[2010] UKFTT 159 (TC)

TC00464

Appeal number LON/2006/0874

	VAT – Input tax – Invoice – Nature of goods
VAT – Input tax – Non compliant invoice – Discretion to permit deduction – Reg 29 
VAT- Assessment – Section 73(2) – to recover VAT which should not have been repaid

FIRST-TIER TRIBUNAL
TAX CHAMBER

	F I PROMOTIONS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS(VAT)	Respondents

				TRIBUNAL: 	CHARLES HELLIER (Judge)
						NIGEL COLLARD (Member)

Sitting in public in London on 9-13 and 16-20 November 2009

Andrew Young, counsel, instructed by Needleman Treon for the Appellant

Mario Angiolini, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION
I.	Introduction

1.	In 2005 FI Promotions entered into five separate transactions in memory cards.  In each transaction it contends that it bought memory cards from a UK supplier and exported them.  In each of those transactions the supplier gave FI Promotions an invoice.  FI Promotions sought a deduction for the input VAT on that invoice.  HMRC say that no deduction is available.  In this appeal FI Promotions says that a deduction is due to it.

2.	As we shall explain below, in order to qualify for credit for input tax there are two particular conditions which must be satisfied: (i) there must be a supply and (ii) either the trader must hold an invoice containing the required particulars of the supply – in particular of its nature and quantity – or the claimant must hold such other evidence of the input VAT charged as HMRC accept.  In relation to these conditions the following issues arose:-

(i)	was it proved that there was a supply to the Appellant?  This was a question of fact.
(ii)	if there was a supply was its nature and quantity detailed on the invoice.  HMRC say it was not.  This raised the legal question of what is meant by the “nature” of goods, and a factual question as to whether it was the case that the nature of the actual supply was adequately detailed on the invoice;
(iii)	if there was a supply but the invoice held by the Appellant did not detail its nature, then “should” HMRC have accepted that the Appellant held appropriate evidence of the VAT charged.

We say “should” in the last paragraph because the test is whether HMRC’s refusal to accept was reasonable.

3.	There is a further issue.  It arises in this way.  When FI Promotions submitted its VAT returns for the periods in which it entered into these transactions (we shall call them Deals 1, 2, 3, 4 and 5), it claimed input tax deduction.  Because its export sales were zero-rated these amounted to claims for the repayment of input tax.  After some initial investigation these claims were paid by HMRC, on a “without prejudice” basis.  Then, at a later date, and in circumstances we shall explain, HMRC decided that input tax was not deductible, and issued assessments under section 73 VAT Act 1994 to recover the tax it had previously repaid.  Mr Young contends that they were not entitled so to do.  

4.	The remainder of this decision is therefore structured as follows:-

II   Legal Issues :	(a)	the conditions for deduction and the required           
				contents of an invoice: the nature of a supply 
			(b)	the scope of HMRC’s discretion to accept other 
				evidence of VAT charged
			(c)	the tribunal’s jurisdiction in relation to (b) 
			(d)	section 73

III  The evidence and our findings of fact:-

			(a)	the Evidence
(b)	the conduct of FI Promotions’ business and the five Deals
(c)	Mr Katz’ knowledge of the memory card market
(d)	inspection
(e)	communications with Mr Atkin (HMRC)
(f)	FI’s suppliers and customers
(g)	SanDisk Products
(h)	Lexar Products
(i)	Mr Laing’s evidence

IV   Evaluation

       The Five Deals: did the invoices specify the quantity and nature of the supply?

 V    Discussion

			(a)        The Parties’ submissions
(b)	The Invoices
			(c)	The assessments
			(d)	The exercise of the Commissioners’ discretion
			(e)	Counterfeit cards: would it make any difference?

VI  Conclusions

II	Legal Issues

(a)	the conditions for deduction and the required contents of an invoice :the nature of the supply

5.	Article 17 of the Sixth Directive provides for a right to deduct the input tax attributable to supplies to a trader used for his taxable transactions.  (The Sixth Directive was the relevant Directive at the time of the transactions relevant to this appeal.) Art 18(1) provides that, in the circumstances of this appeal, in order to exercise that right the trader must hold an invoice complying with Art 22(3).  But Art 18(3) provides a discretion which may enable a trader to exercise his right to deduct even if he has no compliant invoice:

“Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provision of paragraphs 1 and 2.”

6.	In Terra Bauberdorf-Handel Gmbh v Finanzampt Osterholz-Scharmbeck  [2004] ECR I-5553 (“Terra”) the ECJ found that the right to deduct must be exercised in the tax period in which the two conditions were satisfied: (i) that the supply had been made and (ii) that the trader held the invoice. Holding an invoice was seen as a condition for the right to deduct. 

7.	Until 2001, the requirements of Art 22 as regards the contents of invoices were relatively few. They were set out in Art 22(3) and limited to matters such as the price and the VAT: the old Art 22(3)(c) required Member States to lay down criteria which would determine whether a document was an invoice and Art 22(8) permitted Member States to “impose other obligations which they [deemed] necessary for the correct collection of the tax and the prevention of evasion”.  There were limits on that discretion, but on its face Art 22(8) permitted member States both to augment the earlier requirements of Art 22 and to reduce them.

8.	In 2001 Directive 2001/115 EEC (the “Invoice Directive”) changed this.  Its first recital explained that the current conditions laid down for invoicing listed in Art 22(3) were relatively few in number, and thus left it to Member States to define the most important conditions.  The second recital noted that a Commission report had recommended a study of what details should be required on an invoice for VAT purposes, and the fourth recital concluded that it was “therefore necessary, in order to ensure that the internal market functions properly, to draw up a list, harmonised at Community level, of the particulars that must appear on invoices for the purposes of value added tax.”

9.	The Invoice Directive then proceeded to amend Art 22 in two significant respects.  First it removed the general discretion given to Member States by Art 22(3)(c) and provided, in a replaced Article 22(3), a list of the details which were required in a VAT invoice under 14 headings.  The one which is relevant to this appeal was the sixth: 

“the quantity and nature of the goods supplied or the extent and nature of the services rendered”.

10.	The second relevant amendment was to restrict the discretion previously afforded to member States under Article 22(8).  That was done, first, in the new Art 22(3) by providing that “only” the details specified were required, and, second, by inserting at the end of Art 22(8) the extra words:

“The option provided for in the first subparagraph cannot be used to impose additional obligations over and above those laid down in paragraph 3.”

11.	In the light of the fourth recital to the directive (“a list harmonised at Community Level”) it is clear to us that a Member State does not now have authority to impose in its requirements for a valid VAT invoice any obligation in relation to the description of the goods which is more onerous than “details [of] the quantity and nature of the goods”.  It may impose lesser obligations but not greater ones.

12.	Finally in relation to the Invoice Directive we note that it added a provision to Art 22(9) permitting specific relaxation of the list of requirements in Art 22(3) where the amount of the invoice was minor or where commercial administration or technical conditions made it difficult to comply with the full list of invoice content.  But in such a case it provided that the invoices must contain, as a minimum, four pieces of information of which the third was:

“Identification of the type of goods supplied or services rendered.”

13.	Since this is the only one of the four requirements which relates to the nature of the goods it cannot in our view be a greater requirement than that to detail the ‘nature’ of the goods.

14.	The ECJ cases to which we were referred related only to the provisions of Art 22 before its amendment by the Invoice Directive.  Some care is therefore needed in applying their reasoning in relation to the contents of invoices more widely.  However, we found Finanzamt Gummersbach v Bockemühl [2004] ECR I-5583 (“Bockemuhl”) and Terra helpful in the following respects.

15.	In Bockemühl one of the questions referred to the Court was whether a trader who was liable to pay VAT under a reverse charge type mechanism could deduct the VAT as input tax only if he held an invoice compliant with the (old) Art 22(3).  It was held that such was the case.  In so recommending, the Advocate General based his conclusion principally on the grounds that:

“47.	If VAT is to be deducted, there must be proof that it has been incurred…  
… It is the ‘ticket of admission’ to the right to deduct …  The proper issuing and keeping of invoices is also of crucial importance for the checks carried out by the relevant tax administration to ensure compliance with the relevant VAT rules.”

16.	The Advocate General in this case did refer to the new requirements of the Invoice Directive but did not directly opine on their meaning.  However, in relation to the second question before the Court, which essentially related to whether a Member State could, in the exercise of its discretion under the (old) Art 22(3)(c), require details of the supplier’s name and address and the identification of the transaction, he said:-

“72.	The significance of particulars such as those under examination, and their contribution to the proper functioning of the VAT system, in particular to ensuring the current collection of the tax and the prevention of evasion, are self evident and confirmed – if confirmation were needed – by their inclusion in the list of compulsory statements following [the Invoice Directive] …

74.	[the] identification of the taxable transaction is clearly of great practical importance for determining what provisions are applicable.  It is evident that … the taxable transaction must be defined correctly in accordance with the categories in the Directive, since a different qualification may trigger the application of different provisions of the Directive and possibly different tax rates.  Definitions which are not accurate … may prejudice the application of the Directive and distort competition.”[our italics]

17.	He went on to opine that under the old Art 22(3)(c) Member States could require that invoices identify accurately the nature of the supply since this was within the established restriction of that discretion for matters “necessary to ensure the correct levying of value added tax and permit supervision by the tax authorities.” [78].

18.	Whilst the italicised passage in para [74] highlights the description of the nature of the goods as being important for determining the correct rate of VAT, it seems to us that in paras [72] and [78] the Advocate General attaches to that description a wider purpose than simply the verification of the rate of VAT: that purpose is the supervision or audit by the tax authorities of trader’s records.  It is apparent that he sees that purpose in the new provisions of the Invoice Directive as much as in the older provisions of Art 22(3).

19.	The Court came to a different conclusion from that of the Advocate General on the first question and did not therefore answer the later questions.  But its reasoning did not in our view call into any question the Advocate General’s statement about the importance of the contents of an invoice generally, or the function of those contents in the context of the VAT system.  Indeed at [51] it said that it was true that “an invoice has an important documentary function because it may contain verifiable data.”

