(Tax and Chancery Chamber)
London EC4A 1NL Heard on 22 October 2024 |
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B e f o r e :
JUDGE ANNE REDSTON
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FS COMMERCIAL LIMITED |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Respondents |
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For the Appellant: Tim Brown, Counsel, instructed by Jurit LLP
For the Respondents: Howard Watkinson, Counsel, instructed by the General Counsel and Solicitor for His Majesty's Revenue and Customs
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Crown Copyright ©
VAT – scope of grounds of appeal to the FTT – whether FTT jurisdiction supervisory or appellate – appeal dismissed
Introduction
(1) a preferred assessment for £19,064,622 for periods 05/16 – 11/18 inclusive, on the basis of there being insufficient evidence to support the claims to input tax; and
(2) an alternative assessment for £15,036,031 for periods 11/16 – 11/18 inclusive, on the basis of inadequate evidence of payment of consideration.
(1) whether the FTT's jurisdiction in the appeal against the preferred assessment was appellate or supervisory; and
(2) whether the Appellant was entitled to rely, at the substantive hearing, on invoices it did not provide to the HMRC decision-maker.
(1) its jurisdiction as regards the input tax appeal was supervisory; and
(2) the Appellant could not rely on invoices not provided to the HMRC decision-maker.
(1) The FTT erred in law when it held that the Grounds of Appeal to the FTT ("the FTT Grounds") did not include, as one of the Grounds, that the Appellant had held valid VAT invoices at the time of HMRC's decision ("First Ground of Appeal").
(2) The FTT erred in law when it decided that in the absence of a reference in the FTT Grounds by the Appellant to it holding valid invoices, the jurisdiction was supervisory ("Second Ground of Appeal").
Background
The period before the assessments
(1) On 21 September 2018 the Appellant submitted its 08/18 VAT return ([4]). On 2 October 2018 HMRC Officer Steve Mills requested records from the Appellant in order to clear the repayment claimed by it for that VAT period, including any purchase invoices with over £1,000 input tax ([5]).
(2) On 8 October 2018, Mr Dave Clarke, director of the Appellant, replied by sending Officer Mills bank statements, a "VAT report (detailed)"; a supplier/ customer list ([6]) and eight supplier invoices, including one from Aspire Partnership Limited ("Aspire"), the Appellant's representative at the time. The bank statements showed numerous large transfers to an account "Ref: Verity", for example: £560,000 on 2 August 2018. Verity Ltd appeared as a supplier on the supplier list but no invoices had been produced from Verity Ltd ([6]).
(3) On 10 October 2018 Officer Mills asked the Appellant for the Verity invoices ([7]). The Appellant replied on 11 October 2018, saying that there were no invoices from Verity Ltd; these amounts related to a consolidated amount of invoices/VAT charged by its supplier, and there could be "between 800 and 1000 invoices from different suppliers" in relation to each of the Verity amounts ([8]).
(4) On 18 October 2018, Officer Mills emailed the Appellant saying that he needed to see the invoices making up the Verity supplies and asking for them to be provided ([9]).
HMRC's letter of 7 January 2019
"… Although I have requested information regarding your records, as yet I hold insufficient information to evidence the input tax deducted or payments made against those purchases.
…
At this stage I do not hold the basic records for FS Commercial since commencement. The bank statements provided only related to the one period and do not represent the full bank statements for the business. I will require the full business records and bank statements since commencement. With regard to those statements, although payment is shown as made to Verity, this cannot represent the actual evidence of payment. Verity you have clarified is a number of companies. A single payment therefore cannot represent payment to the individual companies that make up Verity.
…
Can I also repeat my request for a full account listing for Verity showing payments made since commencement of the business? I will also require a detailed makeup of the subsidiary companies that make up each Verity transaction and supporting invoices…
…
At present in the absence of records to substantiate the input tax claimed I will have to disallow all input tax claimed since the commencement of the business
…
If you would like to comment or give me any more information, please contact me by 29 January 2019 …If I do not hear from you by then, I will take this to mean that you agree with my calculations. I will then make assessments of the amount due and send you notice of those assessments…"
Subsequent correspondence regarding provision of evidence
"3. I can confirm information pertinent to the August return is available. Please provide a schedule of records you wish to see in order to check the return and process the repayment.
