First-tier Tribunal (Tax)

[2010] UKFTT 119 (TC)

TC00430

VAT – output tax – inadvertent overpayment by the Appellant recouped by offset in later return – assessment by the Commissioners to cancel the set-off – did Appellant follow correct procedure – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

                            STARGLAZE WINDOWS & CONSERVATORIES LTD         Appellant

- and -

THE COMMISSIONERS FOR

                                      HER MAJESTY’S REVENUE AND CUSTOMS         Respondents

Tribunal:        Lady Mitting (Judge)

                        Nicholas Dee (Member)

Sitting in public in Birmingham on 10 February 2010

Laura Poots, counsel, for the Appellant

Nigel Bird, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.           The Appellant appeals against part of an assessment to VAT dated 8 December 2004 and in the sum of £15,440.  An element of the original assessment was conceded for reasons which are explained below and the sum in dispute stood at £9,815.38.

2.           The Commissioners called no oral evidence.  On behalf of the Appellant oral evidence was given by Mr. Malcolm John Cashmore, a chartered accountant by profession, a shareholder in the Appellant company and also a non-executive director with responsibility for the company’s finances and accounting.  Neither he nor his firm acted as the company accountants.

The background to the raising of the assessment

3.           The Appellant carries on business as a manufacturer of UPVC windows and doors which it supplies to retailers and wholesalers.  In the course of its business, the Appellant, at its own cost, installs sample windows and doors into the showrooms of its customers.  These are promotional items provided in the form of a sales display.  At all materials times, the customer would enter into an agreement with the Appellant under which the promotional items were provided free of charge to the customer, who would be allowed to continue to use them without payment for as long as he was not in breach of his wider agreement with the Appellant.  In effect, we understand, this meant for as long as the Appellant was sole supplier to the customer.  The agreement expressly stipulated that the promotional items remained the property of the Appellant but if the customer defaulted in the wider agreement, the customer would have to pay the Appellant for the cost of the promotional items and at that stage property in the goods would pass to the customer.  On signing the agreement, the Appellant would invoice the customer for the full amount of the promotional items, including a charge for the VAT.  The agreement however made clear that, unless in default, the customer was not expected to pay the invoice and as far as the Appellant was concerned the invoices were recorded in a separate “promotional account” which was created for each customer.

4.           The Appellant accounted to the Commissioners for the VAT shown on the invoices.  At the end of 2003 however the Appellant decided that this treatment of the promotional items was incorrect for both accountancy and VAT purposes.  The customer did not owe the Appellant the amount shown on the invoice and as title to the goods remained at all times with the Appellant, there was no supply and VAT was not therefore due either.  The incorrect procedure was spotted by Mr. Cashmore when he carried out a routine pre-year-end review of the accounting systems.  He noticed that a provision had been set against the sales ledger, which he was told were “Z accounts”.  This was a separate area on the sale ledger where all the promotions were recorded.  As Mr. Cashmore told us, the effect of the invoicing had been to overstate the debtors.  There had been no supply so there was in fact no debt and the invoices should not therefore be there.  He instructed the accounting staff that the ledgers should be corrected and the debtors restated onto what was a collectible basis.

5.           The Appellant sought to correct the VAT position during the period 12/03.  Internal adjustments were made by crediting each individual promotional account with an amount equal to the amount owed.  This adjustment recognised that there was therefore no payment due from the customer to the Appellant and accordingly no VAT due either.  This exercise was reflected in adjustment to the 12/03 return.  On the VAT summary which we were told accompanied the return, the adjustment was explained as “year end provision for promotional debtors” and the total amount was deducted from declared outputs.  In effect therefore the Appellant offset the total amount of output tax which it considered it had incorrectly paid on the invoices against the output tax due for the period 12/03.  The tribunal was shown a schedule headed “promotional accounts December 2003 – VAT adjustments”.  This schedule listed all the promotional accounts and the totals, more or less, tallied with the adjustments shown in the VAT return.  They differed by a few pence.  The provenance of this schedule was far from clear.  It was clearly a computer-generated internal accounting document.  Mr. Cashmore told us it “would have” been generated by the accounts department in December 2003.  Mr. Cashmore had no part in its preparation but said that he “would have” and later on “must have” seen it when he carried out a further review in January 2004.  Mr. Cashmore told the tribunal that it would have been attached to the VAT return.  He had no part in the preparation of the return or in its submission.  It was the Commissioners’ contention that the schedule had never been produced to them and indeed the review officer had never seen it until it was produced on the day of the hearing.

