[2010] UKFTT 91 (TC)

TC00402

VAT – INPUT TAX – claim for deduction of VAT in respect of invoice – whether goods and services supplied were for the purposes of a business – VAT Act 1994 Section 24(1) – Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX

                                             1 -4 - ALL LIMITED                            Appellant

                                                                      - and -

                                    HER MAJESTY’S REVENUE and CUSTOMS Respondents

Tribunal:        JOHN N. DENT        (Judge)

PHILIP JOLLY         (Member)        

Sitting in public in Manchester on 11 January 2010

No appearance by or for the Appellant

Mr Jonathan Cannan of counsel, instructed by the General Counsel and Solicitor to HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

The appeal

1.     The Appellant was appealing against the Respondents’ decision dated 22 February 2008 refusing to repay input tax claimed on the Appellant’s tax return for the period 09/2007.

2.     The Appellant’s Notice of Appeal was dated 23 July 2008.

3.     The Appellant’s grounds of appeal were as follows:

HMRC have come to an erroneous decision that I have undertaken a contrived transaction. I have provided all necessary supporting evidence and clarification for all their requests. HMRC have been most uncooperative throughout forcing me appeal - further information will be requested which has not been provided to date – costs are sought against HMRC due to unreasonable behaviour

4.     The Appellant had been notified of the hearing. On the morning of the hearing the Director of the Appellant, Mr Ali Rashid telephoned to say that he would not be attending. He sent an email to confirm that he had been feeling the symptoms of flu/fever. He apologised for not attending, and stated that he did not mind if the case proceeded in his absence.

5.     The Tribunal decided to proceed to hear the appeal

The facts

6.     On or around 17 April 2006 1-4-ALL Limited ("the Appellant"), now of 60 Madeley Street, Derby DE23 8EY, applied to register for VAT, declaring its business activities to be "wholesalers of confectionery, drinks and toys to retailers". The Appellant had been incorporated as a private limited company on 3 February 2006 as a wholesaler
of alcoholic and other drinks.

7.     The signatory to the Appellant's application for registration was Mohammed Ali
Rashid ("Mr Rashid''), a director of the Appellant company. Mr Rashid had been the
company secretary of Spin Enterprises Ltd, formerly registered for VAT under
number 746 0089 32. That company was dissolved on 12 March 2002   and
compulsorily deregistered as a missing trader in April 2002.

8.     The Appellant was registered for VAT under number 890 6344 05 with effect from 11 October 2006.

9.     In February 2007 the Appellant submitted its first return for period 12/06, claiming a net repayment of £4,357.29. An officer of the Respondents, Mr Anthony Illidge, visited the Appellant to verify the repayment claim. The Appellant had charged and accounted for VAT on all of its sales since incorporation and was allowed to backdate its effective date of registration for VAT. The repayment was then allowed.

10.  The Appellant submitted repayment returns of £7,353.75 and £785 for periods 03/07
and 06/07, which were paid by the Respondents without prior verification. In October
2007   the   Appellant   submitted   its   return, for tax   period   09/07_;   reclaiming   net
repayment of £13,346.55. The Respondents required verification of this claim before
repayment.

11.  Mr Illidge visited the Appellant on 9 November 2007 and 15 January 2008.
On the first occasion Mr Rashid explained that most of the Appellant's records had
been lost in the theft of a vehicle, which had been reported to the Police.   The only
records made available were contracts which were to be used for a nursery agency
business, through which the Appellant would link parents of nursery age children to
suitable nurseries.  Mr Rashid stated that £13,125 of the Appellant's claim on its 09/07 return related to an alleged supply of a childcare licence by a company called Yaadain Limited (“Yaadain”) for the sum of £75,000. In the absence of other records, the Appellant was unable to offer any explanation for the balance of the claim.

12.  Mr Rashid told Mr Illidge that he had met a representative of Yaadain through a friend in a restaurant. Their discussion had turned to the profitability of childcare agencies. Following further meetings, the Appellant had entered into an agreement with Yaadain for the purchase of the childcare licence. Mr Rashid had not sought professional advice, either legal or accountancy, before committing the Appellant to the purchase.

13.  In   reply   to   a   written   request for  urther  information,   the  Appellant  sent  the
Respondents copies of purchase invoices, one of which related to an earlier period
(03/07) and was irrelevant.

14.  The Respondents made further enquiries about Yaadain, ascertaining that it had
been incorporated as a private limited company on 2 March 2005, declaring its
business as (i) Wholesale of textiles, (ii) Wholesale of clothing and footwear and (iii)
Other business activities. There was no indication of any intention to make supplies of childcare or nursery licensing or franchising. The Respondents produced evidence to the Tribunal that the same legal person, James Hammond Ltd, was recorded as company secretary of' both the Appellant and Yaadain, but not of any other entity.

15.  After due consideration of all the evidence then available, the Respondents concluded that the input tax reclaimed by the Appellant in period 09/07 could not be allowed:

a.      The invoice purportedly from Yaadain was invalid, in that it failed to show a VAT number.

b.     Save for the licence agreement and other documentation produced by the Appellant, there was no evidence that either the Appellant or Yaadain were engaged in business activities to which the agreement apparently related.

c.      Mr Rashid had submitted the disputed return on the basis that the Appellant's outputs
were exempt supplies of childcare. However, the Appellant was not registered with a
regulatory body and his purported supplies of childcare could not qualify for exemption in any event. The Respondents accordingly recalculated the Appellant's
liability to output tax in periods 03/07 (£431.32) and 09/07 (£460.21).

16.  On 22 February 2008 the Respondents issued the disputed decision to reduce input
tax on the Appellant's 09/07 return to nil and increase output tax to £891.53. This
was amended in October 2008, to reflect an increase of output tax in period 03/07 by
£431 and an equivalent reduction in period 09/07.