…
6. I am not able to accept your point that an entry on a bank statement cannot be accepted as actual evidence of payment. In terms of "Verity", Mr Clarke explained the rationale behind the consolidation of invoices for a variety of suppliers. It is not a single payment, rather a bank file uploaded to meet multiple suppliers - for administrative convenience.
7. For the purpose of checking the August return, I cannot see any reason why HMRC should request a full account listing for "Verity" since the commencement of the business in 2010.
8. There are no "subsidiary companies" that make up each Verity transaction, as FSC does not have any subsidiary companies.
9. What is meant by "a listing of all subsidiary companies made up by Verity"?
10. It is wholly unreasonable, unwarranted and indeed provocative to threaten my client with a disallowance of its input tax deduction under these circumstances. At the present time my client is having to deal with a prolonged PAYE/NIC enquiry (started in 2011 and subject to complex tribunal proceedings). These proceedings involve significant record production in terms of expenses records - the timeframe given for production of these records is June 2019. It is envisaged that many of the staff, including Mr Clarke, will be engaged in some capacity on locating records in an off-site storage facility. I would add that FSC is also the subject of a National Minimum Wage enquiry. The director is trying to run a business. It is unlikely that the records can be produced much before July 2019. Should you require confirmation of the directions in this case, please let me know."
"6. As indicated within my letter of the 7th I would require evidence that a payment against a supply was made to the corresponding supplier. To date this has not been evidenced.
7. This would be covered with the evidence of payment as above.
8. And 9 [sic]. On 26th October 2018 Dave Clarke stated that Verity isn't a company but lots of individuals. I would require evidence of the invoices that make up these individuals and a full listing of them all.
10. Whilst I note your point that there is a further case that is time consuming, these are enquiries on the VAT situation with regard to FS Commercial. You will be aware that my initial approach regarding the records for this business commenced in October 2018. That timeframe strikes me as more than reasonable."
The assessments
"I believe that you have not declared the correct amount of VAT due for the period shown on the enclosed schedule. I explained this in my letter dated 7 January 2019…As a result of these assessments, the total VAT due is £34,185,989."
Further correspondence
"I can confirm that the records which you have requested are available. However, in view of the interest shown by HMRC into businesses under the common directorship of Mr Clarke, I would respectfully request that we arrange a suitable date and time when all the records relating to the above-named companies can be produced and reviewed."
"I note the suggestion of a visit to see the records at the premises.
As you are aware I initially enquired regarding a combined visit and the records in October. As such I would not wish to delay the production of the records any further. In the case of FS Commercial you will be aware assessments have been raised.
On any assessments issued, I would be happy to look at the evidence again should it be produced within the normal assessment time limits."
"The Assessment is overstated because the Appellant is entitled to claim a deduction for the input tax associated with its transactions in accordance with Section 24 - 26 of the VAT Act 1994. Accordingly, the Assessment plus interest accrued should be set aside. The Appellant's transactions for which input tax has been claimed are predominantly in relation to supplies of labour services from its UK suppliers and so, an input tax deduction is applicable in these circumstances as B2B services are being supplied for consideration. HMRC's grounds for making the assessment is based on its contention that no evidence of input tax deducted and payment has been provided to support the claim.
Schedule 11 of the VAT Act 1994 sets out the requirement to keep records, and to make those records available on request to an officer of HMRC.
The Appellant has made these records available.
Paragraph 6, Schedule 36 of Finance Act 2008 requires the Appellant to produce information at a place agreed by the Appellant and HMRC.
The Appellant has attempted to reach an agreement to produce the records on a reasonable basis by making them available at the Principle [sic] Place of Business.
Additional Information
…
The case officer was invited to attend the Principle [sic] Place of Business on 13th February 2019 to inspect the business records. This meeting date was declined, and the Case Officer demanded that the records be sent to him directly.
