[2009] UKFTT 263 (TC)

TC00210

INPUT TAX – no valid supporting invoice – Commissioners’ discretion to allow alternative evidence – no sufficient documentation produced – appeal dismissed

FIRST-TIER TRIBUNAL (TAX CHAMBER)

                                                    WATT POWER (UK) LTD                                   Appellant

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Lady Mitting (Judge)

                        Peter Whitehead (Member)

Sitting in public in Birmingham on 23 February & 4 September 2009

John Plant for the Appellant on 23 February.  No attendance by or for the Appellant on 4 September

Richard Mansell, senior advocate to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.           The Appellant company (“WP) appeals against two decisions of the Commissioners.  The first matter under appeal is the Commissioners’ decision to assess the Appellant in the sum of £11,715, the assessment being dated 4 January 2007 and being raised to recover input tax which the Commissioners maintain was improperly claimed in VAT period 12/03.  The second disputed decision is the decision to assess the Appellant to a misdeclaration penalty for the same period in the sum of £1,757.

2.           We heard oral evidence from Mr. John Plant, currently the sales director of the Appellant, and on behalf of the Commissioners we were referred to two unchallenged witness statements from Mr. Antony Elliott and Mr. Max Beeken.  Additionally, Mr. Elliott gave oral evidence.  The hearing was adjourned at the conclusion of the oral evidence to allow Mr. Plant to obtain further supporting documentation.  Both the tribunal and Mr. Mansell suggested to Mr. Plant the various sources from which he could obtain the necessary documentation and with the full agreement of Mr. Mansell, Mr. Plant was allowed a six-month period to obtain such evidence.  The Commissioners heard nothing whatsoever from Mr. Plant.  No further documentation was submitted and neither he nor anyone else on behalf of the Appellant appeared at the resumed hearing.

Evidence

3.           Mr. Plant told us that the Appellant company is a small, family owned company.  At the time of the transactions in issue, the directors of the company were Mr. Plant’s wife and son although it was Mr. Plant who effectively ran the business.  The business of the company was to acquire new energy contracts / customers on behalf of energy providers such as Electricity Direct (now Centrica) and Economy Power (“EP”).  Economy Power was to be bought out by Powergen who in turn were later bought out by EON.  The transactions in question were all with EP.  WP ran its own sales force.  Their job was to effect the transfer, on behalf of a customer, of an existing supply contract to a new supplier.  WP’s salesman would make contact with the customer, take the customer through the contract documentation with the new provider; see to the completion of the documentation; process it internally and then send it on to the new provider, who would effect the transfer process.  For each new customer who signed a five year contract, EP would pay WP a commission of £265.  The accounting process for the payment of the commission was by way of self-billing invoices prepared by EP.  The VAT shown thereon would be treated by WP as its output tax, for which it accounted to HMRC.  The invoices would be accompanied by a weekly statement summarising the contracts covered by the invoices and the current state of those contracts.  EP would make payment of the invoices within 21 days of preparation.

4.           It sometimes happened that the new supply for some reason never went live and no effective transfer of supply was made or the customer might not fulfil the entire five year contract.  In each of these cases, a claw-back situation would arise under which EP would seek to recover the commission which had originally been paid over on that contract to WP.  The claw-backs would be shown as a reduction on a self-billed invoice for commissions.  Where the clawback exceeded the amount due as commission, this would in effect be a self-billed credit note.  The tax treatment of the clawbacks would therefore be expected to be reflected as a reduction in output tax due.  A serious clawback situation arose in respect of the dealings of one particular salesman, a Mr. Ocal.  Mr. Ocal was a very successful self employed agent working on behalf of WP, and who would regularly turn in fifty or sixty new contracts per month.  It came to the attention of one of the administrative staff however that a good part of Mr. Ocal’s success was down to the fact that he was duplicating contracts and selling the same customer to two different suppliers.  It also became known that he was not physically seeing the customer but would complete the documentation himself and sign it fraudulently in the “customer’s” name.  There were several hundred of these fraudulently obtained contracts upon which EP had paid WP its commission.  EP therefore sought to recover or claw-back the overpaid commission.  This it did on a drip basis over a period of some eighteen months, the amount of the claw-back for any particular period being shown on the weekly statement provided by EP to WP.  We were told that there had been some sixty or seventy of these statements.  By means of the claw-back EP was therefore effectively recovering the overpaid commission.  WP had already accounted for output tax and was being provided on a regular basis by EP with invoices and statements showing the amounts of the claw-back.  However WP was challenging the right of EP to make the claw-back and lengthy litigation ensued, which WP eventually lost.  However, because WP had never accepted the validity of the claw-back, it had never sought to recover its overpaid tax.  In December 2003, WP’s accountants told WP that they had to make the reclaim in that period or risk losing their entitlement to recovery.  At that time WP still had all the original claw-back statements and working from these original documents the accountants were able to arrive at the total amount of the claw-back and calculate the amount of tax due on it.  They sought to reclaim it in period 12/03 as input tax.  Although Mr. Plant told us that at the time the claim was made, he had all the original paperwork to support it, this was later all handed over to his solicitors to be used in the legal proceedings.