6.           Having made the internal accounting adjustments and recouped its overpaid VAT by way of set-off, the Appellant had by December 2003, to its own satisfaction, corrected its previous error.  There matters lay until 18 October 2004 when a routine VAT inspection was carried out by Mr. David Barraclough.  Mr. Barraclough noted the adjustment to the declared output tax in period 12/03 and queried it with Mr. Richard Cripps, the Appellant’s director.  Mr. Cripps explained the background to the adjustment and that the Appellant had decided that since the goods were no longer of commercial value they would write down the value as a reduction in sales.  It was Mr. Barraclough’s view that there had been a supply for VAT purposes and that as the invoices had been issued for the transactions then credit notes would have to be raised and issued to the customers, without which the adjustment was incorrectly made.  Credit notes were not raised and the assessment under appeal was raised.  The decision went through the review system, Mr. Barraclough’s assessment being upheld at all stages.  It was, during the review process, accepted that on the facts there had been no transfer of title and no supply but the Respondents’ view remained that the correct way to deal with the adjustment would have been to issue credit notes and make a voluntary disclosure.  This was not done and the assessment remained in place.

7.           Before the tribunal, it was accepted by both parties that there had been no supply and VAT had not therefore been payable and on the face of it, provided the correct procedure was followed, should be repaid to the Appellant.  The Appellant accepted that through the capping provisions, part of the assessment had to be conceded, which explains the reduction in amount on appeal.

Arguments

8.           Throughout the correspondence and negotiation between Mr. Cashmore and the Commissioners, it had been Mr. Cashmore’s case that the invoices had been issued in error; there was no intention to pass title; there was therefore no supply and there was therefore no VAT due.  By the time the case came before the tribunal the case was put slightly differently.

9.           Before the tribunal, various methods were identified by which a taxpayer could make a reclaim for output tax which he had believed he had overpaid.  The correct method to adopt would depend upon the circumstances – including for example the amount involved and the reason for the overpayment.  Miss Poots relied upon two methods, the first being very much her major submission and the second in the alternative.  It was Miss Poots’ primary contention that the Appellant had acted within regulation 38 Value Added Tax Regulations 1995 which permits an adjustment to a VAT return where there has been a decrease in the consideration for a supply.  Miss Poots submitted that the invoices had been issued in advance for future supplies which the Appellant now realised may never take place and by this mechanism it was effectively reducing the consideration to nil.  Regulation 24 provides that an increase or decrease in consideration has to be “evidenced by a credit or debit note or any other document having the same effect”.  There were no credit notes here but it was Miss Poots’ submission that the schedule constituted “any other document having the same effect” as a credit note.  Miss Poots submitted that a credit note can be issued to cancel the consideration invoiced for a supply that has not taken place (tribunal decision Securicor Granley Systems 4575).  Obviously accepting that in this case there was no credit note and therefore nothing had been issued to the customer, Miss Poots relied on the High Court decision of Customs and Excise Commissioners v General Motors Acceptance Corporation (UK) PLC 2004 STC 577.  In that case Field J. held there was no need for documents to be issued to the customer where that customer was not entitled to input tax relief on the original invoice.  There had to be:

“A document that comes into being at or after the time of the decrease in consideration and which by some means records the acceptance by both parties that the event triggering the decrease has occurred.  Moreover that document on its own or with others must disclose the reduced price…”

Miss Poots maintained that there need in fact not be a “triggering” event.  There could just be a general state of affairs known to both supplier and customer.  Alternatively if a triggering event was needed the trigger in this case would have been the Appellant’s recognition that the invoice should never have been issued.

10.        Miss Poots’ secondary and alternative submission was that an effective voluntary disclosure had been made pursuant to section 80 VAT Act 1994 and the provisions set out in the Commissioners’ Public Notice 700/45 which has the force of law.  Paragraph 4.3 requires a written claim to be made setting out how the error arose; the VAT period in which it occurred; whether it was an input or an output tax error; the amount under-declared or over-declared; how that under or over-declaration was calculated and the total amount to be adjusted.  Miss Poots accepted that this voluntary declaration had not been done in a formal manner but contended that Mr. Cashmore’s letter to the Commissioners dated 23 November 2004 constituted the written claim.  This letter reads as follows:

“I refer to our telephone conversation this morning regarding your letter to Starglaze dated 22 November 2004.  Please accept this letter as our request for local reconsideration in respect of point 1; on the grounds that the property and title in the goods remains at all times with Stern Fenster (now Starglaze).  Any invoices issued which may purport to be tax invoices were issued in error.