This request is wholly unreasonable, unrealistic and unjustified as the business records run into many hundreds of thousands of transactions and would have taken a significant amount of time to produce. It is also doubtful if HMRC's Drop-box facility would have been able to cope with such a large volume of records.
The Appellant is willing to produce its records albeit on a reasonably required basis having regard to the objective of HMRC's enquiry which is to check the validity of the VAT re-claim.
On 8th February the Case Officer was offered alternative dates for a meeting during the week commencing 20th March 2019 at which time the records would be produced for inspection at the Principle [sic] Place of Business.
On the same date, the VAT assessments were received by the Appellant (dated 6th February 2019) to which this appeal relates."
Review decision
"Introduction
I refer to your representative's, Aspire Partnership, letter of 04 March 2019, which requested a statutory review be carried out in relation to HMRC officer Mills' decision that the input tax recovered by the company should be repaid to HMRC as the company does not hold sufficient evidence to support the recovery of the input tax claimed.
…
Matters under dispute
A decision has been issued that determines the input tax claimed by the company cannot be recovered as sufficient evidence has not been presented to demonstrate an entitlement to recover input tax. Also there has not been evidence of payment provided to show that any input tax incurred has been paid by the company.
Your representatives have stated that sufficient alternative evidence has been presented to allow recovery of the input tax. Your representatives have also stated that evidence of payment by the company for supplies received has been provided.
…
The facts
…
The records provided showed bulk payment details for the account "Verity" which you advised Officer Mills is a variety of labour providers and your representatives have stated is used for administrative purposes. Officer Mills has advised that the actual invoices that make up the "Verity" payments have not been provided meaning that the input tax relating to these supplies cannot be verified.
…
No further information or detail regarding the input tax claimed has been presented since the request for the review was received.
What I have considered in my review
…
Your representatives consider that there has been sufficient evidence presented in the form of alternative evidence for the input tax claimed to be allowed and that the assessments raised should be withdrawn.
…
Input tax
…
Regulation 29(2) allows for a claim to be made for input tax despite not having an invoice if other evidence, as allowed by the Commissioners, is held to show VAT was charged.
It is considered that the company does not hold a VAT invoice that is required to be provided as per Regulation 13 and that the information provided to date does not amount to sufficient alternative evidence to support any claim for VAT to be recovered as input tax of the company.
…
The lack of evidence to support the input tax claimed is sufficient to deny the claims that have been made. The decision made here is that HMRC does not have sufficient alternative evidence that can allow a claim to input tax to be made by the company.
As HMRC has not been provided with such evidence I am satisfied that Officer Mills is correct to deny the input tax claimed.
VAT assessment
I am satisfied that Officer Mills was correct to raise an assessment as the company has not produced satisfactory evidence to support the input tax that has been claimed.
…
The evidence I have seen
As noted above, I have considered the evidence that has been provided by representatives and I have also considered the various correspondences [sic] between your representatives and Officer Mills…"
The Appellant's grounds of appeal to the FTT
"1. These are the grounds on which the Appellant notifies its appeal to the Tribunal against the decision made by the Respondent on 7th January 2019.
2. By that decision, the Respondent disallowed the Appellant's input tax claimed since commencement of the business. The decision did not reference the legislative basis on which it was made.
3. The Appellant appeals to the Tribunal on the grounds that the claim for input tax is valid and correctly due.
4. The Respondent's decision was issued on 7th January 2019 based on the Investigating Officer's view that he had not been supplied with enough evidence of the input tax deducted for the entire trading history of the Appellant.
5. The Assessment relevant to this decision is dated 6th February 2019 which related to periods 05/16 to 11/18.
6. The Respondent has been invited to inspect the business records at the Principal Place of Business. This invitation was declined on the same day that the assessment for £34,185,989 was received in the post by the Appellant and again on 14th February 2019.