5.           In July 2005, Mr. Beeken carried out a routine Assurance visit at the premises of Watt Power.  During the course of this and subsequent visits, he picked up the claim for input tax and asked for sight of the substantiating purchase invoice.  No documentation in support was available until eventually WP produced to the Commissioners what appeared to be a self billed document issued by EP to WP.  It was headed “invoice” and was dated 12 November 2003.  The invoice purported to be for “claw-backs / credits” in the sum of £66,943 and showed VAT of £11,715.02.  The document bore WP’s VAT registration number and at the foot was displayed the statement “the VAT shown is your output tax due to Customs & Excise”.  As Mr. Beeken was on secondment when this document was received, it fell to Mr. Elliott to consider it.  His first query was as to the provenance of the invoice.  Mr. Plant explained to Mr. Elliott, as indeed he did to us in his oral evidence, that he had approached his solicitors for the original supporting documentation only to find that it had been either lost or archived but was not available.  He then approached a Steve Halsey who had been employed by EP as WP’s account manager and had at all material times been the direct contact between WP and EP.  By this time, Mr. Halsey had been made redundant on the takeover of EP by Powergen but was possibly still serving his notice.  He explained the position to Mr. Halsey, suggested that a consolidation statement showing all the amounts might be acceptable – for which Mr. Halsey said that he had a template and would produce the necessary documents.  He therefore produced the invoice in question accompanied by a single page summary statement and several pages scheduling all the fraudulent contracts.  Mr. Elliott could not accept this paperwork as substantiating the claim for input tax.  Purely on the face of it there were evident differences in the graphics and the font sizing from earlier paperwork from EP.  It was also a contradictory document because far from supporting a claim to input tax deduction it appeared to indicate a potential output tax liability.  Mr. Beeken also later looked at the document and he too was unable to accept it as in his view it also clearly showed an amount due as output tax to the Commissioners and did not display a valid VAT registration number for EP, which had itself deregistered on 1 July 2003, four months before the document was purported to have been issued.

6.           Mr. Plant had tried to secure Mr. Halsey’s attendance before the tribunal so that he could speak to the document and provide the primary source from which the information contained on the documents had been obtained.  However Mr. Halsey, although he agreed to be a witness, requested £600 to do so which Mr. Plant did not consider appropriate.

7.           In the course of the evidence it also came up that although the two companies had used a self billing procedure for many years, there was no Self Billing Agreement in force.  In cross-examination, Mr. Elliott was asked whether or not that would always be a bar on his obtaining the input tax repayment, to which Mr. Elliott had replied that provided he knew the tax had been properly accounted for in the first place and the repayments to EP properly made, the lack of a self billing agreement would not block repayment of the tax.

Conclusions

8.           A trader is entitled to recover the input tax on supplies to him of goods or services provided he holds a valid VAT invoice and regulations laid down by the Commissioners set out the minimum requirements of such a document.  Where a trader cannot for some reason provide to the Commissioners a valid invoice, the Commissioners do have the discretion to accept such other evidence as satisfies them that the supply was made and that the statutory requirements for entitlement have been met.  In this case the accounting procedures are not at all clear.  It would appear from the limited paperwork which we saw that clawbacks were normally dealt with by way of set-off against commissions due, leading to a resulting reduction in output tax.  We were lead to believe by Mr. Plant that output tax had been accounted for on these commissions and when they were therefore clawed back by EP, it would seem that the Appellant had earned an entitlement to a repayment of overpaid output tax.  For some reason the Appellant’s accountants chose to make the claim by way of a claim for input tax but there was no invoice which satisfied the statutory requirements and the status of the documents which we did see were not at all clear.  The Commissioners, over the years, allowed the Appellant abundant time to produce alternative evidence and indeed this continued right the way up to the tribunal hearing when a further six months was allowed for satisfactory evidence to be obtained, and indeed we informed Mr. Plant of the evidence which would be needed.  He either could not or would not produce any further documents and we are left with a totally unsatisfactory state of affairs.  There is no clear audit trail leading up to the claim for the recovery of input tax and indeed there is no evidence that output tax was accounted for in the first place on the commissions now clawed back.  In the absence of a satisfactory invoice or any further supporting evidence, the Commissioners’ decision to refuse the Appellant’s claim was totally reasonable and correct and we therefore reject the appeal against the decision to assess.

9.           We also reject the appeal against the misdeclaration penalty.  We were never addressed on this by Mr. Plant and we have seen and heard nothing which leads us to believe that there was a reasonable excuse or that there should be any degree of mitigation.

10.        Mr. Mansell made an application for costs.  He pointed out the failure of the Appellant to be represented on the second day of the hearing and the failure of the Appellant to produce any further documents despite the plentiful time given to it by firstly the Commissioners and secondly the tribunal.  This, to Mr. Mansell, pointed to a vexatious and frivolous appeal which should be penalised by a costs order.  We do not believe that the Appellant should have to pay full costs.  However, a partial costs order is undoubtedly in order.  Mr. Plant appeared on the first day of the hearing and he conducted the Appellant’s case in a perfectly proper and efficient manner.  The case could have concluded on that first day and indeed would have had there not been the adjournment for the additional evidence.  Had the appeal been concluded on day one, even though the Appellant would not have succeeded given his lack of evidence, there would not have been an order for costs.  We therefore believe that the Appellant should not have to pay the costs of the first day but we do direct that the Appellant should pay all the costs incurred from the conclusion of that first day’s hearing.  Such costs would include the work done by Mr. Mansell and his officers in between the two hearings in chasing up the position over whether or not there had been any compliance with the tribunal’s direction as to production of documents and of course the full costs of the second day.  It is hoped that the amount of the costs can be agreed but if not then it should be referred to a tribunal judge sitting alone.

11.        In summary therefore, we dismiss the appeal against the assessment.  We dismiss the appeal against the misdeclaration penalty.  We direct that the Appellant should pay the Commissioners’ costs incurred from the conclusion of the first day’s hearing.

MAN/2007/0018

LADY MITTING

JUDGE
Release Date: 16 October 2009