20.	In Terra the Court held (at [34]) that the trader must have received the supply and hold an invoice before the right to deduct arose.  It then noted (at [36]) that such an interpretation was consistent with the principle of neutrality. (This principle is expressed in various forms, but we take as a basis the provisions of Article 2 of the first Directive that VAT is to be a tax on consumption proportional to the price, and unaffected by the number of transactions which take place before consumption, that that involves a supplier receiving credit for tax born at previous stages.) At [37] it considered the principle of proportionality (namely that exceptions to general principles should be framed or executed in a manner least detrimental to those principles) and said it was not infringed by requiring the holding of an invoice because:

“First, that requirement is consistent with one of the aims of the Sixth Directive, that of ensuring that VAT is levied and collected, under the supervision of the tax authorities,… and secondly [because payment] for delivery of goods or performance of services, and therefore payment of input VAT, is not normally made until the invoice has been received.”

Summary

21.	From this survey of the legislation and from the cases to which we were referred we draw the following principles:-

(i)	in order to deduct input tax it is a condition that a supply of goods or services has been received (Art 18/2), Commission v Netherlands [2001] ECR I-8265 (“Netherlands”) at [75], Terra [28]);
(ii)	absent a lesser or different obligation permitted by a member under Art 18(3) it is also a necessary condition that the trader holds an invoice compliant with Art 22(3).  (Art 18(1), Netherlands [75], Terra [38];
(iii)	the maximum requirements which may be required in an invoice for it to qualify are those in Art 22(3)(b) or, in the case of minor etc supplies, those in Art 22(9).  Member States cannot impose greater requirements;
(iv)	those requirements include details of the “quantity and nature” of a supply of goods.  (Art 22(3)(b));
(v)	in determining what is required by “details of the quantity and nature” of the goods regard should be had to the purpose or aims of the directive;
(vi)	those aims and purposes include the principles of neutrality and proportionality but also include the purpose of enabling the proper supervision or audit of the system.  These specific purposes displace neutrality because the supervision by the tax authorities is one of the aims of the Directive.  (Terra [37], Bockemühl A-J);
(vii)	in relation to the requirements as to the “nature” of the goods it is relevant that “identification of the type of goods supplied” may be a lesser requirement but will not be a greater one;
(viii)	the detailing of the nature of the goods is relevant to the audit of the tax rate applied to the goods but may also be of more general relevance to the supervision of the VAT system (see our conclusion in Bockemühl).
(ix)	Art 18(3) provides for a discretion: in exercising any discretion provided for under the Directive the member States must have regard to the aims and purpose of the Directive (see Teleos v the Queen Case C-409/04 (“Teleos”)).

Discussion : “Quantity and Nature”

22.	What is meant by the “nature “of goods? We did not find this an easy issue.  We find no direct guidance in the decided cases on the extent of the meaning of “nature”. We looked at the English, French, Spanish, Portuguese and Italian versions of the Invoice Directive. Each used a word like ‘nature’.

23.	Mr Young suggested that ‘nature’ must mean nature for VAT purposes ie a description sufficient to be able to tell which VAT rate should apply.  He said that for example:

(i)	an invoice for “trousers” would not be adequately detailed because “trousers” could be zero-rated children’s trousers or standard rated adults’ trousers, and
(ii)	an invoice detailing “a CD player” would be adequately detailed: there is no need to say “a red Zanussi XY3 new boxed CD player” because CD players are all standard rated.

24.	It seems to us that the requirement to specify the nature of the goods is wider than simply requiring a description sufficient to identify their VAT nature.  That is because:-

(i)	of the indication that ‘nature’ is more specific than “the type of the goods supplied”, and the latter phrase does not suggest simply “the VAT classification of the supply”;
(ii)	of the conclusion that the purpose of the requirement is the audit of the supplier and the recipient by the tax authorities and our belief that more could be involved in such an audit than simply checking the VAT rate applied.

25.	In relation to this last issue, revenue authorities might well wish (i) to check how accurate a trader’s stock control was by reference to purchases of specific goods, sales of those goods and stocktakes: that would require details sufficient to enable such tracing; (ii) to investigate the use of inputs in making the invoiced supply, or the use of the supply in making particular taxable or exempt outputs : that requires more detail than the taxable nature of the supply.  The requirement in Art 22(3)(b) for quantity and unit price rather than simply total price reinforces the conclusion that the object of requiring the information is to enable such auditing.

26.	But it might well be that a particular supplier’s records could be audited easily even if his invoices were fairly simple.  A sand quarrying business invoicing “1 ton of our sand” would provide all that was necessary for its own audit.  But if the recipient of that supply were a merchant selling sharp sand, washed sand, high silica sand and coarse sand, that invoice on its own would not be enough to trace its use.

27.	In dealings between commercial enterprises the details of the nature of goods necessary to enable a proper audit (to trace the use and origin of the goods) will be those which the parties can objectively be seen to have agreed for the supply. Thus the terms of that agreement will determine the qualities which are relevant commercially, and which will always enable the source and use of the goods to be identified.

28.	Those qualities of the goods must then be the maximum that can be required by the Directive.  Whilst they may not in all cases be the minimum necessary for any audit, they will be so in some cases and it does not seem to us disproportionate to require those details agreed (expressly or impliedly) between the supplier and the recipient to be set out (if wished simply by reference to the identified agreement) on the invoice in all cases.

29.	We conclude that by “nature of the goods” is meant those particulars of the goods supplied which, objectively viewed, are specified between the parties for their supply.  The wine merchant has agreed to buy 1985 Chateaux Blanc not 1995; the sand merchant knows he will get only coarse sand from that quarry and the quarry knows that that is all it will supply.  The invoices must specify the nature of the goods as ‘1985 Chateaux Blanc’ and “coarse sand”.  (If a manufacturer agrees to sell “red trousers with a 15” inside leg in style X” to a retailer that is the nature to be detailed on the invoice.  It is not necessary to say ‘children’s trousers’: the indication of the availability of an exemption or lower rate of VAT is required by other parts of Art 22(3)(b) and may be audited against that description).

30.	 Article 18 and 22(3) are transposed into UK legislation in Regulation s 14 and 19 of the Value Added Tax (General) Regulations 1995. The requirement in Art 22(3) as regards “nature” is expressed in Reg 14(1)(g) as “ a description sufficient to identify the goods or services supplied”. It was not suggested to us, not do we find, that this has a meaning different from “nature”. 

(b)	the scope of HMRC’s discretion to accept other evidence of the charge to VAT

31.	As we have noted Art 18(1) requires that a person must hold a qualifying invoice to exercise his right of deduction, but Art 18(3) provides for the exercise of a discretion under which Member States shall determine the conditions and procedures whereby a person may be authorised to make a deduction which he has not made in accordance with Art 18(1).

32.	Likewise we have noted, not only the licence given to Member States by Article 22(8) to impose obligations other than those in, among other paragraphs of Art 22, Art 22(3), but also the limitation in that licence so that it cannot extend the obligation in Art 22(3).  Thus its exercise in relation to Art 22(3) can be by derogation only.

33.	Those permissions appear to us to be taken advantage of in two parts of the relevant domestic legislation.  First regulation 29, which deals with the procedure for reclaiming VAT, taking advantage of Art 18(3), provides in paragraph 2 that at the time of claim a person must hold an invoice as required to be provided under regulation 13, but continues:

“provided that where the Commissioners so direct either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other evidence of the charge to VAT as the Commissioners may direct.”

34.	Second, Regulation 14, (enacting Art 22(3)) which sets out the required contents of an invoice, commences:-

“(1)	Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow … a VAT invoice … shall state the following particulars …” 

35.	In exercising the discretion given by the Directive, are there any restrictions on the State? Cases such as Teleos and Solleveld v Staatssecretaris van Financien [2007] STC 71 show that member States must have regard to the object of the relevant EU provision and the general principles applicable to the Directive and EU law. The general principles applicable to the VAT Directives, will include neutrality, but in the context of Art 22 that principle, we have found (at para 21 above), is displaced in relation to the invoicing provisions by the aim of the supervision or audit of the VAT system to the extent of those provisions. The discretion in Art 18(3) is a relaxation or exception from the code and exists within a code aimed at supervision and audit. Thus the discretion must be exercised in such a way as not to detract from the purpose of proper supervision and audit: it is therefore proper to have regard, in particular, to whether there is an adequate audit trail which enables the tax authority to ensure that the input VAT which is claimed has been paid at the preceding stage, and generally to whether a laxity in the exercise of the discretion would cause more general lack of regard for the requirements of the Invoice Directive. Subject to those constraints neutrality must be a relevant consideration (in that regard we note that the language of regulation 29, in directing attention "to such other evidence of the charge to VAT", points exactly in that direction). Further the object of preventing evasion of tax is one of the principles of the Directive, and in our view is also to be considered in exercising this discretion (see eg Teleos at [64]): that principle is closely bound with that of the supervision of the VAT system.

36.	In 2003 HMRC (in its then guise as the Commissioners of Customs and Excise) published a Statement of Practice on “Input Tax deduction without a valid VAT invoice”, to take effect from 16 April 2003.  It seems to us that this statement of practice relates only to the Commissioners’ policy in relation to regulation 29. One section of that notice (paras 17-20) indicated how Customs would apply their discretion if the trader held an invalid invoice.  If the goods or services were not within categories, listed in the Statement, considered to be prone to abuse, traders had to do “little more than [provide] alternative evidence to show that the supply of goods or services [had] been made”.  But if the supplies were in the listed categories (which included computers and other equipment used in connection with computers) claimants were expected to be able to answer satisfactorily all or nearly all of six extra questions. In addition, they were likely to be asked further questions “in order to test whether they took reasonable care in respect of transactions to ensure that their supplier and supply were ‘bona fide’.”

37.	The six questions were these:

1.	Do you have any alternative documentary evidence other than an invoice (e.g. supplier statement)?
2.	Do you have evidence of receipt of a taxable supply on which VAT has been charged?
3.	Do you have evidence of payment?
4.	Do you have evidence of how the goods/services have been consumed within your business or their onward supply?
5.	How did you know that the supplier existed?
6.	How was your relationship with the supplier established? For example:
a.	How was contact made?
b.	Do you know where the supplier operates from (have you been there)?
c.	How do you contact them?
d.	How do you know they can supply the goods or services?
e.	If goods, how do you know the goods are not stolen?
f.	How do you return faulty supplies?
It was stated that this list was not exhaustive and additional questions may be asked in the individual circumstances.