7. It is the Appellant's stated position that the Respondent's decision to deny a VAT input tax claim is incorrect because there is evidence to demonstrate that:
a. The Appellant correctly charges VAT on its supply made to customers. This charge meets the definition of output tax at Section 25 of the VAT Act 1994.
b. The supply included VAT which meets the definition of input tax at Section 24 of the VAT Act 1994 and, therefore, the claim for a deduction should be allowed in full.
c. The Appellant holds evidence to demonstrate that it receives payment for the supply that it makes to customers in the form of a bank account into which payments are deposited and has made this evidence available to the Respondent.
d. The Appellant holds evidence that its supply chain is valid and has correctly been charged VAT relevant to the supply of labour services and has made this evidence available to the Respondent.
e. The Appellant holds evidence that it received a supply of taxable services for which it made payment which included an element associated with VAT and has made this evidence available to the Respondent.
f. The Respondent incorrectly states that "no evidence" has been provided which is absolutely not the case. The Appellant cooperated with providing information, however due to an unreasonable amount of records being requested the Appellant requested that evidence be reviewed at the Principle [sic] Place of Business.
g. Having regard to these facts there are no valid grounds for the Respondent to deny the reclaim of VAT input tax.
8. The Appellant requests the Tribunal to quash the Respondents' decision for the reasons set out in these grounds of appeal."
The FTT's findings and conclusions
(1) The FTT Grounds did not state that valid invoices were held by the Appellant at the time of submitting the relevant VAT return; they were instead "entirely predicated on the absence of such invoice". Reliance on invoices as a ground of appeal was first raised in a letter dated 13 December 2020, after the Appellant had changed its advisers from Aspire to Duncan Lewis Solicitors ([40]-[44]).
(2) The decision made by Officer Mills refusing the right to deduct VAT was made on the basis that the Appellant had not provided VAT invoices. In the absence of valid VAT invoices, Officer Mills exercised the discretion conferred on him by Reg.29 VATR and did not accept that the Appellant had provided HMRC with sufficient alternative evidence ([45]).
(3) The correct approach to be followed was that in Scandico Ltd v HMRC [2017] UKUT 467 (TCC) ("Scandico"), which was binding on the FTT, not the two-stage test in London Wiper Limited v HMRC [2011] UKFTT 445 TC ([46] – [47]).
(4) The Tribunal should only address the HMRC decision that was before it, viz. the decision that, in the absence of VAT invoices, HMRC were not prepared to exercise their discretion to accept the alternative evidence provided by the taxpayer, and the test the FTT applies in reviewing that decision is that set out in Kohanzad v Customs & Excise Commissioners [1994] STC 967 ("Kohanzad"), namely whether the officer in question had acted as no reasonable officer could have acted. The FTT's jurisdiction in the appeal was therefore supervisory ([48]).
(5) The Appellant had accepted that if this was the position, it could only rely on evidence that was before Officer Mills when he made his decision. In consequence, the Appellant could not rely on the Verity invoices as these were not provided to Officer Mills before he issued the assessment ([49]).
The Law
European law
"In order to exercise the right of deduction, a taxable person must meet the following conditions:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240; …"
Domestic statute and secondary legislation
"...only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases;"
"(1) …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 save that, where he does not at that time hold the document or invoice required by paragraph (2) below, he shall make his claim on the return for the first prescribed accounting period in which he holds that document or invoice.
…
(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;…
…
provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, or provide, such other evidence of the charge to VAT as the Commissioners may direct."
Appeal rights against HMRC's assessments
"Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."
"(1) Subject to sections 83G and 84, an appeal shall lie to the tribunal with respect to any of the following matters
…
(c) the amount of any input tax which may be credited to a person;
…
(p) an assessment—
(i) under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act;…
or the amount of such an assessment;"
Relevant case law
(1) where a taxable person incurs input tax, the right to deduct it arises,
(2) however, to exercise the right to deduct as of right the taxable person must hold a valid VAT invoice;
(3) in the absence of a valid VAT invoice, whether the claim to input tax should be permitted is at the discretion of HMRC under Reg.29 VATR; and
(4) the FTT's jurisdiction on an appeal against HMRC's exercise of its discretion is supervisory only.
Appellant's submissions
(1) that as a question of fact, the Appellant held appropriate invoices at the time of deduction, and
(2) HMRC should have exercised their discretion to accept that they had received sufficient evidence to support the input tax claimed.
