Scandico Ltd v Revenue and Customs (VAT - SUPPLY : Deemed)

Factual and Procedural Background

This appeal concerns the entitlement of the Appellant, a mobile phone trader, to claim input VAT deductions on iPhones acquired indirectly through approximately 80 employees ("runners"). The Appellant circumvented Apple's policy limiting purchases to two phones per customer by instructing employees to buy small quantities from Apple retail stores, often under false or no names, and never openly on behalf of the Appellant.

The Appellant initially had its VAT reclaims accepted, but following increased turnover in January and February 2011, HMRC subjected the claims to extended verification and subsequently denied the input VAT deduction due to the absence of valid VAT invoices and insufficient corroborating evidence. The Appellant challenged HMRC’s refusal, leading to this appeal before the First-tier Tribunal.

The Appellant’s purchases were evidenced by Apple till receipts, which lacked required VAT invoice details. The Appellant contended that these receipts and other documentation, including sales invoices to overseas and UK customers (subject to reverse charge), sufficed to establish taxable supplies. HMRC disputed this, emphasizing the lack of a proper audit trail and documentary evidence confirming the supply chain from Apple to the Appellant.

The Appellant’s business model involved cash withdrawals from a money exchange, distribution of cash to head runners and runners, purchase of phones in stores, and subsequent export or domestic sale. The runners were paid fixed monthly salaries with no documented bonuses or expense reimbursements. The Appellant also had a related company providing funding and involved in distribution logistics.

HMRC’s refusal was partly grounded on section 47(2A) VAT Act 1994, which deems supplies made through agents acting in their own name to be supplies both to and by the agent, thus potentially precluding the Appellant from claiming input VAT when purchases were made by non-registered employees acting as agents in their own name.

Legal Issues Presented

1. Whether section 47(2A) VAT Act 1994 applies such that the supplies by Apple to the employees acting as agents in their own name preclude the Appellant from claiming input VAT deductions.
2. If section 47(2A) is inapplicable, whether HMRC’s refusal to accept alternative evidence in the absence of valid VAT invoices was reasonable.
3. Whether section 47(2A) VAT Act 1994 complies with Article 14.2(c) of the EC VAT Directive 2006/112/EC and whether this issue should be referred to the European Court of Justice.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that Apple had charged VAT on supplies evidenced by till receipts and that the phones were acquired for its business, with onward sales documented by invoices to customers.
• The Appellant argued HMRC’s refusal to accept alternative evidence in lieu of valid VAT invoices was unreasonable.
• The Appellant challenged the applicability of section 47(2A), submitting that employees acquiring goods for their employer should not be treated as agents acting in their own name for VAT purposes.
• In closing submissions, the Appellant advanced three additional legal arguments contesting the application of section 47(2A), including a contention that the provision conflicts with the EC VAT Directive and should be referred to the ECJ.

Respondents' Arguments

• HMRC contended that section 47(2A) VAT Act 1994 applies, deeming supplies through agents acting in their own name to be supplies to and by the agent, thus barring the Appellant’s input VAT claim.
• HMRC maintained that the case officer’s refusal to accept alternative evidence was reasonable given the lack of documentary evidence forming an audit trail from cash withdrawal to phone acquisition and onward supply.
• HMRC emphasized deficiencies in the evidence, including absence of documentation for cash distribution, phone collection, and IMEI number verification, undermining the Appellant’s claim.
• HMRC disputed the Appellant’s contention that section 47(2A) conflicts with the Directive and urged dismissal without referral to the ECJ.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal first considered the applicability of section 47(2A) VAT Act 1994, which deems supplies made through an agent acting in his own name to be supplies both to and by the agent. The Appellant’s employees ("runners") purchased phones in their own names or under false names, never disclosing they acted for the Appellant. The Tribunal agreed with prior decisions that employees acting in their own name as agents fall within section 47(2A), which modifies the legal ownership and supply chain for VAT purposes.

The Tribunal acknowledged the general English law principle that an agent for an undisclosed principal contracts on behalf of the principal; however, for VAT purposes, section 47(2A) creates a statutory fiction that treats the supply as to and by the agent. This prevents the Appellant from claiming input VAT deductions because the supplies are deemed to be made by non-registered agents to the Appellant.

The Tribunal rejected the Appellant’s arguments that section 47(2A) should be narrowly construed or disregarded to avoid unfair hardship or breach of VAT neutrality principles. It explained that neutrality applies between registered persons, not where supplies involve non-registered agents acting in their own name. The Tribunal also considered whether employee services being non-business services conflicted with section 47(2A) and concluded there was no such conflict.

On the second issue, assuming section 47(2A) did not apply, the Tribunal assessed whether HMRC’s refusal to accept alternative evidence in the absence of valid VAT invoices was reasonable. The Tribunal found that although the Appellant had established on the balance of probabilities that taxable supplies occurred, the evidence had significant deficiencies. These included lack of documentary audit trail for cash distribution, phone collection, and IMEI verification; inadequacies in witness statements; and uncertainties regarding the role of the related company.

The Tribunal emphasized that the burden was on the Appellant to provide sufficient evidence beyond the invalid till receipts to support the input VAT claim. HMRC’s caution and refusal to accept limited secondary evidence was held to be reasonable given the gaps and uncertainties.

Regarding the challenge that section 47(2A) conflicts with Article 14.2(c) of the EC VAT Directive and the request to refer this to the European Court of Justice (ECJ), the Tribunal analyzed the Directive’s wording and related correspondence between UK Customs and the European Commission. It found the Directive provision obscure and the domestic provision clear and unambiguous. The Tribunal concluded it had no jurisdiction to override or strike down section 47(2A) and that a referral to the ECJ was unnecessary as the appeal was disposed of on other grounds.

Holding and Implications

The Tribunal’s final decision was to DISMISS the Appellant’s appeal.

This means the Appellant is not entitled to recover input VAT on the iPhones purchased through employees acting as agents in their own name, pursuant to section 47(2A) VAT Act 1994. The Tribunal held that HMRC’s refusal to accept alternative evidence in the absence of valid VAT invoices was reasonable. The Tribunal did not set new precedent beyond affirming existing authority on section 47(2A) and declined to refer the question of compatibility with the EC Directive to the ECJ as it was unnecessary for the disposal of this appeal.