A prerequisite to incurring a VAT output tax liability is a “taxable supply”, which requires, in this case, the transfer of legal title, which is, I trust you agree, absent.”

11.        It was Miss Poots’ further submission that although this letter did not give the Commissioners the information set out in paragraph 4.3, the Commissioners had, albeit on a piecemeal basis, been provided with this information both by correspondence and during the course of Mr. Barraclough’s visit.  Miss Poots accepted that if this argument was accepted then the voluntary declaration would not have been made until 23 November 2004, the date of the letter, and therefore earlier periods might well fall foul of the capping provisions.

12.        It was Mr. Bird’s contention that regulation 38 was not applicable to this case and that in any event the requirements of regulations 38 and 24 had not been satisfied.  Further no effective voluntary declaration had been made.  In effect what the Appellant had done was to quite simply take the overpayment out of its VAT liability for 12/03.  The Appellant had carried out an internal accounting exercise with communication with neither the Commissioners nor its customers.

Conclusions

13.        We do not accept Miss Poots’ contention that regulation 38 is applicable here or indeed that its provisions have been satisfied.  Miss Poots relied on Securicor for authority that a credit note can be issued when no supply has taken place.  Judge Medd in the judgment stated that the credit note may “be evidence that the supplier of the goods or services no longer requires to be paid for the goods or services referred to in the tax invoice, and it may, if it gives credit for the amount of tax included in the tax invoice be evidence that the supplier no longer considers the recipient of the goods or services liable to pay him the VAT because he, himself, is no longer liable to account for it to the Customs and Excise”.  The phrasing here presupposes, as was the case in Securicor, that there had been a validly issued invoice in the first place.  The supplier is referred to as “no longer” requiring to be paid for the goods or that he is “no longer” liable for the VAT.  In this case, as Mr. Cashmore argued throughout, there never was a supply.  The invoices should never have been issued.  They were incorrectly issued.  It was not a case of their having been valid at the time but circumstances changing.  There was no supply because there was never any consideration.  There cannot therefore be any reduction in the consideration.  Further, regulation 24 quite clearly requires the decrease in consideration to be evidenced by either a credit note or some other document having the same effect.  The schedule does not, in our view, serve the same purpose as a credit note would have done.  Field J., recognising that there was no need to issue the document to the customer, still thought it vital that the document “by some means records the acceptance by both parties that the event triggering the decrease has occurred”.  This must imply that both parties are involved in the raising of the document and are aware of the reason for it (the event) and what the document purports to do.  Here there was no communication by the Appellant with its customers.  The customers had no idea what the Appellant was intending to do.  There has to be some form of communication with the customer for what was being done to be accepted by both parties.  The schedule is nothing more than an internal accounting document and does not fall into the definition of “any other document having the same effect as” a credit note.

14.        Turning to the alternative argument of Miss Poots that an effective voluntary declaration had been made, we do not accept that it had.  We accept Mr. Bird’s contention that under paragraph 4.3 of the Public Notice, a written claim setting out certain required information has to be put in.  We don’t believe that Mr. Cashmore’s letter of 23 November 2004 comes anywhere near making a voluntary declaration.  The officer receiving that letter would have no idea that that was Mr. Cashmore’s intention.  It is also not sufficient for a taxpayer to argue that the Commissioners had all the information set out in paragraph 4.3 by some other means if only they had looked for it.  Paragraph 4.3 gives the taxpayer quite straightforward and simple instructions as to how a claim should be made.  It sets out the mechanism for making the claim.  The Appellant quite simply did not follow that mechanism and we therefore find that no effective voluntary declaration had been made.

15.        In summary therefore we have to reject both of Miss Poots’ contentions.  We do not accept that a valid voluntary declaration was made.  Neither do we accept that regulation 38 is appropriate in these circumstances but if we are wrong in that view, we do not, in any event, believe that the Appellant had satisfied the requirements set out for its operation.  The appeal is therefore dismissed.

16.        We were given the impression that the Commissioners would not be making any application for costs but we were asked to formally reserve the position, which we do and direct that if there is to be an application for costs then it should be made within 14 days of the release of this decision.

MAN/2005/0735

LADY MITTING

JUDGE
Release Date: 12 March 2010