First-tier Tribunal (Tax)

[2011] UKFTT 83 (TC)

TC00960

Appeal reference: TC/2010/10248

ELECTION TO TAX LAND – request for belated notification turned down – had a decision to elect been effectively made? – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

MILL HOUSE MANAGEMENT UK LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting (Judge)

Sitting in public in Birmingham on 8 December 2010

Mr. Andrews, VAT consultant, for the Appellant

Vinesh Mandalia of counsel for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.           The Appellant was appealing against a decision, notified by the Commissioners on 16 June 2008 and later confirmed on review dated 9 April 2009, to refuse to accept a belated notification of an option to waive exemption on two properties, the effective dates of the option requested being 1 March 2005 and 1 January 2008 respectively.  Section 83(wb) VAT Act 1994 gives a right of appeal against such a decision, but only in respect of supplies made after 1 June 2008.  In this case all material supplies pre-dated that date, and the original section 83 gave no similar right of appeal.  However the Appellant also was requesting registration, an application turned down by the Commissioners on the consequential ground that no taxable supplies were being made.  With the agreement of both parties, I am therefore treating the appeal as an appeal against the Commissioners’ refusal to register the Appellant and with the jurisdiction given to the tribunal by section 84(10), I am considering the primary issue as the prior decision arising out of which the Commissioners refused registration.  The Appellant does make some taxable supplies but these have never been set out or quantified and I was asked by both parties to consider the appeal on the basis only of the exempt supplies.

2.           Or behalf of the Commissioners, unchallenged witness statements had been served from the decision-making officer, Mr. Moazzam Rasul, and the review officer, Mrs. Sarah Jane Bates.  They did not give oral evidence.  On behalf of the Appellant, oral evidence was given by its sole director, Mr. Mohammed Iqbal.

The evidence

3.           By letter dated 13 May 2008 from the Appellant’s tax advisors, Messrs Smith Cooper, the Commissioners received a request to accept a belated notification of an option to tax in respect of two properties used as serviced office blocks, namely the Mill House Business Centre (“Mill House”) in Castle Donnington, which opened in April 2005, and secondly the Schoolhouse in Derby, which was acquired in summer 2007.  The letter also requested registration.  Smith Cooper explained that Mill House had been acquired subject to VAT as the vendor had opted to tax.  The Appellant’s bookkeeper, who dealt with the raising and processing of invoices and the company’s tax and VAT affairs, mistakenly believed that that obliged the Appellant to charge Vat to its tenants.  On this misunderstanding therefore, all tenants from 1 April 2005, when the first office was let out, were charged VAT on their invoices.  Substantial sums had already been spent refurbishing both properties and the company would, the Commissioners were told, for much of 2005 and 2006 have been in a repayment position.  A schedule was attached to the letter detailing, quarter by quarter, the output tax which would be due on the rental income and the input tax which would be reclaimed on the refurbishment.  The schedule showed that in relation to Mill House, from 1 April 2005 to February 2008 output tax of £157,433.70 would be due against input tax of £86,703.79.  In respect of Schoolhouse, no output tax was due, but input tax would be reclaimed of £51,601.28.  The letter went on to say that Mr. Iqbal and his bookkeeper had become concerned towards the end of 2005 that no VAT returns had been received, but as neither of them was familiar with the VAT registration and accounting process they assumed that a single global return would be received upon which they would declare all outstanding output tax and reclaim their input tax.  The position was apparently exacerbated by the illness first of the bookkeeper, who was off sick for most of 2005, followed by Mr. Iqbal, who suffered a heart attack in 2007, leaving him incapacitated for the remainder of the year.

4.           The request was considered by Mr. Rasul who, by letter dated 16 June 2008, turned it down.  Mr. Rasul explained in his letter the procedure for making and notifying an election, and considered first whether or not the Appellant had demonstrated on a balance of probabilities that it had exercised an option to tax at the relevant time.  His view was that it had not.  He pointed to the absence of any written evidence and importantly the absence of any application to register for VAT.  The actions of the Appellant were not, in Mr. Rasul’s mind, consistent with someone who had opted to tax.  He expressed concern that the Appellant had been charging Vat for over three years without accounting for it and asked for an undertaking that it would be refunded to the tenants or alternatively the Commissioners would recover it as a debt due to the Crown.

5.           Smith Cooper requested a reconsideration of the decision and for similar reasons to Mr. Rasul, Ms. Bates upheld his earlier decision.  Ms. Bates pointed out that the behaviour of the taxpayer should demonstrate that it has acted upon a decision to opt.  This would normally be self evident by, for example, the taxpayer charging and accounting for tax, but in this case the Appellant, although charging it, had made no attempt to account for it.