(1) entitlement to input tax deduction follows from the proper attribution of inputs to taxable outputs;
(2) inputs were paid for in good time; and
(3) the Appellant holds the proper evidence.
"The response from Aspire dated 21 January 2019 referred to Officer Mills having been previously provided with "a list of invoices relating to Week 10 (8th June 2018)…10 sample invoices from week 10" and proceeded to state "I can confirm that information pertinent to the August return is available". I consider it is of note that the response from Aspire referred to "information pertinent to the August return" and not "invoices". As noted, there is reference to "invoices" in the preceding part of Aspire's letter indicating that a distinction was being made between "information pertinent to the August return" and "invoices". Officer Mills responded on 25 January 2019 stating that in respect of Verity supplies he "would require evidence of the invoices that make up these individuals and a full listing of them all." That response made clear that the documents previously provided by Aspire was not sufficient evidence. Accordingly, I reject Mr Brown's submission that "information pertinent to the August return" was intended to confirm that valid invoices were in the Appellant's possession. In my view, the response was clear and without ambiguity and I do not accept that such an intention can be ascribed to the clear wording used."
"The suggestion that the Appellant was in possession of valid invoices at the time of the claim was made for the first time in a letter to HMRC dated 13 December 2020 by the Appellant's newly appointed legal representatives, Duncan Lewis…"
HMRC's submissions
Discussion and Analysis
The FTT Rules and the case law
"(1) A person making or notifying an appeal to the Tribunal under any enactment must start proceedings by sending or delivering a notice of appeal to the Tribunal.
(2) The notice of appeal must include—
(a)-(c) …
(d) details of the decision appealed against;
(e) the result the appellant is seeking; and
(f) the grounds for making the appeal.
(3) The appellant must provide with the notice of appeal a copy of any written record of any decision appealed against, and any statement of reasons for that decision, that the appellant has or can reasonably obtain."
"... to mark out the parameters of the case that is being advanced by each party. In particular they are...critical to identify the issues and the extent of the dispute between the parties. What is important is that the pleadings should make clear the general nature of the case of the pleader."
"…I would strongly deprecate any attempt to construe grounds of appeal in these cases in a narrow and formalistic way. What is important is to ensure that the question of law which the applicant seeks to raise is identified with sufficient clarity to enable both the respondent and the Tribunal to understand what it is."
"Grounds of appeal are intended to be short, succinct documents which identify as briefly as possible the respects in which it is said that the court below (in this case the Upper Tribunal) erred. If drafted as the rules intend and require, they provide the court and the parties with a clear and concise statement of the issues that will arise on the appeal and to which argument will be directed. They are not intended to be a vehicle for describing in general terms the circumstances giving rise to the appeal; nor are they intended to serve as a vehicle for setting out the appellant's arguments or submissions. That is the function of the skeleton argument..."
(1) must identify the issues of fact and law on which an appellant challenges the HMRC decision (which an appellant is required to provide by virtue of Rule 20(3)); and
(2) must be comprehensible either as a self-standing document, or by making explicit reference to HMRC's decision. The FTT and HMRC should not be required to read other submissions, representations or correspondence in order to understand the points of fact and law which are in issue.
Discussion and conclusion
(1) Read broadly, the FTT Grounds attempted to answer HMRC's assessment dated 6 February 2019 for the reasons set out in the letter of 7 January 2019 by asserting that the Appellant did hold the necessary and sufficient evidence of its right to deduct input tax (see [4]).
(2) The assertion was that the evidence the Appellant held included all business records made available to HMRC (see [6] and [7(f)]);
(3) The reference to "business records" implied that the Appellant held both valid invoices and other or alternative evidence of both the charge to VAT [7(d)] and the payment of VAT [7(e)].
(4) This reading would not have required the FTT to draw upon the details or language of the correspondence passing between HMRC and the Appellant between October 2018 and June 2019, but was instead based upon a plain reading of HMRC's assessment dated 6 February 2019 (issued for the reasons set out in the letter dated 7 January 2019) together with the FTT Grounds.
(5) The FTT was therefore wrong to find at [40] of the Decision that the FTT Grounds "were entirely predicated on the absence of such [valid VAT] invoices".
