First-tier Tribunal (Tax)

[2010] UKFTT 38 (TC)

TC00352

VAT – input tax – claim for deduction where Commissioners accept supply was made and paid for but supplier not registered and using a hijacked VAT number – the Commissioners’ discretion – was it reasonably exercised – yes – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                                           HURSTBOURNE PROPERTIES LTD                         Appellant

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Lady Mitting (Judge)

                        Susan Stott (Member)

Sitting in public in Manchester on 17 November 2009

Mr. Martin Chong for the Appellant

Bernard Haley, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1. The Appellant appeals against an assessment to tax dated 18 May 2007 in the sum of £29,108.  The assessment was raised to recover input tax in that sum already credited to the Appellant in the quarterly period 01/07.

2. We heard oral evidence on behalf of the Appellant from Mrs. Julie Williams, a director, and from her daughter Miss Siobhan Williams.  The assessing officer Mr. Steven Lloyd Owens gave evidence for the Commissioners.

Legislation

3. “VATA 1994 s 26.  Input tax allowable under section 25.

(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below

(2) The supplies within this subsection are the following supplies made or to be made by taxable person in the course or furtherance of his business –

a) Taxable supplies;”

4. The regulations referred to above are contained in the Value Added Tax Regulations 1995 (SI 1995/2518).

         “Regulation 13 Obligation to provide a VAT invoice.

(1) Save as otherwise provided in these Regulations, where a registered person –

a) Makes a taxable supply in the United Kingdom to a taxable person, -- he shall provide such persons as are mentioned above with a VAT invoice--- ”

“Regulation 14.  Contents of VAT invoice.

(1) Subject to paragraph (2) below and regulation 16 (and save as the Commissioners may otherwise allow), a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars -

d) the name, address and registration number of the supplier

“Regulation 29.  Claims for input tax.

(1) Subject to paragraphs (1A) and (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

(2)  At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –

                     a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;”.

The facts

5. The essential facts were not in dispute and we find to be as follows.  Hurstbourne Properties Limited (“Hurstbourne”) was registered with effect from 24 November 2005 and carries on the business on renting out commercial property.  On the company premises there was a spare piece of land upon which Hurstbourne decided to build a standalone industrial unit.  The idea was to erect the unit and sell it on as soon as possible but pending sale to let it out.  Mrs. Williams obtained a set of architect-drawn plans for an insulated factory unit of some 5,000 square feet.  An application for planning permission was submitted to the local authority, following which Mrs. Williams obtained a number of cold calls from builders offering to carry out the building work for her.  Funds were tight and it was Mrs. Williams’ intention that the building works should be carried out over a long time period to avoid pressure on cashflow.  Once planning permission had been granted, the steel frame was erected and at that stage one of the cold calls received by Mrs. Williams was from a Dave Turner, who purported to be a director of Copthorne Development Ltd.  He had a customised van with Copthorne Development written on the side and presented Mrs. Williams with a folder of photographs of completed work and letters from satisfied customers.  He told Mrs. Williams that the company was VAT registered and therefore VAT would be charged and he gave her a verbal quote.  Initially, to test the quality of the company’s work, she asked him to do a very small job.  She was satisfied with the quality of this and awarded him the remainder of the contract.  Work took place from 1 June 2005 until January 2007.  The work was in the main carried out by Mr. Turner and a Mr. John Thomas and varying additional labourers at additional times.  Mrs. Williams had at this stage received no documentation from Copthorne and all negotiation was done verbally.  Throughout the 21 months of works, Mr. Turner would regularly (almost weekly) ask for an interim payment to cover wages, materials and work done since the previous request.  Mr. Turner at all times wished to be paid in cash and whatever sum he asked for, Mrs. Williams would visit the bank with a cheque made out to cash, draw the cash and make the payment to Mr. Turner or Mr. Thomas.  Mrs. Williams did ask for interim invoices but none were ever forthcoming and Mrs. Williams would therefore ask Mr. Thomas or Mr. Turner to sign a hand-written receipt which Mrs. Williams would have drawn up.  The payments were in the main for round sums but not invariably and there were several which ended in an irregular number of pence.

6. Throughout the period during which the building work was being carried out, Mrs. Williams’ father was seriously ill and as she had to make frequent visits to see him, she was not always on hand when payment was needed.  When she was not available, Mr. Turner would make his requests for payment to Miss Siobhan Williams.  Miss Williams and her brother were directors of a company called JW Plastics Ltd and she adopted a similar practice to that of her mother when payment was requested and make one of her own company cheques out for cash, draw the cash and make the payment to Mr. Turner or Mr. Thomas.  Unlike her mother, because Miss Williams believed that the cheques were sufficient proof of payment, she did not obtain a signed receipt.  The total payments made by Mrs. Williams out of Hurstbourne’s bank account was £78,933.07.  Miss Williams, out of the JW Plastics Ltd account, made payments totalling £75,036.11.

