First-tier Tribunal (Tax)

[2010] UKFTT 394 (TC)

TC00676

Appeal number:  TC/09/14810

Value Added Tax – recovery of under-claimed input tax – whether manner of calculation and evidence of expenditure sufficient – Appeal Allowed.

FIRST-TIER TRIBUNAL

TAX

MORRISON BOWMORE DISTILLERS LTD Appellant

-       and –

-        

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL JUDGE: Mr Kenneth Mure, QC Members: Mr Peter Sheppard, F.C.I.S., F.C.I.B., ATII

Mr Ian G Shearer

Sitting in public at 126 George Street, Edinburgh on Wednesday 30 June 2010

Stuart Brodie, Grant Thornton, LLP for the Appellant

Sean Smith, Advocate , instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Preliminary

1.       This is a claim by the Appellant for repayment of £4,539.87, being input tax on entertainment expenses for its staff and relating to the period from July 1993 to April 1997.  The claim was not made until 5 February 2009 (App/doc/1) and was enabled by the House of Lords Decisions in Fleming t/a Bodycraft v HMRC and Conde Nast Publications v HMRC [2008] UK HL2 and Section 121 Finance Act 2008. These allow claims for repayment of input tax which accrued pre-May 1997 if made before 1^st April 2009.  Until the Decision in Ernst & Young (LON/96/1377) it had been the practice of the Respondents to restrict the recovery of input tax on the cost of staff entertainment to 50% during the period in question.  That decision permitted recovery of up to 100% of input tax.  It is in these circumstances that the present claim arises.

The Issue

2.       The issue for the Tribunal’s Decision was whether there was adequate evidence to support the incurring of the relevant expenditure and the methodology of the Appellant’s calculations of the unrecovered VAT element.  There was a considerable lapse of time between the date of the expenditure (between 1993 and 1997) and the making of the claim in February 2009.  It was acknowledged that the burden of proof rested on the Appellant.  Reference was made to the principles which were considered in Dickinson v Minister of Pensions [1952] 2AER 1031 and we noted also R (on the application of UK Tradecorp) v CCE [2005] STC 138.

The Evidence

3.       Copies of correspondence between HMRC and the Appellant’s VAT Advisor, Mr Brodie, and documentation relating to the Appellant’s turnover and business accounts were produced and explained by Parties’ representatives.  Mr Philip Mortell, a senior officer of HMRC involved in scrutinising retrospective recoveries of input tax following on the Fleming Decision, gave evidence of his enquiries and conclusions in the present case.  The Appellant’s approach was to calculate the input tax on staff entertainment by reference to total turnover for (direct) Corporation Tax purposes for each of the 5 years in question (figures easily verified and not apparently in dispute) and then take a fraction of that, the numerator being the amount of input tax for staff entertainment in 2007, and the denominator being the turnover for direct tax purposes (see schedules annexed to App/docs/1).  Mr Mortell criticised this approach by reference to the inadequacy in his view of the Appellant’s records generally.  In particular he noted an error of £152.66 made in 1996 (see Resp/docs/3B and 3D).  There are other discrepancies noted in the Statement of Case presented by the Respondents at para 2.6(2).  Mr Mortell described the Appellant’s calculations by reference to 2007 as “a leap of faith”.

Submissions

4.       Mr Brodie for the Appellant argued that his calculations were logical and reasonable given the extent of information available.  Ordinarily tax records for only the 6 preceding years would be preserved.  Beyond that they would not be available.  However, the figures of annual turnover were readily verifiable.  The fraction in the proposed formula allowed, he submitted, a logical extrapolation of the sum of input VAT recoverable. 

5.       Mr Smith adopted the criticisms of this approach as set out in the Respondents’ Statement of Case at para 2.4 et seq.  He referred to the reports of visits by tax officers to the Appellant’s premises (see Resps/docs/4).  Although the sums appeared to be small they did cast doubt on the reliability of the claim.  Certain of the inspections had not been exhaustive and undue emphasis should not be placed on the absence of criticisms.  The burden of proof had not been satisfied, he argued, and therefore the review dated 7 September 2009 (Resps/docs/3P) should be upheld.  In the event of the Tribunal’s finding a repayment was due, simple interest should be payable meantime.  Entitlement to compound interest was presently the subject of an application to the Court of Appeal in England.

Decision

6.       We consider that the approach of the Appellant’s representative is sound.  Given the dearth of documentation relating to the years in question, 1993-1997, which is to be expected given that an interval exceeding 6 years had passed, it is in our view acceptable.  The onus of proof certainly rests on the Appellant but that on the balance of probabilities.  The amount at issue is comparatively small and we consider that exceptional or disproportionate measures to confirm the claim precisely could not reasonably be required.  The figures of turnover can be established satisfactorily for the years in question and were not disputed.  The formula for calculating the fraction taken has been derived from one year’s figures, viz 2007, but some information for the 3 preceding years was proffered too to HMRC (App/docs/17).  Moreover, in the years in question it seems that the level of staff entertainment was greater (the Appellant formerly held a more expensive staff function in Summer) including a somewhat greater amount of input VAT, but the turnover had been smaller in the earlier years.  While the numerator in the fraction is increased in the earlier years, the denominator is decreased, so increasing the fraction.  Accordingly the extrapolation by means of 2007 figures producing a lower fraction is conservative, and adverse to maximising the claim for the Appellant (see App/docs/1 and annexations). 

7.       We considered the tax “history” of the Appellant company.  While certain isolated and limited criticisms may fairly be made (see App/docs/7 and the Statement of Case para 2.6(2)), no serious systematic failures in their internal accounting emerge.  Reference was made to notes of HMRC’s inspections – see App/docs/33 et seq.

8.       Accordingly we allow the taxpayer’s appeal in respect of a further repayment of input tax of £4,539.78 together with interest to date of payment.

9.       Mr Brodie sought interest on a compound basis, which Mr Smith resisted pending the outcome of the appeal in England in Sempra Metals Ltd.  We consider that the appropriate course is to award simple interest meantime, reserving the matter of entitlement to its being calculated on a compound basis.

10.    No application for expenses was moved – appropriately we think – and accordingly no award is made.

This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

MR KENNETH MURE, QC

TRIBUNAL JUDGE

RELEASE DATE: 20 August 2010