(1) We reject his submission that this "invoice" ground was implied from the statement that the Appellant's "claim for input tax is valid and correctly due". Almost any input tax VAT appeal could use the same wording: it fails to explain why the claim is considered to be valid. Moreover, a claim can also be valid if HMRC unreasonably refused to accept alternative evidence.
(2) Mr Brown referred to the fact that (a) the FTT Grounds refer to Officer Mills' decision, and (b) that decision was made because no invoices had been provided, and went on to submit that the FTT Grounds are therefore to be read as including a ground that the Appellant has the necessary invoices. However, it is not enough for grounds of appeal to make a generic reference to the decision under appeal, they must say why the appellant disagree with that decision. Moreover, the invoice ground cannot be implied simply by referring to Officer Mills' letter of 7 January 2019, because that letter said that "insufficient evidence had been provided" and it referred more generally to "an absence of records", including the lack of "a full account listing for Verity showing payments made" as well as "the full business records and bank statements since commencement".
(3) Paragraph 7 of the FTT Grounds set out a list of specific points, including that the Appellant held evidence (a) to demonstrate that it received payments; (b) that its supply chain was valid and (c) that it had offered to show HMRC the business records on site. The Appellant then said at (g) that "having regard to these facts there are no valid grounds for the Respondent to deny the reclaim of VAT input tax". The "facts" set out in paragraph 7 do not include that the Appellant was holding evidence in the form of Verity invoices.
(4) Although Mr Brown is right that the FTT Grounds do not refer to Regulation 29(2) or to reliance on alternative evidence, that does not change the position: the FTT Grounds do not state that the Appellant's appeal is made on the basis that it holds valid VAT invoices.
(5) We reject Mr Brown's submission that the invoice ground can be inferred from the fact that the "Desired outcome" box on the Notice of Appeal was completed with the words "we would like the Tribunal to vacate the assessment". The grounds must say why the Appellant wants the assessment set aside.
(6) Mr Brown also relied on the history and context of the FTT Grounds, saying these make clear that the Appellant was appealing on the basis that it held the invoices, and he criticised the FTT's Decision at [42] and [43] for misconstruing the context and background. We disagree, and instead endorse and accept the summary set out by the FTT in those two paragraphs, for the reasons there given.
(7) Mr Brown also criticised the FTT for saying at [44] that the invoice ground was raised for the first time by Duncan Lewis in December 2020. Mr Brown made two points:
(a) He referred to the letter sent by the Appellant on 8 October 2018, which says that invoices were provided. However, as the FTT found at [6], those did not include any invoices from or relating to Verity, and this was confirmed by the Appellant on 11 October 2018.
(b) He relied on the fact that in the same letter of 11 October 2018, HMRC had been told that "between 800 and 1000 invoices from different suppliers" underpinned each of the Verity amounts, and HMRC thus knew that the invoices existed. But that does not assist the Appellant, because the FTT Grounds made no reference to the existence of those invoices; in short, the point was not pleaded. The FTT was thus correct to find at [44] that the first time the Appellant sought to argue that the invoice ground formed part of the FTT Grounds was in the letter from Duncan Lewis of December 2020. The half-sentence on which reliance is now placed was instead one of numerous points made in earlier correspondence between the parties, and it is the purpose of grounds of appeal to identify the points on which an appellant wishes to rely.
(8) Mr Brown did not expand the point made in his skeleton about the FTT having carried out "an impermissible 'mini-trial' of issues of fact, but we have taken this to be a criticism of the detailed findings made about the communications between the parties. However, Mr Brown had also submitted that in order to understand the FTT Grounds "the previous correspondence between the parties must be taken in account and the [FTT Grounds] interpreted in context", see [32]. The Appellant's case thus rested in part on what should be implied from the inter-partes correspondence, and the FTT had to make findings of fact. There was no "mini-trial".