7. Mrs. Williams eventually and towards the completion of the building pressed Mr. Turner for a final invoice, which he eventually gave her.  This is the only written document which Mrs. Williams ever received.  The invoice is in the name of Copthorne Development Ltd of 5 Bibbys Lane, Bootle.  It is dated 2 January 2007, is in the sum of £122,850 plus VAT of £21,498.  Attached to the invoice is a single sheet giving an itemised breakdown of the work done and the specific sums attached to each element.  The invoice contains a VAT number.  Having received the invoice, Hurstbourne reclaimed the input tax in the quarter 01/07.

8. The Commissioners decided to verify the repayment claim and it fell to Mr. Owens to carry out the verification.  Mr. Owens established at the outset that the VAT registration number was a valid number but did not relate to Copthorne Development Ltd but to a Chinese takeaway business.  He also established that the company was not registered at Companies House.  Mr. Owens visited Mrs. Williams who told him that she had had no written communication with the company; everything had been done verbally and the only document she had was the invoice.  She described the payments which she had made and let Mr. Owens have copies of all the receipts which she had had Mr. Turner sign.  The visit note makes clear that Mr. Owens advised Mrs. Williams that the VAT registration number did not relate to Copthorne and that the company had no right to deduct the input tax on the invoice as it stood.  He asked if Hurstbourne could obtain a replacement purchase invoice in the hope that that would be valid, thus enabling the input tax to be deducted.  Mr. Owens also visited 5 Bibbys Lane but he found it shuttered and locked.  Enquiries of neighbours revealed that they had never heard of Copthorne and that the premises were in fact occupied by a Chinese food wholesaler.

9. Mrs. Williams was unable to provide Mr. Owens with any other documentation to show payment and he therefore took the view that repayment had to be denied.  He wrote to Hurstbourne on 18 April 2007 advising that the purchase invoice upon which the company sought to rely was invalid for the purposes of input tax deductibility as the registration number shown did not relate to Copthorne.  He went on to say that he had given the company an opportunity to obtain a replacement invoice but they had not been able to do so.  In his oral evidence, Mr. Owens also added that he at that stage had no knowledge that some of the payments to Copthorne had been made by Miss Williams out of the JW Plastics account.  Believing that the payments made by Mrs. Williams were the only payments made, he also thought that payment in full had not been made.

10. Having formed the view that Hurstbourne was not entitled to reclaim its input tax on the invoice, Mr. Owens raised an assessment against which the Appellant sought a review, which fell to Mrs. H J Thomas to carry out.  Mrs. Thomas wrote to Mr. Chong on 5 October 2007 confirming that an invalid invoice was one which did not meet the full requirements - which in this case the invoice clearly did not - but confirming that the Commissioners did have the discretion to allow alternative evidence.  She went on to ask a number of questions.  She asked whether there was alternative documentary evidence beyond the invoice and if so could she have a copy?  She asked for evidence of payment in full.  She asked how the initial contact had been made and what, if any, steps Hurstbourne had taken to check the bona fides of the company.  Correspondence between Mrs. Thomas and Mr. Chong continued with Mr. Chong providing all the information sought including a full schedule of all payments made by both Mrs. Williams from Hurstbourne and Miss Williams from JW Plastics.  To evidence payment, Mrs. Thomas asked for copies of five cheques which she selected from each of the two companies.  These were all provided.  By letter dated 13 March 2008, Mrs. Thomas upheld Mr. Owen’s decision and maintained the assessment.  Her reasoning was that the cheques did not confirm that the monies were actually destined for Copthorne; it was not usual that construction stage payments would be made with pence rather than round amounts; there was no contract with Copthorne to provide the periodic stage payments and finally that although the Commissioners accepted the building was erected for business purposes, they did not accept that Hurstbourne had made proper commercial checks into Copthorne.

The Appellant’s submissions

11. Mr. Chong relied on paragraph 8.12 of the Commissioners’ internal guidance booklet V-13.  This section reads as follows:

            “8.12 The basic right to deduct principles

In principle, taxable persons have a right to deduct VAT incurred on goods or services that form a cost component of their taxable supplies.  A business will only have incurred input tax if all the following conditions are met:

· there has actually been a supply of goods or services;

· the supply took place in the UK;

· the supply was taxable at a positive rate;

· the supplier was taxable person at the time of the supply i.e. someone who was registered, or who was required to be registered, for VAT;

· the supply was made to the person claiming the deduction;

· the recipient was a taxable person at the time the tax was incurred or the tax was eligible for relief under Regulation 111;

· the recipient intends to use the goods or services for the purposes of his business.

It follows that input tax may be allowed only where the above conditions are met, whether or not proper evidence is held.”

It was Mr. Chong’s contention that each single bullet point had been met and therefore the Commissioners were bound to allow Hurstbourne to recover its input tax.  He stressed the full cooperation given to the Commissioners by Mrs. Williams and the fact that she had been struggling to look after her father at the same time as the building works were being carried out.