38.	It did not appear to us that the requirements of this statement were beyond those the state was permitted to make having regard to the aims of neutrality and supervision and audit. The requirements appear to us to be aimed at obtaining auditable evidence for the purposes of determining whether VAT was born on the cost components of the eventual onward supply, or whether there was evasion. All of those are relevant aims of the directive. We shall return to the way in which the discretion was in fact exercised later in this decision.

(c)	The tribunal’s jurisdiction in relation to (b)

39.	In Kohanzad v C&E Commrs [1994]STC 967, Scheimann J said that when considering a case where the Commissioners have a discretion it was established that the jurisdiction of the tribunal was a supervisory one, in which it determines whether the commissioners exercised their discretion in a defensible manner on the basis of materials available to them at the time they considered the exercise of their discretion.

40.	As a result, in relation to the question of the exercise of the discretion under regulation 29, we can uphold the appeal only if we conclude that the commissioners took into consideration irrelevant factors, failed to take into account relevant factors, made a material error of law, or exercised their discretion in a way in which no reasonable body of commissioners would have done.
 
(d) Section 73 VATA
41.	Section 73 provides so far as is relevant:
“(1) where a person has failed to make any returns … or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgement.
“(2) in any case where, for any prescribed accounting period, there has been paid or credited to any person:
(a) as being a repayment or refund of VAT, or
(b) as being due to him as a VAT credit
an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him …”
42.	We pause at this point to note that Mr Angiolini accepted that the assessments in this case had been made under the power conferred by subsection (2); and also to explain that “VAT credit” in (2)(b) is defined by section 25 to mean the excess (if any) of input credits over output tax for a period which is due to be paid to the trader. 
“… (6) an assessment under subsection (1), (2) … above … must be made within the time limits provided for in section 77[ 3 years after the period; longer in the case of fraud], and shall not be made after the later of the following:
(a) 2 years after the end of the … period, and
(b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment comes to their knowledge…”
43.	We note that there are two limbs to subsection 2. Under the first limb power is given to assess where there was payment or credit "which ought not to have been so paid or credited". That phrase suggests to us an occurrence such as a clerical error, as a result of which, on the basis of the facts known to HMRC at the time of the repayment, the repayment should not have been made.
44.	The second limb is where the amount paid or credited “would not have been so paid or credited had the facts been known …”. It seems clear that the words after “credited” in the tailpiece of section 73 (2) make clear that the issue of new facts is applicable only to the second – the “would not have been paid” – limb. It seems clear in this context that the persons whose knowledge is relevant are the Commissioners. It is they who are able to exercise the power to assess. That conclusion is also indicated by subsection 73 (6) (b) where the time limitation on assessment is referable to the Commissioners’ knowledge and opinion. It also seems clear to us that it is not the knowledge of the assessing officer which is relevant but that of the Commissioners as a body. The knowledge or otherwise of facts at different times is a limitation on the power given by the second limb of subsection (2): if there is no change in the facts  known, there is no right to assess under the second limb.
45.	It seems to us that the first limb is needed to deal with a situation where a mistake was made in making a repayment and the second limb is needed where there was nothing wrong with the original payment or the process of payment on the basis of what the Commissioners knew at the time, but further facts come to light subsequently.
46.	Mr Young said that the power given by section 73 is limited. He relied  on Teleos for the propositions that:

a.	a VAT decision taken by a member state must conform with the general principles of proportionality, legal certainty and fiscal neutrality; and
b.	even though, as a matter of objective application of the law to   the facts, tax is found to be due, there are circumstances in which these principles preclude member states from enforcing the payment of that tax.

47.	He then said that the circumstances in this appeal are such that under those principles HMRC cannot assess F1 in relation to the relevant input tax credit.

48.	Teleos concerned the power of member states to lay down conditions for the exemption of intra-community supplies. It is clear that the court held that in exercising its powers in relation to VAT a state must act in accordance with the general principles noted by Mr Young (see [45] and [46) of the judgement).

49.	The court held that as a result of the application of these principles:

"... article 28C(A)(a) of the sixth directive is to be interpreted as precluding the competent authorities of the member state of supply from requiring a supplier who acted in good faith and submitted evidence establishing, at first sight, his rights to the exemption of an intra-community supply of goods, subsequently to account for a VAT on those goods where that evidence is found to be false, without, however, the supplier's involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-community supply he was effecting did not lead to his participation in such evasion.” [our italics]

50.	Mr Young relied upon Teleos in particular in relation to the repayment of the VAT which was made in respect of each of the quarters. Having repaid VAT he said that the principles of legal certainty and proportionality which were important to the court in Teleos, are relevant to F1 and prevent HMRC subsequently requiring it to account for the VAT if the evidence of the supply to it was later found to be false.

51.	We accept that the principles in Teleos are potentially applicable to a decision to assess VAT. However, the conclusion of the court was that such retrospective action by a state may not be permitted if “the supplier took every reasonable measure in his power”. This requirement was stated in the context of article 28c(A)(a) which enabled member states to impose requirements for collecting tax and preventing  evasion in the context of the granting of an exemption. A similar provision appears in article 22 (8) which affects the invoicing provisions. The Teleos conclusion was that Art 28C(A)(a) did not permit tax to be assessed where every precaution had been taken to avoid participation in evasion. It seems to us, in the context of the invoicing provisions, that it would not be contrary to the general principles to seek to collect tax where the requirements of those provisions were not satisfied unless the state clearly accepted that they had been, and the taxpayer had taken every reasonable precaution to ensure that they were satisfied.

III   The Evidence and Our Findings of Fact
(a)    The Evidence	
52.	We heard oral evidence from Anthony Katz, the sole director of the Appellant, from Hugh Connolly, the general manager of Sandisk’s European headquarters in Dublin (two of the five transactions at issue related to invoices for SanDisk products), from Dr Leo Melnicki, the director of manufacturing and materials of Lexar Media Inc (three of the transactions related to invoices for Lexar products), from Smita Parikh, Andrew Waller and Ian Maxted, officers from HMRC, who had received and analysed sales data provided by Mr Connolly, and from Jonathan Laing, an officer from HMRC who gave evidence in relation to the assessments under appeal. Each of these witnesses provided a witness statement.
53.	Dr Melnicki’s evidence was heard by telephone from the USA. We did not see him in person. Mr Young invited us to disregard or give little weight to Dr Melnicki’s evidence on four grounds:
(i) first he said that Dr Melnicki's evidence was given by phone. He could not be seen. We accepted that it would have been better to have seen Dr Melnicki;
(ii) at one stage during his cross examination Dr Melnicki took a phone call.
(iii) Dr Melnicki gave answers to Mr Young's questions which, Mr Young told us, contradicted information Mr Young had read from Lexar's SEC return. We did not find the extent or nature of these contradictions cast doubt on his veracity, but it cast a shadow over the care he gave to the accuracy of his answers.
(iv) particular parts of his evidence -- as to shrinkage and the weight of the product -- were, he said, clearly defective. We discuss this in more detail below.
We agree that some parts of Dr Melnicki's evidence displayed a lack of care. Overall however we were generally minded to accept his evidence.

54.	We received no evidence from David Atkin, the officer from HMRC who made the assessment which is under appeal and who was the principal point of contact with the Appellant.
55.	Mr Katz was a poor witness. He was understandably nervous. He suffered from hypothyroidism and we were told his memory was adversely affected by the medication he took for it. His recollection of the events which occurred in 2005 was thin.
(b)   the conduct of F1 promotions’ business and the five Deals
56.	The Appellant was a one-man company and that man was Mr Katz. It had a share capital of £2, did not hold stock and, save perhaps during a short period surrounding any transaction, did not extend or take credit. It began to trade in mobile phones and memory cards in 2002.
57.	In January 2004 it appears that F1 saw an opportunity to export mobile phones and, after consultation with Mr Atkin, made an application to make monthly rather than quarterly VAT returns. The application was approved. Thereafter the Appellant sent details of (and some paperwork for) each month’s Deals to Mr Atkin, and until April 2005 it appears that it received VAT repayments. Mr Katz said that after 2004 F1 abandoned UK sales.
58.	The Appellant’s VAT history indicated that during 2005 it made and received supplies only in the months of January, April, May, July, August, and December. The transactions in May, July, August and December were confined in substance to the subject matter of this appeal. We did not have details of January’s transactions but they appeared to be the purchase and export of goods in one or more transactions similar to those in this appeal. In April there were three transactions of purchase and export which included one which is the subject of this appeal.
59.	We conclude that during 2005 the Appellant completed no more than about 10 transactions of purchase and export of  goods of which five are the subject of this appeal. Those five are the following:
	Product	Supplier	Customer	
April: Deal 1	350 Lexar compact Flash cards 8 GB	Demravale	Mobiland	
May: Deal 2	250 Lexar compact Flash cards 8 GB	Jontec	Mobiland	
July: Deal 3	750 SanDisk 8 GB CF cards	Jontec	Unisonic	
August: Deal 4	675 Lexar 8 GB CF cards	Ashertone	Mobiland	
December: Deal 5	1499 SanDisk 4 GB mini cruzer	Ashertone	Mobiland	

