Introduction

The case of HMRC v. Arkeley Limited (In liquidation) ([2014] STC 309) serves as a pivotal judgment in the realm of Value Added Tax (VAT) law in the United Kingdom. Heard by the Upper Tribunal (Tax and Chancery Chamber) on August 22, 2013, this case delves into critical issues surrounding VAT zero-rating for exported goods and the conditions under which input tax claims can be successfully appealed. The primary parties involved are HM Revenue and Customs (HMRC), the UK's tax authority, as the appellant, and Arkeley Limited, in liquidation, as the respondent.

Summary of the Judgment

The core of the dispute centered on two main issues:

• Whether the First-tier Tribunal (FTT) erred in law by finding that the conditions for VAT zero-rating were met in respect of certain invoices related to alleged export transactions.
• Whether the FTT erred in law by finding that an invoice was paid in full within six months of the date of supply, thereby disallowing certain claims to input tax.

The Upper Tribunal ultimately dismissed HMRC's appeal regarding the zero-rating issue, affirming the FTT's decision that Arkeley had provided sufficient evidence of export to qualify for VAT zero-rating. Additionally, HMRC's application to appeal the input tax issue was refused. The judgment emphasized the sufficiency of documentary evidence in establishing exports and underscored the necessity for tax authorities to respect the principles of good faith unless fraud is alleged.

Analysis

Precedents Cited

A significant precedent cited in this judgment is R (on the application of Teleos plc and others) v Revenue and Customs Commissioners [2008] STC 706. While Teleos dealt with intra-Community trade, its principles are applicable to exports outside the EU. The Court of Justice of the European Union (CJEU) in Teleos clarified that tax authorities cannot later question the evidence of export provided by suppliers acting in good faith unless there is evidence of fraud or negligence.

Other important cases referenced include:

• Kittel v Belgium and Belgium v Recolta Recycling SPRL [2008] STC 1537
• Edwards v Bairstow and another [1956] AC 14
• Proctor & Gamble UK v Revenue and Customs Commissioners [2009] STC 1990
• Designers Guild Ltd v Russell Williams (Textiles) Ltd [2000] 1 WLR 2416

These cases collectively reinforce the importance of fair evaluation of evidence and the limits of appellate scrutiny over factual determinations made by lower tribunals.

Legal Reasoning

The tribunal's legal reasoning hinged on the interpretation of the Principal VAT Directive (2006/112/EC) and its domestic implementation through the Value Added Tax Act 1994 (VATA) and the Value Added Tax Regulations 1995. Specifically, it scrutinized:

• Section 30(6) VATA: Outlines the conditions under which a supply of goods can be zero-rated if exported outside the member states.
• Notice 703: Provides detailed conditions and evidential requirements for zero-rating, including time limits and documentation standards.

The Upper Tribunal applied the principles from Teleos to ascertain that as long as Arkeley provided sufficient documentary evidence in good faith, the HMRC could not later challenge the export unless fraud was proven. The tribunal emphasized that the FTT appropriately assessed the evidence, considering the entire documentation rather than requiring physical proof of export beyond the provided documents.

Impact

This judgment has several significant implications:

• Clarification on Evidence Sufficiency: It reinforces that documentary evidence, when properly linked and credible, suffices for VAT zero-rating, aligning with the principle of good faith in commercial transactions.
• Limits on HMRC's Authority: HMRC cannot easily overturn lower tribunal findings on zero-rating without substantial evidence of wrongdoing.
• Appellate Caution: Upper tribunals should exercise caution in re-evaluating factual findings unless there is clear evidence of error or perversion.

Future cases involving VAT zero-rating and input tax claims will reference this judgment for guidance on evidential standards and the scope of appellate review.

Complex Concepts Simplified

VAT Zero-Rating

Zero-rating in VAT allows suppliers to charge VAT at 0% on certain goods or services, typically those exported outside the country. This means that while no VAT is charged to the customer, the supplier can still reclaim VAT on related purchases (input tax).

Input Tax

Input tax refers to the VAT that a business pays on its purchases and expenses. Businesses can typically reclaim this VAT, provided certain conditions are met, ensuring that VAT is ultimately borne by the end consumer.

Good Faith

Acting in good faith means conducting transactions with honesty and without intent to deceive. In tax matters, if a supplier provides accurate documentation in good faith, tax authorities are limited in their ability to later challenge the legitimacy of claims unless fraud is evident.

Certificates of Shipment and MAWBs

A Certificate of Shipment is a document issued by a carrier confirming that goods have been shipped. A Master Air Waybill (MAWB) is a specific type of airway bill used in air freight. These documents are crucial in proving that goods have been exported.

Conclusion

The HMRC v. Arkeley Limited judgment underscores the necessity for clear and credible documentary evidence in securing VAT zero-rating for exported goods. It reaffirms the principle that tax authorities must respect the good faith efforts of businesses to comply with VAT regulations unless there is substantial evidence of fraud or negligence. This decision not only upholds the findings of the First-tier Tribunal but also sets a clear precedent for future VAT-related disputes, balancing the interests of tax authorities with the operational realities of businesses engaged in international trade.