The Commissioners’ submissions

12. Mr. Haley accepted before the tribunal that the building work had taken place; that the work had been carried out by the company calling itself Copthorne Development Ltd and that the Appellant had paid the total invoiced sum.  It was Mr. Haley’s contention that in the absence of a valid invoice, there was no automatic right to recovery of input tax but the Commissioners did have a discretion to accept alternative evidence.  It was accepted by Mr. Haley, as indeed it was by Mr. Chong, that at some stage during the process of the building works, Copthorne would have become registerable, based on the income from Hurstbourne alone.  We were referred by Mr. Haley to the tribunal decision of Massood Ahmed t/a new Touch (200119).

Conclusions

13. The case was put to the tribunal by both parties on the basis that the invoice was invalid because of its incorrect VAT number but that the Commissioners did have a discretion to allow alternative evidence.  It was accepted that the exercise of the discretion was a continuing process involving the decisions of both Mr. Owens and Mrs. Thomas.  The powers of the tribunal in considering the exercise of a discretion are supervisory only.  We cannot substitute our own opinion for that of the Commissioners but are limited to considering whether or not the Commissioners acted reasonably in their exercise of the discretion.  Unless we find that they acted in a way which no reasonable body of Commissioners could have acted, the assessment has to be upheld and the appeal dismissed.

14. We understood Mr. Chong’s primary contention to be that Hurstbourne was entitled as of right to the deduction of input tax based on his interpretation of paragraph 8.12 of the Guidance Note.  We do not read that paragraph in the same way.  The paragraph lists a number of minimum conditions which have to be met before input tax can be incurred.  The paragraph does not go on to say that once these conditions are met, the business is entitled to automatic repayment regardless of whether or not proper evidence is held.  The primary thrust of this paragraph, in our view, is to say that in addition to proper evidence being held, those conditions have to be met.  Even then the paragraph uses the word may.  It does not say will.  This paragraph reinforces the discretion which the Commissioners have.  This is also the thrust of the tribunal decision in Massood Ahmed, with which we respectfully agree.  Adopting the reasoning of that tribunal, the mere fact that the Commissioners accept the supply was made and paid for does not give Hurstbourne the automatic entitlement to repayment.  Entitlement to repayment is dependant upon the evidence put before the Commissioners and in the absence of a valid invoice, it falls back to the discretion of the Commissioners to accept alternative evidence.

15. Dealing therefore with the exercise of their discretion, we look at the decision of Mr. Owens and the later review decision of Mrs. Thomas.  Mr. Owens had really gone as far as he could in his enquiries.  He was aware that the VAT registration number quoted did not belong to Copthorne.  He knew the company was not registered at Companies House and he also knew that it did not trade from the address given on the invoice.  He sought alternative evidence but Mrs. Williams was unable to provide any.  Additionally, Mr. Owens was not aware of the payments made to Copthorne by Miss Williams and he, for good reason, believed that only partial payment had been made.  The decision which he took to disallow the input tax cannot be faulted.

16. When Mrs. Thomas came to review Mr. Owens’ decision, she picked up his reasoning and again requested sight of any alternative documentary evidence which Hurstbourne might hold and also asked for evidence of total payment.  There is a clear inconsistency between the view of payment which Mrs. Thomas took and that which Mr. Haley took before the tribunal.  On precisely the same evidence, Mrs. Thomas did not accept that payment had been made whereas Mr. Haley did.  This alone is not fatal to Mrs. Thomas’ decision provided the view that she took at the time was reasonable and we hold that it was.  She distinguished between the payment made by Hurstbourne which had been evidenced by the receipts provided by Mrs. Williams and those made by JW Plastics where there were no such receipts.  This approach cannot be seen as unreasonable.  Her reference to the HMRC brief 36/07 is unfortunate and is quite clearly incorrect for two reasons: first it is not on point and secondly it was not in existence at the time these arrangements were entered into.  Again, however, we do not believe that this flaw invalidates her decision or renders it, in the wider context, unreasonable.  She and Mr. Owens had both sought supporting documentary evidence and absolutely none was forthcoming.  That view is entirely reasonable and is certainly not one which no reasonable body of Commissioners could have reached.  For these reasons we uphold the Commissioners’ decision to assess.

17. Two further points should be made.  First, the company search which Mr. Owens carried out came back showing an entry for a company called Copthorne Developments Ltd.  It was Mr. Chong’s initial contention that that search proved the existence of Copthorne.  We understand however that he had not appreciated the different spelling of Development and Developments and we hold that this company search does not relate to Copthorne Development Ltd and has no relevance to the present case.  Secondly we should say that we do have sympathy for Mrs. Williams.  It was clearly most unwise, and was indeed asking for trouble, to deal with Copthorne without any form of written documentation in place.  This would cover an initial written contract and just as importantly interim invoices for the stage payments.  We are certain that Mrs. Williams would not have acted so unwisely had she not been distracted from business affairs by the illness of her father.  This can change nothing but may give some explanation as to how the situation arose.

18. For all the reasons which we have previously given, we dismiss the appeal.  Mr Haley made no application for costs and no order is made.

MAN/2008/0405

LADY MITTING

JUDGE
Release Date: 19 January 2010