60.	Given that the five transactions under appeal represented half the transactions undertaken by F1 in 2005, we found Mr Katz’ lack of memory over some of their details worrying, even making allowance for the state of his health. He told us that he “didn’t just sit there and wait and do five Deals over the whole six months, I was chasing whatever I could lay my hands on”; but we cannot believe that the detail of half the Deals which actually matured would have been easily forgotten.
61.	Mr Katz’ evidence was that F1’s Deals were set up in the following way. A customer would contact him asking for a particular product. He would then phone one or more of his suppliers to see if he could source it. (He said that sometimes a supplier would contact him and he would try to find a buyer; but this had not been the case in any of the five Deals.) Once a supplier was found he would agree a purchase price and the sale price. He would be told where the goods were – i.e. in which freight forwarder’s premises they were located – and issue an invoice and instructions to the freight forwarder to send the goods on. The invoice was generally paid before the goods were received by the customer. The supplier would be paid in part from the monies received from the buyer.
62.	In his negotiations in relation to these Deals Mr Katz told us that the key element was the memory capacity of the product. Its speed was not discussed. There was no discussion with suppliers or customers about whether the products came with manufacturers' warranty cover. He could not remember whether there was discussion about how or whether the products were packaged. He said that the goods “came as they came and were sold as they were sold”. We conclude that there were no such discussions even though, as he accepted, whether or not the cards were in their original individual retail packaging could affect their market value.
(c)   Mr Katz’ knowledge of the memory card market
63.	Mr Katz told us, and we accept, that before doing these Deals he had a layman's understanding of memory card products. There was some evidence that before trading in the products he had done Internet searches on them. He was clearly not an expert however, and would have been unable to determine whether or not a card truly filled its description. In his discussions with his suppliers and customers it appeared that no heed was paid to the speed of a card but just as to its capacity. We were not convinced that Mr Katz made any thorough enquiry to check that the prevailing market price of the cards matched the price at which he was dealing.
(d)   Inspection
64.	Mr Katz did not himself inspect the goods he purchased (and then exported).
65.	Although in his witness statement Mr Katz gave the impression that a firm called Imex Logistics was contracted to inspect the goods which F1 purchased, the evidence before us indicated that there had been inspections only for the goods in Deals 3, 4, and 5.
66.	Imex' documentation indicated that they conducted three classes of inspection:
a full 100% physical inspection;
a 100% box count and a 10% physical inspection (to be undertaken through random selection of the entire consignment);
a 100% box count.
67.	Imex’ documentation also indicated that following inspection the goods were repackaged and wrapped by Imex.
68.	Mr Katz told us that he had never ordered a full (class 1) inspection: it was too costly. Yet in Deal 5 Imex’ documentation (and F1’s letter to Imex) appears to indicate a full inspection. Mr Katz could not remember the detail but suggested that inspection may have been undertaken by Imex on behalf of Ashertone from whom F1 purchased the goods.
69.	Mr Katz could not remember, or did not know, what checks Imex conducted to satisfy itself that the goods inspected were of the relevant description. He said however that he did not expect Imex to open original packaging when making their random selection for a 10% test: they would select from those which were already open.
70.	Imex’ invoices for Deal 3 indicated a charge of £112.50 for a 100% inspection. Mr Katz indicated that this must have meant a 100% box count and a 10% check (a class 2 inspection). Deal 3 was for 750 SanDisk cards. Mr Connolly told us that apart from sales to original equipment manufacturers (OEMs) SanDisk’s goods were packed in individual heat sealed plastic packs. The number of such sales of this product to OEMs in 2005 was less than the number sold in this Deal. We think it likely that if they were SanDisk products of the relevant description they would have been individually packed. We do not believe that 75 (10% of 750) cards could have been removed from their packages, tested, and repacked for £112.50.
71.	Mr Katz apparently forwarded e-mail correspondence in September 2005 with Mr Atkin in relation to Deals 3 and 4 to Imex. Mr Atkin had asked whether the goods were inspected, and whether details of serial numbers were kept. We were shown what appeared to be an e-mail reply from Julie Brotherton of Imex. She said that “on your stock in question, there was a random 10% check carried out on your stock by the use of the camera that was made available to the inspection. The cards worked adequately and the inspection report was completed accordingly.” She said that: often stock was sealed in such a way that it would be devalued by breaking the seals, indicating that in those circumstances they did not break open the packages; and that the stock carried no serial numbers.
72.	We did not hear any evidence from Julie Brotherton. We are unwilling to place much weight upon the e-mail document. If by “serial numbers” Ms Brotherton meant part numbers, then the evidence from Dr Melnicki ( see below) and the images of the packaging he exhibited to his witness statement indicated that Ms Brotherton was wrong. Even if the e-mail were truthful and accurate, it is not evident to us that the fact that the cards “worked adequately” shows that they were the goods described.
73.	Imex’ inspection reports in Deals 3, 4 and 5, indicated the number of outer pallets/boxes, the number of inner boxes, and the number of units per box. They showed the manufacturer and some details of the model. They also gave dimensions (we believe of the boxes) and the weight of the boxes in Deals 3 and 4, and of the whole consignment in Deal 5. These details could, in our view, have been obtained from a visual inspection of the boxes.
74.	Our conclusion is that the most Imex did by way of physical inspection was to look at what was written on the boxes, or if the boxes were opened and the content examined to look at whatever label was affixed to whatever was in the box. The nature of any inspection, whether class 1, 2 or 3, could, in our view, have been sufficient only to verify the number of packages and what they were described as containing. 
(e)   Communications with Mr Atkin
75.	In February 2004 Mr Atkin wrote to Mr Katz and indicated that any  repayment claims would be referred to him for checking. Normally, Mr Atkin said, he would telephone and ask for the records he wished to examine, but  he would need to see the Deal sheets and copies of export documentation. In a later letter in the same month Mr Atkin asked also for invoices evidencing the supplies to and by F1, payment instructions and banking details.
76.	On 30 August 2005 Mr Katz sent Mr Atkin copies of most of these documents in support of his July return, and in September similar documents for the August return. Mr Atkin replied asking for details of the checks carried out to ensure that the goods were as described. Mr Katz replied to him by forwarding a copy of the e-mail from Julie Brotherton of Imex referred to above.
77.	In response Mr Atkin replied that, “although further enquiries with the manufacturers would continue”, he was passing the “July claim forward for payment without prejudice”. After being pressed by Mr Katz in relation to the August claim, Mr Atkin e-mailed Mr Katz on 4 October: “Re August Payment ... a bank giro for £52,615.24 was authorised on 30 September 2005 I would expect this to hit your bank account tomorrow.” This e-mail did not expressly contain any mention of further enquiries, or the phrase “without prejudice”.
78.	On 31 May 2005 Mr Davies of HMRC wrote to the Appellant in relation to the April 2005 return, and said that whilst “based on the evidence currently available your claim will be repaid, HMRC are making this payment without prejudice to any action which may result from continuing enquiries.”. There was no documentary evidence before us in relation to the payments for the claims in May, and December returns. We understood them to have been made, or at least credit allowed in relation to the invoices in Deals 2, and 5. We think it likely that “without prejudice” words were attached to the May return payment, and that the December return repayment is likely to have been coloured in some way by the October e-mail.
79.	Mr Katz told us, and we accept, that Mr Atkin did not, prior to December 2005, indicate to Mr Katz that the documentation Mr Katz kept or presented was insufficient (save as reflected in the e-mails described above). The documents available to us were consistent with that. We do not however find that Mr Atkin gave any assurance that F1 was doing all it could, or ought to, do to ensure that it was entitled to and would be allowed, the input tax credits it was claiming.
80.	Mr Katz told us that after Deal 4 Mr Atkin had suggested that on the next Deal F1 offer Mr Atkin an opportunity to inspect the goods before they were shipped. Deal 5 took place in December. Mr Katz said he spoke to Mr Atkin while this Deal was in progress and said that the goods were at Imex if Mr Atkin wished to inspect them. Mr Katz said that he remembered clearly that Mr Atkin said he was very busy, and suggested that Mr Katz hold one unit back for  inspection if required. Therefore in Deal 5 Mr Katz purchased 1500 units and sold 1499 units. Mr Katz produced the unit he said had been sent to him. He said Mr Atkin had not in the end requested it. Mr Connolly confirmed to us that it looked like a SanDisk 4 GB mini cruzer, but without having it tested by his engineers he could not be sure it was genuine.
81.	On 16 June 2006 Mr Atkin wrote to F1 indicating that he considered that F1 was not entitled to the input tax it had claimed on the five Deals, and enclosing an assessment for £223,007, being the input VAT claimed on those Deals, plus interest. Mr Atkin gave as his reasons that the total and consignment of volumes of the products shown on the invoices were not credible when compared with the sales data from the manufacturers. He also noted that Mr Katz lacked knowledge of the products.
82.	Mr Atkin said he did not feel it appropriate on the basis of the “total material available in the case” to exercise his discretion under regulation 29 (f).
83.	There is one last aspect of the communication between Mr Atkin and Mr Katz to which we should refer. Mr Katz' e-mails to Mr Atkin indicate reliance on Imex to check the goods: at no stage does Mr Katz indicate that he has the expertise to do so himself. Mr Katz indicated to us that he had a layman's understanding of the products. We think it likely that Mr Katz may have communicated some hint of that orally to Mr Atkin, and find that if Mr Katz did so hint, the e-mails would support a conclusion by Mr Atkin that Mr Katz was not likely to have expertise in these products.
(f)   F1's Suppliers and Customers
84.	Mr Katz told us that he was content to conclude that the goods supplied to him were those specified on the invoices because: (i) he had Imex inspections, (ii) he was told by his suppliers that the goods were as described, and (iii) his customers were happy with what he had supplied.
85.	In the five Deals Mr Katz had been supplied by three suppliers: Demravale, which he had known for two years, Jontec for 4 to 5 years, and Ashertone for three years, although he had known Jontec’s and Ashertone’s directors for longer. In each case he had traded with them before and had had no problems. Mr Katz said he trusted them.
86.	Each of these companies was, like F1, a one-man company. Copies of the accounts before us for Ashertone and Jontec disclosed shareholders’ funds of less than 1% of the transaction values. We saw no accounts for Demravale, but Mr Katz gave no indication that they were more substantial. We conclude that they were not. It would, in our view, have been difficult to obtain compensation in amounts equivalent to the transaction values from these companies if the goods they supplied did not match the description agreed by them with Mr Katz.
87.	F1's customers in the five Deals were Mobiland and Unisonic. Mr Katz could not remember how he had come into contact with them. We saw copies of undated confirmations of receipt from Mobiland in relation to Deals 1 and 2, dated  confirmations in relation to  Deals 4 and 5, and a fax dated 5 August 2005 of confirmation of receipt for Deal 3 from Unisonic. The fax read:
"we inform you that 750 pcs compact flash card SanDisk Ultra II have received on Aug 1 2005. Have you any stock for this goods and fax the quotation for us as detail. Thank you very much for your cooperation."
We found that the second sentence of this confirmation threw some doubt on the reliability of the first sentence.
88.	The appellant appears to have sought and obtained copies of certificates of incorporation, VAT certificates, and letters of introduction from Jontec and Ashertone. At various times it received confirmations from HMRC’s Redhill office that  the VAT registrations of these companies were valid. We were also shown declarations from Ashertone and Jontec declaring that VAT had been paid on the goods being sold in the transactions under appeal. Some were dated. Some appear to have been sent to F1 after the transactions had taken place.
89.	On several occasions Mr Katz wrote to Mr Atkin asking whether there was anything else he could do to ensure that VAT repayment went smoothly. Mr Atkin referred Mr Katz to HMRC’s notice 725, and suggested that customers’ and suppliers' VAT registrations should be checked with HMRC's Redhill office, but offered little further guidance.
(g)   SanDisk products
90.	From Mr Connolly's evidence we find as follows:
(1)		the closest matches of the goods listed on F1's invoices in Deals 3 and 5 to products produced by SanDisk recognised by Mr Connolly were: 
Deal 3:	"SanDisk 8 GB CF cards"
		closest match: Ultra II CompactFlash 8192 MB
		launch date: February 2005
		weight without packaging: 11 g
		weight with packaging: 62 g
Deal 5:  "SanDisk mini-cruzer 4 GB USB"
		closest match: cruzer mini 4096 MB
		launch date: April 2005
		weight without packaging: 0.4 oz
		weight with packaging: 2.3 ounces
(2)	The Ultra II CompactFlash 8192 MB was new in 2005. It was aimed at a specialist market, and in 2005 was in short supply.
(3)		SanDisk had approval procedures which had to be followed before it accepted new customers. Where it sold to distributors, its sales force had direct contact with the retailers to whom the distributors sold. Mr Connolly would normally have been aware of a person dealing in the volume of SanDisk products in which F1 allegedly dealt in Deals 3 and 5. He had not been aware of F1.
(4)		If a customer was unhappy with a SanDisk product he or she would generally deal with the retailer from whom it was bought. The product would then find its way back to SanDisk which would check it and where appropriate provide credit. Occasionally customers contacted SanDisk directly in which case the product would be sent directly to them; if it was a genuine SanDisk product and was faulty it would be replaced.
(5)	Thus in practice a consumer would rely on the retailer, or directly on SanDisk, and there would be little reliance on the possession of a formal warranty document.
(6)		The stock management systems normally used by those dealing in SanDisk products used part numbers to keep track of stock. Invoices without part numbers made using such systems difficult or impossible.
(7)		Silicon wafers or chips were the basic component of SanDisk products. They were manufactured by only a few factories in Japan. The conditions required for their manufacture meant that in the region of $5bn was needed to build the factory. The chips were in short supply.
(8)	SanDisk acquired the chips and sent them with the other components to a Chinese assembler. The differences between the numbers of sets of components supplied to the assembler and the number of final products returned was in the region of 2 or 3%. The difference arose through theft, breakage and faulty components. It was possible that there was some diversion of completed products. Theft, however, happened on a small scale and was generally of low value low capacity products.
(9)		The products bore sticky labels supplied to the assembler. SanDisk did not closely control the manufacture of the labels. It was possible that cards were sold with a SanDisk label which were not SanDisk products, or that 8 GB labels may have been stuck on 1 GB SanDisk products by a counterfeiter.
(10)	The returned products indicated that there were some counterfeit SanDisk products sold. The constraint on counterfeit manufacture was the limitation in the availability of the chips. As a result counterfeit SanDisk products either had markedly lower memory capacity, or were dummy products with SanDisk labels
(11)	The speed at which a memory product operated was of particular significance to a professional or serious amateur user. SanDisk marketed Standard, Ultra, Ultra II and Extreme products. The extreme range was twice as fast as, and sold for 20% more than, Ultra II, and Ultra II was twice as fast, and sold for 20% more than, Standard. Thus the description of the speed of the card was an important commercial consideration.
Volumes of SanDisk products sold
91.	Mr Connolly provided HMRC with detailed shipment records extracted from SanDisk's computer systems for all its shipments between 3 January 2005 and 18 December 2005. These records were analysed by Mr Waller and Mr Maxted. Mr Maxted produced details of the numbers and prices of shipments of the products identified by Mr Connolly as the closest matches to those on F1's invoices for Deals 3 and 5. We accept that analysis was accurate and that it reflects the supplies made by SanDisk. The following tables set out the relevant figures.
Deal 3: Ultra II compact Flash 8192 MB (products number: SDCSH -- 8192 -- 902)
Total number shipped in the period: 5441
	July 2005	December 2005	The year 2005	
Greatest shipment quantity	10	20	100	
Greatest shipment price	$6000	$9600	$60,000	
Average shipment quantity	Six	Nine	Nine	
Average total price	$3660	$4464	$4960	
Average unit price	$582.27	$478.29	$545.50	