6.           Mr. Iqbal told the tribunal that he had previously been running a restaurant, but business became quiet and a business associate who was himself operating a highly successful business centre letting out serviced offices, suggested that Mr. Iqbal should do likewise.  Mr. Iqbal found the Mill House on which he took out a lease towards the end of 2004 and spent a considerable sum of money on refurbishment and furnishing, thus giving rise to a potentially very large input tax claim.  The licenses which Mr. Iqbal would need were cribbed from those used by his business associate, with any necessary amendments being made to them by Mr. Iqbal’s solicitors.  Mr. Iqbal had no idea what amendments those were.  Under clause 3.1, the licensee undertook to pay the license fee, itself defined in clause 1.6 as “£… +VAT”.  VAT was therefore clearly to be charged to tenants under the terms of the license, and the invoices which were before the tribunal (all in respect of Mill House, none in respect of the Schoolhouse) clearly showed a VAT element.  Mr. Iqbal explained that his knowledge of VAT was limited but his belief was that he could charge VAT from the outset (i.e. 1 April 2005) but did not need to register until he had reached a turnover of £60,000, when he expected to be able to account for all output tax to date and recover all input tax to date.  Mr. Iqbal told the tribunal that in fact he wanted to register at the earliest possible date because he was losing prospective tenants because he could not supply to them a VAT number, and he was also out of pocket because of the cost of the refurbishment.  Whilst it had always been his intention to apply as soon as his turnover reached the level of £60,000, business was slow and by the time the threshold was reached, Mr. Iqbal had fallen ill and he did not work from early 2007 to mid-2008.  During this period, he told the tribunal, he did no more than, every few months, sign cheques for invoices, which were brought to his home by the centre manager.  Mr. Iqbal’s illness was evidenced by a letter from the Cardiology Department at Derby Hospital to Mr. Iqbal’s GP dated 5 February 2007.  This referred to a six-day stay in hospital, where he underwent treatment, the results of the treatment being described as excellent and confirming that Mr. Iqbal should continue with his medication.  A further “to whom it may concern” letter  from Dr. Singh dated 21 February 2008 said that Mr. Iqbal was still under the care of the Cardiology Department and had been advised to avoid stress.

7.           Mr. Iqbal was cross-examined at some length about the company formation.  He could not remember when it had been incorporated but accepted that it would have been 1 February 2005 when referred to his application for VAT registration.  The company had always had only one director.  Initially it had been Mr. Iqbal’s wife, with her sister’s husband being company secretary.  Mr. Iqbal could not remember why he had not been a director from the outset, but at some date, he could not recall when but possibly one or one and a half years later, he became a director, and on the same date his wife ceased.  Mr. Iqbal was no uncertain as to date he could not recall whether his directorship pre or post-dated his illness.  When asked about his own role in the company at the outset he said that he had had no formal role.  He was more like a manager, helping and guiding, although he did have a financial input.  His evidence about the decision to opt to tax was unclear.  He accepted there was no written evidence of the decision.  When it was put to him by Mr. Mandalia that as he, Mr. Iqbal, had no official position within the company, the decision could not have been made by him, Mr. Iqbal agreed and told the tribunal that in fact it had been his wife’s decision, but he did not know how she came to make it or whether it had been discussed.  He described it as “just common sense” because he wanted to reclaim the input tax spent on refurbishment.  On re-examination, however, Mr. Iqbal accepted Mr. Andrews’ suggestion that in reality he, Mr. Iqbal, had always run the business and any decision-making would have been his.  Mr. Iqbal agreed and said that his wife had not made any decisions because she was a housewife.  As to the decision to opt to tax in respect of Schoolhouse, Mr. Iqbal’s evidence was “it was the same company, why should it be any different?”.  Although he maintained a positive decision had been taken in respect of this second property, he referred repeatedly back to the decision already having been made “on day one” (i.e. 1 April 2005).

8.           Mr. Iqbal accepted that all the “VAT” claimed on the invoices and which had been collected from the tenants was spent by the company in its refurbishment, but he justified this by the view that he would in any event be owed in the region of £250,000 by way of VAT repayment.  He told the tribunal on two occasions that the business couldn’t run without it as money had been borrowed from the Bank to finance the purchase and refurbishment.

Submissions

9.           It was common ground that making a legally effective election to waive exemption is a two stage process, the first stage being to make the decision to opt to tax and the second being to notify such decision to the Commissioners.  The notification has to be within 30 days of the decision or within such longer period as the Commissioners may in their discretion allow (Legislation then in force – paragraph 3(6)(b)(1) schedule 10 VATA 1994).

10.        It was also common ground that the Appellant bore the burden of proof.  It was Mr. Mandalia’s basic submission that given the vagueness of the evidence the Appellant had not discharged that burden.  There was no satisfactory or clear evidence from which the tribunal could conclude that a positive decision to opt had been made.  It followed that if no decision had been made there could not have been an election and the Commissioners had acted reasonably in refusing to accept the Appellant’s request for acceptance of a belated notification.