17.  On 3 March 2008 officers from the Nottingham MTIC team visited the Appellant.

18.  Mr Rashid informed them that Yaadain had supplied an education pack and that
although the invoice total was £88,125, he had paid only £5,000 to date. A further
£8,500 was due shortly according to the terms of a 5-year payment plan. Mr Rashid
told the officer that he had made no checks on Yaadain, other than his confidence in the personal integrity of his contact 'Naim'. Mr Rashid ran a small playgroup from home, without regulatory licence.

19.  On 7 March 2008 Mr Illidge wrote again to Mr Rashid, (i) explaining why the invoice from Yaadain was invalid, (ii) asking whether he proposed to pay the instalment of £15.000 due under the terms of the agreement on 3 September 2007 and (iii) setting out his doubts about whether the Appellant's activities complied with the criteria which identify business activity for VAT purposes.

20.  On 3 April 2008 Mr Rashid sent the Respondents a further copy of the Yaadain invoice, under fax cover. This copy showed Yaadain's name, address and VAT registration number.

21.  On 29 April 2008 the Respondents wrote to Mr Rashid conceding that the details shown on the copy Yaadain invoice complied with requirements, but reiterating doubts about compliance with the business test and asking about follow up letters to prospective crèches

22.  On 25 July 2008 the Respondents wrote to the Appellant upholding the decision to
disallow input tax, on the basis that the purported invoice from Yaadain related to a
contrived transaction with various non-commercial features.

23.  The Appellant has informed the Respondents that it had lost its copy of the Yaadain
contract and was unable to obtain a further copy, notwithstanding the ongoing
obligation to make payments.

24.  The Appellant did not attend the appeal, so no further information was available to the Tribunal to explain the background to the agreement with Yaadain, the benefit to the Appellant of the contract into which he had entered, how he was proposing to fund the repayments under the contract or, indeed, what benefit he derived from the agreement.

The issues in dispute

25.  The issue for determination by the Tribunal was whether the transaction to which the invoice related was genuine, or whether the agreement with Yaadain was contrived.

The law

26.  European law and the Value Added Tax Act 1994 provide that the VAT paid by a registered trader on a supply of goods or services may be recovered as input tax provided the goods or services forming the subject matter of the transaction have been delivered or performed, and he holds a valid invoice, or its equivalent, in respect of the deduction claimed at the time of making the claim. The Court of Justice of the European Communities has held  that “… the invoice must state clearly the price exclusive of tax and the corresponding tax at each rate as well as any exemptions … and the Member States are to determine the criteria for considering whether a document serves as an invoice …”: see Joined Cases 123/87 and 330/87 Léa Jorion, née Jeunehomme, and Société anonyme d’étude et de gestion immobiliére ‘EBGI’ v Belgian State [1988] ECR 4517.  Further, it is settled law that the mere fact that a

trader holds documents in respect of purchases purporting to be VAT invoices does not, of itself, give any right to deduction or refund where no underlying supply has taken place: see Case 342/87 Genius Holding BV v Staatssecretaris van Financien [1991] STC 239 at 250 and Customs and Excise Commissioners v Pennystar Ltd  [1996] STC 163 at 165f.

27.  In Mr Cannan’s submission the Appellant has not provided adequate evidence to establish either:

(1)  that the claimed supply by Yaadain took place; or

(2)  if it did, which is not accepted, that it related to any business activity carried on by the Appellant

The evidence

28.  Mr Illidge was at the hearing and produced the bundle of documents.

Reasons for Our Decision

29.            In the view of the Tribunal the catalogue of documents produced by the Appellant, and stated by him to be “vital information”, and for which he had paid £75,000 plus VAT was nothing more than a collection of word processed documentation which might be of use to a provider of child care. There were no contracts, no franchise agreement, no name of goodwill. Indeed, there was nothing to support the contention that this was vital information worth the money paid by the Appellant. It appeared to the Tribunal that the refund of VAT anticipated by the Appellant was vital to the continued funding of the payments due to Yaadain. Despite requests by the Respondents, the Appellant had failed to produce bank statements to support his contention that he was running a business. There were in the view of the Tribunal clear reasons to doubt the genuineness of the transactions said to be the subject of invoice. The Appellant got nothing of real value.  Mr Cannan contended that there was nothing to show how the Appellant had satisfied itself that it was a viable and profitable business, nor how the Appellant would provide finance during the course of setting up the business. The Transaction was, in Mr Cannan’s submission so superficial that the Tribunal could not be satisfied that it was a business opportunity, or that a supply had taken place. In his submission there was no evidence of the use of the forms or of finding parents willing to enter into agreements, nor was there any evidence of support from Yaadain in setting up the business. Or that the Appellant was getting anything of value. It was for the Appellant to satisfy the Tribunal that the supply took place, and, on the evidence, Mr Cannan submitted that it did not do so.

Decision

30.  It is for the Appellant to satisfy us on the balance of probabilities, ie that it was more likely than not, that the supply on which the Appellant bases its input tax claim took place. On the evidence it has failed to do so.  Consequently, the fact that it holds what the Appellant submits is a valid VAT invoice avails it nothing. We adopt Mr Cannan’s submissions in their entirety, and dismiss the appeal.

31.  We make no order for costs. The Appellant had not come to the Appeal, but he had contacted the Tribunal to state that he was prevented from doing so by illness. In his email, he had stated that he did not mind if the case proceeded in his absence. In those circumstances it would, in the view of the Tribunal be unfair upon the Appellant to make an order for costs against the Appellant

JOHN N. DENT

JUDGE

              RELEASE DATE: 23 February 2010