Deal 5: cruzer mini 4096 MD (product number: SDCZ2 -- 4096)
Total number shipped in period: 5744
	July 2005	December 2005	The year 2005	
Greatest shipment quantity	100	250	250	
Greatest shipment price	$26,600	$45,750	$66,500	
Average shipment quantity	18	55	28	
Average total price	$4700	$9898	$6427	
Average unit price	$264.79	$180.91	$226	

(h)   Lexar Products
92.	From Dr Melnicki’s evidence we find as follows:
(1)		in 2005 Lexar 8 GB CF cards were comparatively rare. In 2005 the cards would have been produced only in Lexar's Professional range which had high data transfer speeds.
(2)		Lexar CF cards were individually packaged in sealed plastic containers and shipped either individually or in packs of 5 or 10 units, and 4 such packs were shipped in cartons of 20 or 40 units.
(3)		In his witness statement Dr Melnicki set out the weights of Lexar 8 GB CF cards on their own, and in their standard packaging. In his oral evidence Dr Melnicki told us that the weights he had set out for a card had been obtained by carefully weighing one card (only) taken from stock held by Lexar at the time of his weighing.
(4)	Because only one card had been weighed Dr Melnickii could offer no empirical evidence of the variation in weight between individual cards. He suggested that his figures were almost certain to be "accurate" (i.e., we assumed, representative of the mean) to within 5%, but we gained the impression that this was a guess made on the spur of the moment.
(5)	Whilst we believe that Dr Melnicki was correct when he later said that a card would not weigh three or five times as much as his sample card it is little help in assessing whether Dr Melnicki was right in his guess that almost all the weights of cards of a particular kind fell within a 5% interval around that one weighed by Dr Melnickii
(6)	Dr Melnicki’s guess was however the guess of a person who had some familiarity with the products and indicates to us that it would be unlikely for the weights to vary significantly from that given by Dr Melnicki's single weighing.
(7)	Dr Melnicki's evidence was that he weighed a card from Lexar's current stock rather than a card manufactured in 2005. At first he said in oral evidence that the components which went into the cards had not changed since 2005: "the same printed circuit board, the same controllers, the same flash, the same cover, the same connectors.". Later, however, when discussing the weight of a Lexar 8 GB flashcard in 2005 and today, he said that whereas in 2005 an 8 GB card had to contain eight 1 GB chips, today it was possible to purchase 4 GB chips, so that such a card need contain only two 4 GB chips. In relation to a 4 GB Lexar flashcard Dr Melnicki said that as a result of these changes such a card was likely to have weighed 20 or 30% more in 2005 than today's card. Unfortunately we did not hear from Dr Melnicki whether the same weight loss would have applied to the Lexar 8 GB chip: i.e. whether the cards Dr Melnicki weighed contained two 4 GB chips rather than eight 1 GB chips.
(8)	We conclude that it is likely that Lexar 8 GB CF cards in 2005 did not have a mean weight less than that of those cards presently produced by Lexar.
(9)	We therefore reach the following conclusions in relation to the weights in 2005 of Lexar 8 GB CF cards in their various forms of packaging:
	Dr Melnicki's figure	Range of variation in 2005 not likely to fall outside (assuming 20% variation):	Range of variation in 2005 not likely to fall outside (assuming 30 % variation):	
Unpacked card	0.031 lb	0.025 - 0.37 lb	0.022 -0.048 lb	
Card in individual packing	0.13  lb	0.104 - 0.156 lb	0.091 – 0.169 lb	
Carton of 10 units	1.58  lb	1.264 – 1.90 lb	1.106 – 2.054 lb	
Master Carton -- 40 units	7.22 lb	5.77 – 8.66 lb	5.05 – 9.38 lb	
We believe it unlikely that the weight of an average card, carton or unit  would fall outside the 20% or 30% variation figures shown. We also find that a 1 or 4 GB card would weigh less than an 8 GB card

Volumes of cards manufactured shipped and sold
(10)	Dr Melnicki told us that he had extracted from Lexar's Enterprise Resource Planning (ERP) system details of all the shipments of Lexar professional series CF cards for 2004/5. Dr Melnicki told us, and we accept, that all the company's functions were tied into the system which was also used for the company's accounting. We accept that anything shipped by Lexar was likely to have been reflected in the system, and that Dr Melnicki's numbers accurately reflect the shipments of Lexar professional series CF cards in 2004-5
(11)	There is a potential difference between the number of cards manufactured and the number shipped. The difference will be attributable to changes in the stock of products held and the loss, through theft damage or otherwise, of stock. Dr Melnicki explained that since the price of cards dropped on average by some 40% per annum, it would be unlikely that Lexar held (significant) stock ( and by implication it would be unlikely that changes in stock were significant). He was not aware of any significant losses in the period. As a result he considered that the shipping figures were a fair representation of what was manufactured. We accept that conclusion.
(12)	Dr Melnicki produced tables showing the total worldwide shipments and European shipments of Lexar 8 GB CF cards in the period 5 March 2004 to August 2005, and similar tables showing the largest and average shipment sizes and unit prices in these months. We accept that these tables accurately reflected reality. We note here only the figures for the whole period compared with F1's sales in Deals 1, 2, and 4:
	worldwide	Europe	F1's sales	
Total shipped	1337	310	1275	
Largest shipment	152	60	675	
Average shipment	14.22	22.1	425	
Largest unit price	$1770.99	$1048.80	£999	
Average unit price	$1071.99	$798.64		

