VATA 1994 s.47, Agency, Onward Supply Relief, & Double Taxation
On 12 July 2021, the First-tier Tribunal (Tax Chamber) (“FTT”) released its decision in Scanwell Logistics (UK) Limited v HMRC  UKFTT 261 (TC), rejecting the taxpayer’s claim for onward supply relief (“OSR”).
Whilst OSR is now limited, post-Brexit, to goods imported into Northern Ireland for onward supply to the EU, the FTT’s discussion of agency under section 47 of the Value Added Tax Act 1994 (“VATA”) is of broader interest.
The case serves as a reminder of the significant financial consequences that can result from errors in tax planning, as Scanwell was ultimately held liable for £5.7 million in unpaid import VAT despite the fact that the imported goods almost immediately left the UK (which, if properly planned, could have meant Scanwell was relieved from liability to import VAT).
Scanwell acted as an ‘import agent’ in relation to the import of goods from China into the UK (which at the time was still an EU member state) and their onward transport to end customers in other EU countries.
On importing the goods into the UK, Scanwell claimed exemption from import VAT under the OSR provisions. HMRC, however, considered that the relief was not available to Scanwell and subsequently assessed Scanwell to import VAT. Scanwell appealed the assessment to the FTT.
Where goods are imported into the UK, import VAT is typically charged under section 1 of VATA.
At the relevant time, OSR provided a relief from import VAT where the goods imported into the UK were subsequently re-despatched to a VAT-registered entity in another EU country, generally within one month of importation.
Scanwell accepted that it had never acquired title to the goods from the Chinese suppliers. Instead, it argued that, since it acted as agent for the end customers in the EU, it fell to be treated as part of the supply chain under section 47 VATA, so as to meet the requirements for OSR.
The FTT’s decision
After careful consideration of the legislative provisions, the FTT (Judge Hellier) concluded:
- In order to qualify for OSR Scanwell had to make, or be deemed to make, supplies of goods;
- A supply of goods required the transfer of title in goods. Scanwell did not make any actual supply of goods;
- Scanwell could potentially be deemed to make a supply by section 47;
- Scanwell’s activities did not fall within section 47(1), therefore they could potentially fall within section 47(2A);
- Scanwell’s activities did not fall within section 47(2A) because it did not bring about the supply of goods and did not act in its own name in relation to any supply;
- As a result Scanwell was not entitled to OSR.
Section 47(2A) VATA
Whilst the FTT considered various provisions within section 47 VATA, its main focus was on section 47(2A), notably rejecting HMRC’s contention that it was limited to purely domestic transactions.
Section 47(2A) provides that “where… goods are supplied through an agent who acts in his own name, the supply shall be treated both as a supply to the agent and as a supply by the agent”.
The FTT decided that this did not apply on the facts, as Scanwell was neither (i) an agent through which goods were supplied nor (ii) did it act in its own name for the purposes of the provision. Specifically, it held:
- A person is an agent through which goods are supplied “only if he has authority to give rise to a transfer of title to goods to his principal or to cause title to his principal’s goods to be transferred to another”. It was not sufficient that Scanwell be an agent in the sense of having authority to receive and take custody of the goods as they arrived in the UK.
Whilst the agreements with the end customers appointing Scanwell as an ‘import agent’ clearly envisaged and intended that Scanwell would be able to claim OSR (and might therefore be construed as granting it the necessary authority), there was nothing in the tasks assumed by Scanwell under those agreements which involved it actually making, or using its authority to give rise to, a transfer of title;
- For an agent to be acting in its own name, its actions “must create a legal relationship between [it] and the third party” (i.e. give rise to rights and obligations), specifically in relation to the transfer of ownership in the goods. The condition is not met where the agent’s actions in its own name are limited to collateral matters, such as haulage, customs clearance and inspection.
Scanwell had no contact with the third-party Chinese suppliers and there was no evidence of any agreement with them under which Scanwell had acted. Whilst Scanwell did receive invoices from the Chinese suppliers (albeit addressed to it as agent), the terms of the agency agreements with the end customers made it clear that Scanwell was not required to pay these, making any obligation under them nugatory.
The FTT dismissed Scanwell’s concern that the denial of OSR would lead to double taxation on the supply to the end customers: import tax in the UK and tax again in the destination member state. This was because there existed an alternative procedure by which the goods could have been transported which would have avoided double taxation, but which had not been used. There was therefore no need to construe the legislation in the appeal any differently.
The full text of the FTT’s decision is available here.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).