11.        Mr. Andrews submitted that Mr. Iqbal was an honest and straightforward witness but with limited knowledge of VAT.  It was Mr. Iqbal who, in total honesty, had brought the matter to the Commissioners’ attention because he was concerned that he had not received a VAT return and wanted to regularise his VAT affairs.  It was quite clear that a decision to opt had been made, evidenced by the license agreement and the invoices.  He referred the tribunal to the case of Fencing Supplies Ltd v Commissioners for Customs and Excise (10451).  Within that decision, the chairman said:

“In my judgment by charging value added tax on the rent the Appellant made an election… There is nothing in the paragraph or, so far as I can see, elsewhere which lays down the manner in which an election is to be made.  Since the Appellant had no right to charge value added tax on the rent except by making an election…, in my judgment by demanding and receiving value added tax on the rent the Appellant was clearly indicating its decision that thenceforth its supplies in relation to the property were no longer to be exempt from tax…”

Conclusions

12.        I will refer first to Mr. Andrews’ primary submission, supported by Fencing Supplies Ltd, that the mere inclusion of VAT on the invoices was sufficient evidence of an election.  Mr. Andrews was in effect saying that to charge the VAT was enough to show the election had been made and nothing more was needed.  I do not accept this contention for two reasons.  First, every case is fact sensitive.  In Fencing Supplies Ltd what the trader charged was truly VAT and was properly accounted for as such to the Commissioners.  What the Appellant did, was to charge a sum, described as VAT, which the company made no attempt to account for for over three years and which it used in the general running of the business.  What the Appellant described as VAT was not in reality VAT because the Appellant was not registered for VAT and made no attempt to register for some three years.  Secondly, as Mr. Mandalia pointed out, we do have an explanation as to why VAT was charged.  Smith Cooper in their first letter said it was charged because the bookkeeper mistakenly believed that the company was obliged to charge VAT as the purchase of the lease had been subject to VAT.  VAT was charged on the invoices then, not because an election to tax had been made, but pursuant to a misunderstanding by the bookkeeper.  I do not therefore accept Mr. Andrews’ submission that, without more, the mere inclusion of VAT on the invoices evidences an election.

13.        It does therefore become necessary to examine what other evidence there is that a positive decision to opt had been made.  The evidence of Mr. Iqbal, I found to be vague, contradictory and inconsistent.  It contained within itself inconsistencies and was also inconsistent with earlier submissions made on behalf of the company in correspondence.  Before the tribunal, Mr. Iqbal’s position was that he had always intended to register for VAT just as soon as the threshold had been reached.  In fact he was desperately keen to register at the earliest possible date because he was losing prospective tenants to whom he could not supply a VAT number, and he wanted back the input tax which he had been paying on the refurbishment.  He told the tribunal however that this threshold had not been reached before he was overcome by illness.  However, this explanation does not accord with the incontrovertible fact, accepted by Mr. Andrews, that from the Appellant’s own figures, the £60,000 threshold had been clearly reached by December 2005, 16 months before Mr. Iqbal was taken ill.  The threshold therefore came and went and no attempt to register was made.  This position taken before the tribunal was in any event not the position which was taken in earlier correspondence.  In the letter of 23 June 2008, Smith Cooper state, “Mr. Iqbal now accepts that VAT registration should have taken place, but at that time Mr. Iqbal left this to his bookkeeper and unfortunately the bookkeeper assumed Mr. Iqbal would be dealing with the matter.  The subsequent illness of both effectively meant that the registration was deferred and ultimately overlooked”.  Before the tribunal there was no mention of this misunderstanding or of the bookkeeper’s illness.  In correspondence there was no mention of Mr. Iqbal’s intention to register as soon as the threshold had been reached.

14.        The evidence with regard to the running of the company and who actually made the decision to opt to tax is equally contradictory.  Mr. Iqbal accepted in cross-examination that he would not have made the decision and that it had been his wife’s.  In response to Mr. Andrews, however, he said that his wife did not make decisions, and as he was in effect running the company it was his decision.

15.        Although not directly in issue, the evidence with regard to Mr. Iqbal’s illness and absence from work is far from clear.  That he had a heart attack is beyond doubt, but that he needed to be off work for some 12 months plus does not come out of the medical evidence and indeed the stricture that he should avoid stress does not appear to have been adhered to because in fact he and the company purchased the Schoolhouse only a matter of a month or two after the heart attack took place.  Mr. Iqbal was quite clearly having an involvement in the running of his businesses during this period.

16.        In correspondence, the Commissioners had been told that neither Mr. Iqbal nor the bookkeeper were “familiar with the VAT registration and accounting process”.  This is quite clearly incorrect as Mr. Iqbal had been registered for VAT in his restaurant business since 1999 and accepted that he signed quarterly cheques for the VAT payments.

17.        The onus of proof is on the Appellant to persuade the tribunal, on the balance of probability that an effective decision was made to opt to tax and that that positive decision having been made, the Commissioners behaved unreasonably in refusing to accept belated notification.  The Appellant has not succeeded in discharging that burden of proof.  Having rejected the contention that the mere presence of a VAT element on the invoices and in the license agreement is sufficient, an analysis of all the remaining evidence, both written and oral, goes nowhere near showing that a decision had been made to opt to tax.  There is not even any clear evidence as to who made the decision or how it came to be made.  I find that the Commissioners acted quite reasonably in refusing to accept belated notification.  The view of Mr. Rasul, upheld by Mrs. Bates, that no valid election had been made, was a perfectly reasonable view to take for the reasons which they gave.  It follows that the refusal to register the Appellant for VAT was also reasonably made and correct.

18.        For all these reasons the appeal is dismissed.

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.

LADY MITTING

JUDGE
Release Date: 25 January 2011