Losses during production
(13)	At the heart of Lexar's CF cards was a small sophisticated chip variously called a thin small outlying package, a flash memory device or a chip. These were bought by Lexar from one of the handful of companies which manufactured them. Lexar used a Chinese subcontractor to assemble the CF cards: it would send a subcontractor the chips required to assemble the number of cards it needed. The manufacturer would then send back the assembled CF cards. The assembled cards would then be sent to other subcontractors who added retail packaging and sent the packaged chips to Lexar's customers. Dr Melnicki told us, and we accept, that this process was very tightly controlled, and that there were no differences in the period between the number of chips supplied to the subcontractor and the number of CF cards produced.
 (14)	It therefore seems to us highly unlikely that there were any genuine Lexar 8 GB CF cards available for purchase or sale which had not first been sold by Lexar to one of its customers.
Warranties, defective products and forgeries
(15)	Lexar received claims from customers that products they had purchased were defective. Normally such customers would contact Lexar's call centre. Where a card appeared to be defective the customer would be told to send it back to Lexar. If on investigation at Lexar the card was found to be a defective Lexar card it would be replaced. Lexar would not investigate how the customer had acquired the card: what mattered was simply whether or not it was a Lexar card. They stood behind the card rather than behind the formal warranty contract.
(16)	Only 0.2% of Lexar's cards proved to be defective. There were returns however of other manufacturers' cards and of cards which bore a high-capacity Lexar labels which were low capacity cards made either by Lexar or other manufacturers.
(17)	We drew the following conclusions: (i) that, in practice, possession of a formal warranty document offered the customer little extra benefit in practice, and (ii) there were in circulation cards labelled as Lexar 8 GB CF cards which were not genuine.
(18)	Dr Melnicki accepted that counterfeit Lexar 8 GB CF cards could have been manufactured. However he said that if they had been it would have been likely that they would have come across them in dealing with the returns of defective products or have heard about them from their customers. Neither has happened.
(19)	We conclude that there were not significant numbers of counterfeit Lexar 8 GB CF cards in circulation in 2005.
(20)	Dr Melnicki said that Lexar preferred to supply large retailers rather than wholesalers when there were shortages of the chips because the wholesalers would be less willing to pay as high a price as the retailers. There were shortages of the chips in 2005.
(i)   Mr Laing's evidence
93.	From Mr Laing's evidence we find:
(i) the decision to assess F1 was made after the receipt of information from Lexar and SanDisk. The analysis of the SanDisk data was completed in February 2006. The assessments were made in June 2006;
(ii) the goods described on the invoices to F1 in each of Deals 1 to 4 had been traced back through a chain of supply, purportedly of the same goods in the same numbers, from one company in the chain to another, with an initial supply by a trader who had defaulted on the VAT due. In these chains each successive trader before F1 made a profit of about two pounds per unit, and F1 made in the region of £20. Each of the invoices in the chains contained a description of goods similar or identical to that in the invoice to F1 (this was a fact which we considered in relation to the issues in the following section of this decision.). In Deal 5 the absence of records had prevented tracing back;
(iii) no assessments had been made on the other members of each supply chain: HMRC had not sought to deny input tax in respect of the invoices which those members used to establish their credit in respect of the supply described in the invoices to them. Neither had HMRC offered to remit the input tax on any supply made by those traders. It was likely that each of those traders had provided HMRC with details of their transactions; and
(iv) no check had been made to determine whether details of the export of the goods were retained by HMRC’s CHIEF (import/export) system, but no inspection would necessarily have been carried out at the time of export.
IV   Evaluation
The five Deals: did the invoices specify the quantity and nature of the supply?
94.	In this section we evaluate the evidence that a supply of goods of the description on the relevant invoice was made to F1. That evidence includes the invoice itself, whether or not the goods were inspected, and evidence that there was an onward supply of the same goods. It also includes comparisons with the sale volumes of the manufacturers and the weights of the products. (In considering the weight of the consignments shown on the FedEx documents we should note that we have accepted, in making our evaluation, Mr Young's contention that they were unlikely to have been intended to be precise.)
Deal 1
95.	The invoice tendered to support the Appellant’s claim contained the following details:
 Supplier:	Demravale	
Date of invoice	21 April 2005	
Description	Compact Lexar flashcards pro 8 GB brand-new, retail boxed. Full international documentation. All package contents cables manuals etc. No stamps or labels other than original.	
Quantity	350	
VAT	£58,863	
Unit price (excluding VAT)	£961	

96.	The Appellant produced an undated purchase order from Mobiland for “8 GB Lexar memory cards” together with a document on the same notepaper requesting that the shipments be split into 131 and 219 units. F1 issued pro forma invoices dated 25 April 2005 to Mobiland for 350 (and also for 131 and 219) “Lexar compact flash memory cards”.
97.	We saw a copy of an undated order to Imex to arrange shipping of “350x compact Flash memory cards” to Mobiland, to be split into two shipments of 131 and 219 “Lexar CF cards”, invoices for Imex’ handling charges and a FedEx invoice and movement tracking schedule indicating that dispatch had taken place on 10 May 2005
98.	There was an undated document on Mobiland headed paper acknowledging receipt of the 350 “Lexar 8 GB media memory cards”, and bank statements indicating payments by Mobiland on 25 April, and to Demravale on 26 April.
99.	There was also a declaration signed by a director of Demravale indicating that the VAT had been paid on the goods. The signature was dated in manuscript 21 April 2005, the same date as Demravale’s invoice, but the document appeared to have been faxed to Demravale six days later, on 27 April. It was not clear when it had been faxed back to F1. We are not convinced that the document was in fact signed on 21 April.
100.	There was no evidence of an inspection of the goods by Imex. We conclude there was none. Mr Katz did not inspect them.
101.	We noted that the Mobiland purchase order document does not identify the type of memory card ordered (compact Flash, secure data or multimedia), but F1’s invoice to Mobiland indicates “CompactFlash” cards but not their capacity. There is no reference to 8 GB.
102.	This evidence indicates to us that there may well have been a supply of goods of some description by Demravale to F1, and a supply, probably the same goods, by F1 to Mobiland. But the only evidence of the nature of that supply was: (i) the undated documents on Mobiland notepaper, (ii) the reference to Lexar CF cards on Imex’ handling invoice (which did not indicate any verification that the goods were such), (iii) Mr Katz’ evidence of his trust in his supplier, and (iv) Demravale’s own invoice.
103.	That evidence provided in our view only lightweight support for the conclusion that the goods supplied had been those described on the invoice. Set against that were: 
the conclusions we drew from Dr Melnicki’s evidence in relation to the weight of Lexar cards and packs of cards. The Demravale invoice refers to “retail boxed” units. That would mean that the smallest possible aggregate weight would be that of 350 units in individual packaging. That in our view was not likely to be less than 31.85 lb. The FedEx invoice indicated a weight of 8.5 kg or about 18.7lb. That strongly suggests that the goods shipped were not 350 Lexar 8 GB cards in retail packaging.
Dr Melnicki’s evidence that in the period March 2004 to August 2005, Lexar’s largest single sale had been of 152 units, and the extraordinarily high proportion Deal 1 would therefore represent of Lexar’s sales in the whole of 2005: more than 100% of its European sales, and more than 26% of its worldwide sales.
104.	We conclude that the supply was not of the number of goods shown on the invoice or that the description on the invoice did not identify the nature of what was sold.
Deal 2
105.	The invoice tendered to support the Appellant’s claim contained the following details
Supplier:	Jontec Management Services Ltd	
Date of invoice	31 May 2005	
Description	Lexar compact Flas (sic) cards	
Quantity	250	
VAT	£25,156.25	
Unit price	£575	

106.	The invoice mentioned neither the speed nor the capacity of the cards. The Appellant’s implicit contention is that it was for 8 GB cards since it is to its onward invoice for such cards that it links this input.
107.	The documents before us included a copy of an undated purchase order from Mobiland for 250 "8 GB Lexar compact Flash cards". On 31 May 2005 F1 issued an invoice to Mobiland for 250 "Lexar 8 GB compact Flash memory cards".
108.	There were also copies before us of a VAT declaration from Jontec dated 1 June 2005 that the VAT relating to this transaction had been paid, an undated fax from Jontec indicating that the stock was being held at Imex, and that its weight was about 8 kg, and a FedEx invoice airway bill and tracking details indicating dispatch on 6 June 2005.
109.	There was no evidence of inspection by Imex. We conclude that no inspection was made on behalf of F1.
110.	Set against this evidence was: first a consideration of the weight of the goods. The Jontec and FedEx documents indicate a weight of 8 – 10 kg or 17 to 22lb. From Dr Melnicki’s evidence we conclude that 250 unpacked cards would weigh at least 6 lb 4 oz, and that 250 retail packed cards would weigh at least 26lb (or 23lb assuming a 30% variation from Dr Melnicki’s figure which we believe is less likely than a maximum of 20%) . The recorded weight of 17 – 22 lb is inconsistent with both these figures and suggests that the goods were not as described; and second, Dr Melnicki’s evidence in relation to Lexar’s sales of this product in 2005 which indicates that this transaction represented 80% of its European sales and 19% of its worldwide sales.
111.	We conclude that the goods described on Jontec's invoice were not those supplied to F1.
Deal 3
112.	The invoice tendered to support the Appellant’s claim contained the following details
Supplier:	Jontec Management Services Ltd	
Date of invoice	22 July 2005	
Description	SanDisk 8 GB cards	
Quantity	750	
VAT	£52,500	
Unit price	£400	

113.	Whilst this invoice, unlike that in Deal 2, indicated the capacity of the cards, no mention was made of their speed. They were however in the other documentation described as Ultra II cards.
114.	The other documentary evidence in support of this claim consisted of a purchase order of 22 July from Unisonic, a “pro forma” invoice from F1 to Unisonic also 22 July, a VAT declaration of the same date from Jontec, a release note dated 27 July on Jontec paper addressed, not to a freight forwarder but to F1, Imex and DHL documents relating to the shipping of the goods and documentary evidence of payments.
115.	There is an inspection report from Imex (dated 26 July but with a fax header dated 23 July – three days earlier). It does not indicate the class of inspection conducted, but does show that there was one pallet with 750 in boxes.
116.	Our conclusions on the rigour of Imex’ testing on the evidence in the documents indicates to us that there was some supply of goods and that it was likely that there were 750 packages.
117.	Mr Connolly’s evidence on SanDisk’s worldwide sales shows that the sale of 750 of these units would be 7.5 times the size of SanDisk’s largest shipment in 2005, 75 times its largest sale in 2005, and would represent 13.7% of its worldwide sales of this product in that year. The price invoiced of £400 per unit comfortably exceeds SanDisk’s average sale price of dollars 582.27 in that month (but F1’s sale price of £424 to Unisonic exceeds it by yet more).
118.	Taken together with Mr Connolly’s evidence that he would have come to hear of a person dealing in this quantity of SanDisk’s cards, the evidence convinces us that, whatever goods were shipped by DHL and released to F1, they were not those detailed on the Jontec invoice.
Deal 4
119.	The invoice tendered to support F1’s input tax credit on this transaction contained the following details:
Supplier:	Ashertone	
Date of invoice	24 August 2005	
Description	Lexar 8 GB CF cards	
Quantity	675	
VAT	£52,565 .62	
Unit price	£445	

