRC officer. As reviews are usually performed by the solicitor’s office, one would have hoped that some legislative logic would be applied but that was sadly not the case.
To make matters worse, HMRC then pursued this case to tribunal, still applying the exact same arguments as before, with only the tribunal able to bring some much-needed common sense to the situation by simply applying the actual law. That it got this far can only indicate there has been a complete and utter breakdown within HMRC on both a procedural and technical level.
This devastating judgment was the football equivalent of HMRC going into a match expecting to win hands down against a perceived weaker opponent and ending up with a bloody nose, similar to Man’ United visit to Liverpool a few days ago!
*(A CP72 form must be completed for all destinations worldwide and must include details of the contents, value and weight of your parcel, plus contact details for the sender and recipient, including a local phone number for international recipients)