UT/2024/000070 - [2025] UKUT 00210 (TCC)

Before turning to the substantive issue under this ground, we need to resolve a preliminary dispute between the parties as to the proper nature of the issue the FTT needed to decide in order to dispose of the appeal before it.

The Appellant submitted that the true question was whether it had shown, on the balance of probabilities, that the goods had been removed from the UK. HMRC, by contrast, argued that the key issue was whether, as the FTT had correctly identified, the Appellant held, sufficient evidence falling within the conditions of VAT Notice 725 (including that such evidence had been obtained within 3 months of the sale) of the removal of the goods from the UK.

This dispute, over the framing of the issue, permeates a number of the Appellant’s argument before us. As to whether the test is mere factual removal or the existence of sufficient evidence at a given point of time of removal, Ms Rao, who represented HMRC before us, relied on the Upper Tribunal’s decision in HMRC v Arkeley [2013] UKUT 393 (TCC).

That concerned zero-rating in the context of exports from a Member State. HMRC challenged the FTT’s conclusion in favour of the taxpayer that, as regards certain of the transactions, there was sufficient evidence of export. HMRC’s argument on appeal was that the FTT had mistakenly assumed that HMRC had agreed the goods had been exported when (so HMRC argued) that would have been illogical given HMRC were at the same time arguing that the conditions for zero-rating were not met (because the evidence of the alleged export had not clearly identified the relevant goods).

Although the case concerned exports outside the EU rather intra-Community removals there is no reason to suppose that the principles articulated in that case would not apply equally here. That is especially clear from the fact that the Upper Tribunal in Arkeley itself relied on the CJEU’s decision in R(on the application of Teleos plc) v HMRC (Case C-409/04), which had concerned removals rather than exports.

In Teleos, the CJEU considered a situation in which a UK trader was not denied zero-rating even though the document (a CMR) on which it had relied was later found to contain false information. The CEJU held that it was sufficient that the trader had provided adequate evidence at the time; it did not matter that the goods had not, in fact, been exported.

The Upper Tribunal in Arkeley summarised what that meant in terms of the proper issue to be decided as follows (at [21]):

“There is no allegation that the taxable person was acting otherwise than in good faith or that the taxable person failed to take reasonable steps to ensure that he was not participating in tax evasion, the focus must be on the evidence required to establish the right to zero-rating. The taxable person cannot be required to prove the fact of export in any other way.”

The Upper Tribunal went on to explain at [34]:

“It is clear from Teleos that proof of export depends on there being sufficient evidence of export in the hands of the taxable person at the relevant time. Absent fraud or bad faith, such evidence will result in the application of zero-rating even if it is later established that the goods were not exported. No question of bad faith or fraud on the part of Arkeley, or knowledge or means of knowledge of fraud, was alleged in this case. Accordingly, the question for the FTT was not whether it was satisfied that the goods were exported, but whether it was satisfied that there was sufficient evidence of export in the hands of Arkeley within the prescribed time limit.”

In the Appellant’s oral submissions in reply, Mr Southern emphasised that the key point in Teleos and Arkeley was that, even where there was cogent evidence that the goods had not left the UK, zero-rating was still permitted because the taxpayer should not be penalised for, as he put it, “dirty work at the cross-roads” (in other words the wrongdoing of others further down the supply chain).

In our view, and in agreement with Ms Rao, the decisions in Arkeley and Teleos support the position that the correct issue to consider is the sufficiency of the evidence held by the taxpayer. In the absence of fraud or bad faith, a taxpayer who obtains the required information in time will be protected from “dirty work at the cross roads” (something going wrong with the removal), but these cases do not support the view advanced by Mr Southern that there are no consequences for a taxpayer who fails to obtain such evidence (whether or not the removal takes place or not and whether any failure is their fault or not).

The reason why the sufficiency (or insufficiency) of evidence is what matters, rather than whether there was a removal was explained by CJEU at [51] in Teleos (referred to by the Upper Tribunal at [19] of Arkeley):

“To oblige taxable persons to provide conclusive proof that the goods had physically left the member state did not ensure the correct and straightforward application of the exemptions.”

The CJEU’s concern was that it would be contrary to legal certainty if, despite there being a prescribed list of documents which evidenced entitlement to exemption from accounting for VAT, the supplier could later be required to account for VAT. The focus, therefore, is on enabling the operation of a straightforward system where compliance with evidential requirements becomes the decisive factor.

We therefore agree with HMRC and the FTT in their formulation of the issue. The correct question is whether the Appellant held sufficient evidence of removal, not whether the goods were in fact removed.

Mr Southern also sought to argue that HMRCs’ and the FTT’s depiction of the issue was inconsistent with the way the issue had been put in HMRC’s Statement of Case. We reject that argument. HMRC’s case correctly identified sufficiency of evidence as key. That is clear from [6] of HMRC Statement of Case which stated:

“It is common ground that the issue before the Tribunal is whether the conditions for zero rating have been satisfied, and in particular whether sufficient evidence has been provided by the Appellant that the goods in question were removed from the United Kingdom.”

The remainder of the Statement of Case is also consistent with this focus on evidence. For example, at [51] it states:

“HMRC’s position is that alternative evidence may be relied upon, but that the evidence provided does not meet the conditions as to the content of the evidence specified in paragraph 5.2 or 5.5 of Notice 725.”

We therefore find nothing in HMRC’s Statement of Case that is inconsistent with the conclusion that the central issue is the sufficiency of the evidence. The correct issue in this appeal is whether the Appellant held sufficient evidence falling within the requirements of VAT Notice 725 including its time limits to support zero-rating, not whether the goods were in fact removed from the UK. With that in mind we now turn to the Appellant’s arguments under Ground 2.