120.	The documents in this case included a dated purchase order from Mobiland, a dated (pro forma) invoice by F1 to Mobiland, Ashertone’s undated VAT declaration (which appeared to have been faxed to F1 in September 2006 – a year later), dated release notes to Imex, confirmation of receipt from Mobiland, evidence of payments and shipping documents from both DHL and FedEx together with a FedEx tracking report. Mr Katz told us that he thought the DHL shipping had been cancelled.
121.	There was an inspection report from Imex which does not indicate the class of inspection, but said that there was one outer pallet or boxes and 675 inner boxes.
122.	On Dr Melnicki’s evidence of weight, 675 boxed items would have weighed at least 61 lb (taking the maximum 30% variation from his single figure). Both the DHL and FedEx documents indicate a weight of 7.3 kg which is 16lb. Unpackaged cards with no packaging whatsoever would have weighed 16lb 14oz (on a 20% variation from Dr Melnicki’s single figure, or 14 lb 14oz on what we would regard as an extreme variation of 30%) . This, with the evidence of their boxed state, points strongly to the goods not being as described on the invoice.
123.	Dr Melnicki’s figures for Lexar’s sales indicates the sale represented 50% of Lexar’s sales of this product for the year and twice its total European shipments for the year.
124.	We conclude that the goods supplied to F1 were not those described on the invoice from Ashertone.
Deal 5
125.	The invoice tendered to support F1’s input tax credit on this transaction contained the following details:
Supplier:	Ashertone	
Date of invoice	12 December 2005	
Description	The SanDisk mini-cruzer 4 GB USB	
Quantity	1500	
VAT	£34,125	
Unit price	£130	

126.	In relation to this transaction we have set out above Mr Katz’ evidence that he asked Imex to retain one card and send it to him so that he might show it to Mr Atkin. This evidence was supported by the production of the card and by an undated letter or fax to Imex from F1 requesting that they inspect the goods “and retain one unit for F1 to keep”. Imex’ inspection report dated 10 January 2006, a month after the invoice date, indicates 1499 in boxes in one larger outer box, and that a full (class one) inspection was conducted. Imex’ invoice dated 31 January 2006 relates to 1500 units, and charges £50 for administration and handling, £50 for re-wrapping and reboxing, £35 for the customs documentation and makes no reference to any charge for the full inspection. Mobiland confirmed receipt of the goods on 14 January, and there were copies of FedEx airway bills and tracking reports indicating that the goods were transported to Dubai on 10 January 2006. There was also a copy of an F1 invoice to Mobiland and evidence of the making of payment of 13 December 2005 before the goods were dispatched.
127.	Mr Connolly’s (unchallenged) evidence was that the cards which were the subject of this invoice weighed 0.4oz without packaging and 2.3oz with packaging. Thus 1499 would have weighed 37lb 8oz without,or 215lb 8oz with, packaging. The FedEx waybill records of the weight of 19.8 kg and the FedEx tracking statement recorded at 19 kg – that is 43 lbs. 10 oz., or 41 lbs. 14 oz. It is possible that the unpackaged weight of 37 lbs. 8 oz. could have been increased to 41- 43 lb by outer of packaging. Thus the shipment weight was not inconsistent with 1499 packaged units. But the Imex report refers to 1499 “inner boxes” which suggests that the units were packaged: and if that was the case the shipping weight was considerably short of what it should be.
128.	The goods were invoiced by Ashertone. An undated letter of introduction from Ashertone indicates that it will trade in any product provided it is new and the packaging is in top-quality condition. That looks like a standard letter; but it suggested to us that trade in unpackaged units might be unusual.
129.	Mr Connolly’s evidence indicates that 1499 of these cards would have been 26% of SanDisk’s shipments in 2005, and was six times the size of its largest shipment.
130.	Taking all this together, we were not persuaded that the quantity and nature of such goods as had been shipped to and by F1 were as described on the invoice. Whilst Mr Connolly accepted that the unit exhibited by Mr Katz may have been genuine, we had insufficient evidence that Imex had taken it from the goods received from Ashertone to conclude that it had been. The Imex inspection report we read as subject to our overall appreciation of Imex’ operation. It did not persuade us that these goods were as described.
131.	Lastly we should note that we were shown a statement from a Mr Kotales of Mobiland  dated 8 September 2006 confirming that goods sold to Mobiland with the descriptions on the invoices under appeal had been received and shipped to Mobiland's customers, and they had inspected the goods and paid for them. We accorded little weight to this: the statement was signed by a person who appeared to have taken control of Mobiland after the deals had taken place, and gave no direct evidence of inspection of the goods.

V	Discussion
(a)   The Appellant's  submissions
132.	Mr Young contended:
(i)		the Commissioners did not have power to make assessments under section 73. The repayment made was one which ought to have been made. There were no new facts which the Commissioners learned which enabled them to make assessments under the second limb of section 73. He also suggested that the principle in Teleos precluded further assessment where the input invoices had effectively been accepted by the Commissioners as evidencing supply -- as they were when they made repayments on the relevant  returns (not all of which were "without prejudice"), and since F1 had acted in good faith and taken every precaution Mr Atkin required of it, the Commissioners could not make an assessment.
(ii)		on the evidence the input invoices described the nature of goods supplied to F1. The provision of counterfeit or even stolen goods was capable of being a supply. The nature of what was supplied to F1 was taxable memory cards. It did not matter if that description was a little inexact, even if that was the case. HMRC's failure to disallow input tax to others in the chain of supply to F1 showed that HMRC accepted that the earlier invoices were valid.
(iii)		even if the input invoices did not satisfy the requirements of regulation 14 (and/or article 22), the Commissioners erred in failing to exercise their discretion under regulation 29 in the Appellant's favour. The discretion to allow input tax was given by article 22 (8) of the directive. In determining how to exercise that discretion the Commissioners:
(a)	should have regard to the principles of neutrality and legal certainty, and
(b)	were constrained by the approach of the ECJ in Teleos: where a trader had acted in good faith, took every reasonable measure in his power, and submitted documentation establishing at first sight (and to the initial satisfaction of the Commissioners) a right to deduction, the Commissioners should exercise their discretion in his favour.
(c)	There was an unbreakable chain of supply. HMRC had not disallowed input tax to the earlier suppliers in the chain nor remitted the output tax they had charged. That was relevant to the exercise of discretion.
(b)    The invoices 
133.	We have concluded that the description of the goods on the invoices in Deals 1  to 4 did not represent what was supplied to F1, and in relation to Deal 5 it was not proved that the invoice description represented a supply to F1.
134.	There was no evidence which enabled us to conclude what in fact was supplied on each occasion. However broad a view one takes of the requirement to state the nature of the goods supplied we cannot conclude that the requirement to state the nature of the supply on the invoices was satisfied. The onus of proof was on the Appellant and was not discharged.
Mr Young also suggested that HMRC's failure to adjust VAT due by other traders is evidence that the goods were as described. We disagree.  If we had heard anything which indicated that HMRC had received compelling evidence from those traders that the goods were as described, that would be different; but, on the basis of the types of information sought by HMRC from the Appellant, and Mr Laing's evidence as to what was generally sought from such traders, we were not persuaded that HMRC's failure to address the other members of the chains indicated that the goods traded were as described on the invoices.
135.	Therefore we conclude that the condition that a valid input tax invoice be held by F1 was not satisfied in each case. As a result, unless HMRC exercise their discretion under regulation 29, F1 is not entitled to an input tax deduction in relation to Deals 1 to 5. 
(c)   The assessments
136.	It seems clear to us that section 73 permitted HMRC to make the assessments.
137.	When the repayments in relation to Deal 1 to 4 were made, if the Commissioners had known the facts about Lexar’s and SanDisk’s activities and production which became known later, they would not, in our view, have made the repayments. As a result the second limb of section 73 is satisfied in relation to those Deals. 
138.	The repayment in relation to Deal 5 was, we understand, likely to have been made in February 2006. In December 2005 HMRC received the sales information from Mr Connolly. That information was analysed by Mr Waller and Mr Maxted in January and February 2006 with Mr Maxted's results being sent to Mr Waller on 28 February 2006. It seems to us that either the December repayment "ought not" to have been made, given HMRC's possession of the data, or, if one regards the analysis of information as a separate source of information, that the second limb of section 73 (2) is satisfied.
139.	It does not seem to us that, if Teleos imposes a restriction on the ability of HMRC to assess under section 73, the conditions for the operation of that restriction are satisfied in this case. That is for the following reasons. First, that there was in our view no acceptance by HMRC of F1's records and claim when the payments were made under the without prejudice banner. Second, the communications between F1 and HMRC do not display any clear indication that HMRC accepted that F1 was doing everything required. And third, and in particular, we do not believe that F1 took every precaution reasonably required of it to ensure that such goods as were supplied to it had their quantity and  nature described on the relevant invoices. It would not be unreasonable to require a trader carefully to investigate the nature of what it is receiving. F1 procured no inspection at all in relation to Deals 1 and 2. In relation to Deals 3 to 5 the inspection, we believe, was superficial and F1 did not take reasonable steps to ensure it was thorough. Given the price being paid for these goods, F1 could have determined whether the goods it was buying were in their original packaging and considered whether, if they were, Imex could really have checked what was there, even on a 10% sample. Generally it could have considered whether the nature of the tests conducted by Imex was adequate to establish the authenticity of the goods (in our view they were unlikely to have been). F1 could have checked on Imex' expertise and ability to conduct the tests, and, through Mr Katz, could have attended an inspection. All these were in our view reasonable steps. It was insufficient to rely upon assurances from suppliers. Even later acceptance by the customer - even if it could be trusted - did not provide a check on the supply received when it was received. 
140.	Mr Young also said that HMRC had accepted and paid the VAT claims. He said that the "without prejudice language" is without legal effect: HMRC have power to pay or not to pay, but not something in between. 
141.	We do not accept that argument. We were shown no provision of the Directive which so limited the power of HMRC, and the powers of management given by domestic law under schedule 11 VATA would seem certainly wide enough to permit a payment to made coupled with a warning that repayment might at a later date be sought. If the taxing authority has power to accept or deny it must have power to say that it has not made up its mind. Arnold J in N2J limited v HMRC [2009]EWHC 1596 (Ch) certainly cast no doubt on the efficacy of without prejudice words (see para [24]). The principle of legal certainty requires that legislation be certain and its application foreseeable by those subject to it. In Teleos the application of the legislation was found to contravene that principle inter alia, if the authority, having prescribed conditions and having accepted them as fulfilled could then change its mind. That was not, in our view the position in the case of F1: (1) neither HMRC's communication with F1 nor its general acts could be regarded as laying down prescribed conditions; and (2) even if they could, the without prejudice payment was not an acceptance that they had been fulfilled.
(d)	The exercise of the Commissions’ discretion
142.	Mr Atkin’s letter of 16 June 2006 indicated that he decided not to exercise his discretion on the basis of "the total material available in the case". He did not set out the particular factors which he considered. It seems clear however from his letter, and from his earlier correspondence with Mr Katz, that the following information was known to him:

(1)	the comparison between the volumes of goods on the invoices, and the sales data from the manufacturers;

(2)	that Mr Katz did not have expertise in these products; 

(3)	from the e-mail correspondence with Imex forwarded to him on 15 September 2005 by Mr Katz, that Mr Katz relied upon Imex to inspect: Mr Atkins had asked whether Mr Katz physically examined the goods himself, and Mr Katz was able to reply only by referring to the checks carried out by Imex;

(4)	it had been discovered that the July deal (Deal 3) had been chased back down the chain of supply to a defaulting trader (Mr Atkins wrote to Mr Katz to this effect on 16 May 2006); 

(5)	the information available from the other documents supplied to him by the Appellant (which did not include inspection reports in relation to Deals 1 and 2).

143.	It seems to us that these factors were all relevant to the exercise of HMRC’s discretion. The information at (4) above is not referred to by Mr Atkin in his letter, but it was in our view clearly part of the circumstances of the case. Evidence of a default earlier in the supply chain is in our view relevant to the attitude HMRC may take as to the strength of the evidence it requires that the goods had been traded and were as alleged. There was no evidence of other irrelevant matters having been taken into account, and we conclude that there was nothing irrelevant taken into consideration by Mr Atkins in making his decision.

144.	Mr Young made the following criticisms of the Respondents' decision:

(1)	an unbreakable chain of supply
This related to the treatment of other persons in the chain of supply to F1: HMRC had not disallowed their input tax (nor remitted the VAT charged on their invoices). The existence of the goods had not been called into question in any of their cases. There was an unbreakable chain of supply. (He draws that phrase from the record, in [28] of the court's judgement in Netherlands, of a submission from the Commission that a fundamental aspect of the VAT system “is that transactions capable of giving rise to a deduction are carried out between taxable persons, all the taxable transactions together forming an unbreakable chain in that regard.”)

To the extent that this is a submission that HMRC's failure to adjust VAT due by other traders is evidence that the goods were as described, we have dealt with it under the heading (b) The invoices above.

On the basis that the invoices between other members of the chain of supply also failed properly to describe the nature of the supply,  we do not regard the failure of HMRC to address the other traders as relevant to the exercise of its discretion in relation to the Appellant. As Jacob J said in another context in C & E Commissioners v National Westminster Bank Ltd 2003 All ER (D) 489 (“National Westminster Bank”), "just because a tax gatherer makes a blunder which favours some taxpayers does not mean that he should perpetrate the blunder in favour of others. A number of wrongs do not make a right.".

But it is also possible to put this complaint a different way: by focusing only on the Appellant, and ignoring the other members of the chain, it might be said that HMRC were applying a policy in the exercise of their discretion which is unreasonable, illegal, or outside the limits of the discretion afforded by the Directive. It seems to us that if HMRC had a policy in relation to the exercise of the discretion under which persons in similar situations in relation to their input invoices were treated differently without objective justification, that policy would fall foul of the principles of EU law (see [66] of National Westminster Bank and (50] of the ECJ judgement in Marks & Spencer v CCE case C - 309/06.). Thus for example a policy of not exercising the discretion only in the case of the UK member of the chain of supply next to the exporter, and not so targeting other UK members of the chain of supply might be devoid of objective justification, and as a result the exercise of discretion on the basis of that such a  policy might be unreasonable. This is different from the situation in National Westminster Bank where it appeared simply that mistakes had been made in relation to other taxpayers, rather than that a discriminatory policy had been applied.

The evidence before us, however, did not support a conclusion that there was such a policy of discrimination between exporting traders such as F1 and UK - UK traders, such as its suppliers, in relation to the exercise of the discretion. Mr Laing's evidence was that the other traders in the chains would have provided copies of their deal sheets and monthly invoices to HMRC, and that the relevant officer would have then made a decision as to whether he was satisfied with the VAT return on the basis of that evidence. That indicated to us that there had been no consideration of the exercise of the discretion in relation to these traders, and evinced no policy in relation to its exercise which discriminated against the Appellant.

It may well have been the case that the Appellant’s returns were scrutinised more carefully than those of UK - UK traders because of the burden of the repayment of VAT, but that is an issue different from the policy behind the exercise of a discretion.

(2)	The innocence of the Appellant

Mr Young said that HMRC failed to have regard to the absence of any wrongdoing on behalf of the Appellant.

We must consider Mr Atkin’s decision on the basis of the information available to him at the time. There was nothing before us which indicated that Mr Atkins was possessed of information showing that the Appellant was wholly innocent, deeply culpable, or something between the two. There was evidence of the nature of the inspections that the Appellant had conducted, of Mr Katz' expertise, and of the Appellant's willingness to comply. We do not believe that Mr Atkins could reasonably have concluded on that evidence that it was clear that the Appellant was free from any wrongdoing; as a result a  failure  to have regard to such absence (even were it merited) does not make his decision unreasonable.

(3)	The consequences for the Appellant

Mr Young said that HMRC’s decision failed to have regard to the consequences for the Appellant.

Information on the precise extent of the effect of the decision upon the Appellant was not, we believe, available to Mr Atkins. But given the size of the VAT credits involved he must have appreciated that it would have a significant effect. We do not agree however that this was a relevant consideration. A serious effect arises in relation to any decision to assess or deny substantial amounts of tax. The size of the amount may affect the reasonableness of the steps taken before making the decision, but we do not believe that on its own it should be relevant consideration. As to the steps taken, the obtaining and collating information from SanDisk and Lexar were, in our view, sufficient reasonable steps in relation to the size of these claims.

(4)	The neutrality principle

Mr Young said that the decision did not have proper regard to the principle of neutrality.

As we have found that principle is displaced in relation to the invoicing provisions by the aim of the supervision or audit of the VAT system to the extent of those provisions and their purpose. The availability of the discretion is part of the invoicing provisions, and must in our view be considered as capable of exercise only within the purposes of those provisions. Thus the discretion must be exercised in such a way as not to detract from the purpose of proper supervision and audit, but, subject to those constraints neutrality must be a relevant. But so also in our view is the prevention of evasion. 

Thus in our view the principle of neutrality does not compel the exercise of the discretion. Other principles can, and should be considered.
.

Summary 

In our view there appears to have been nothing irrelevant considered by Mr Atkin, no relevant information excluded from his considerations, and no error of law apparent in his considerations. 

In our view for the reasons in the next but one paragraph, having regard to the information before him and the principles of neutrality, prevention of evasion, and adequate supervision of the VAT system, his decision was not unreasonable.

There was, however, no direct evidence before us as to what principles Mr Atkin had regard to in making his decision. It seems likely however that he would have had regard to the statement of practice. If he drew his inspiration from that then for the reasons set out earlier, he was in our view, entitled to do so. Further it seems to us that, having regard to the indication therein about establishing the bona fides of a supply, he would have been entitled to refuse to exercise the discretion on the basis of the facts available to him. 

We have concluded that Mr Atkin’s decision was not one which no reasonable man could have made for the following reasons. (1) there was no evidence available to him indicating what the supplies had actually been, (2) the process of auditing the chain of supply would thus be impeded, and (3) the goods were of a kind known to be used in abusive transactions and HMRC were aware that one of F1's deals had been chased back to a defaulter. (4) in such circumstances too readily exercising the discretion could promote laxity in compliance with the invoicing requirements. 

(e)    Were the memory cards counterfeit, and would it make any difference?

145.	Mr Young raised the possibility that the memory devices F1 bought and sold were counterfeit. If they were he suggested: (a) the purchase and sales were transactions which properly attracted VAT; (b) the principle of neutrality required F1 to be credited with the input VAT on their purchase; (c) the omission of the words "counterfeit" on the invoices was not sufficient to cause them to fall outwith the requirements of the Directive; and (d) even if it was the case that the invoices were inadequate, it was unreasonable in the circumstances not to exercise the regulation 29 discretion in favour of the Appellant.

146.	We accept that there were counterfeit memory devices in circulation. It was less clear that there were, in 2005, large numbers of counterfeits of these particular memory devices in circulation. We believe it is more likely that, if the goods F1 traded in were counterfeit, they were not counterfeits produced for the purposes of selling to end consumers: the volumes of the sales of the goods by Lexar and SanDisk suggested that the numbers traded by F1 were not aimed at consumer markets.

147.	If F1 had been knowingly trading in counterfeit devices then we accept that prima facie it should be entitled to credit for input VAT. But that credit is available only if the requirements of the invoicing requirements of the Directive are satisfied. It seems to us that they would not have been. An indication that the goods were not genuine would have been an important indication of their nature for both supplier and customer. The invoices held by F1 would not have adequately disclosed this nature.

148.	If F1 had unwittingly been trading in counterfeit goods would the position be any different? In that situation also the invoices would not disclose the nature of the goods. The requirements of the Directive were not satisfied. 

149.	In either case does the possibility that the goods were counterfeit affect the reasonableness of the exercise of HMRC's discretion? It is clear to us that, on the information available to Mr Atkin, he could not reasonably have concluded that such was the only possibility, but he might reasonably have concluded that it was a possibility. However the existence of such a possibility does not in our view render Mr Atkin's decision unreasonable.

VI    Conclusions
150.	We dismiss the appeal.
/

			                                       
CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 13 April 2010