The case law on jurisdiction
Petroma
"12. During inspections conducted as from 1997, the Belgian tax authority questioned, both as regards direct taxes and VAT, the intercompany invoices and resulting deductions since the 1994 year of assessment, the main reason being that those invoices were incomplete and could not be shown to correspond to actual services. Most of those invoices included an overall amount, with no indication of the unit price or the number of hours worked by the staff of the service-providing companies, thereby making it impossible for the tax authority to determine the exact amount of tax collected.
13. That tax authority therefore disallowed the deductions made by the companies receiving services on the ground, in particular, of non-compliance with the requirements laid down in Article 5(1)(6) of Royal Decree No 1 and Article 3(1)(1) of Royal Decree No 3 of 10 December 1969 on deductions for the application of VAT.
14. Subsequently, additional information was provided by those companies but was not accepted by the tax authority as a sufficient basis to allow the deduction of the various VAT amounts. That authority took the view that that information concerned either private contracts for services submitted late, after completion of the tax audits and after communication of the adjustments that that authority intended to make, and therefore of no certain date and not binding on third parties, or invoices that were supplemented after they had been issued, at the stage of the administrative procedure, by handwritten references to the number of hours worked by staff, the hourly rate for work and the nature of the services provided and which, therefore, according to the tax authority, lacked any probative value."
"By its first question the national court seeks in substance to ascertain whether the provisions of the Sixth Directive must be interpreted as precluding national legislation, such as that at issue in the main proceedings, under which the right to deduct VAT may be refused to taxable persons who are recipients of services and are in possession of invoices which are incomplete, in the case where those invoices are then supplemented by the provision of information seeking to prove the occurrence, nature and amount of the transactions invoiced."
"…the answer to the first question is that the provisions of the Sixth Directive must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, under which the right to deduct VAT may be refused to taxable persons who are recipients of services and are in possession of invoices which are incomplete, even if those invoices are supplemented by the provision of information seeking to prove the occurrence, nature and amount of the transactions invoiced after such a refusal decision was adopted."
Boyce
"The proviso to regulation 29(2) confers a discretion on HMRC to accept
alternative evidence to the purchase invoice which a person claiming
deduction of input tax must ordinarily have. The exercise of such a discretion
can only be challenged by the taxpayer on the ground that it was a decision
that no reasonable body of Commissioners could have reached: see Customs
and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 at
752 (Dyson J) and Kohanzad v Commissioners for Customs and Excise [1994]
STC 967 at 969 (Schiemann J). The burden lies on the taxpayer to demonstrate
this, based on facts and matters available to HMRC at the time the decision
was taken."
"The FTT had failed to keep in mind when assessing the Commissioners' decision that: (i) the rule, as a matter of both EU and UK VAT law, is that without a valid invoice there can be no input tax deduction; (ii) the use of the discretion in regulation 29(2) involves creating an exception to that rule; and (iii) it is therefore entirely reasonable for the Commissioners to insist on strict adherence to that rule unless and until the taxpayer can demonstrate why an exception to it should be made."
Scandico
"As discussed at my visit to your premises on 10th May 2011, Apple till receipts which you have provided to support the claimed input tax do not constitute proper tax invoices because they do not contain all of the required information, each iPhone purchased is in excess of £250 (inclusive of VAT), which is the limit for which a simplified VAT invoice can be used in relation to [a claim for] input tax deduction; so proper documentary evidence in relation to the supplies is not held by [Scandico]. However, as [Scandico] has not produced any records or documentation that enables HMRC to examine an audit trail to confirm that it had received the taxable supplies as described on the till receipts it has not incurred the right to deduct in the first place."
"The role of the First-tier tribunal is to examine a decision that HMRC have taken and decide whether that decision was right or wrong. Sometimes the test that is applied in examining HMRC's decision is a full merits appeal. Sometimes it is a review as to whether the decision fell within the reasonable bounds of HMRC's discretion."
"What the case officer decided is that, in the absence of VAT invoices from Apple to Scandico, there was not enough information provided by Scandico for HMRC to decide whether there has been a taxable supply or not. HMRC
has therefore exercised the discretion conferred on it by regulation 29(2) of the VAT Regulations 1995 by declining to direct that the alternative evidence that Scandico provided should be treated as sufficient evidence of the supply of the iPhones to Scandico. That is the decision which has been taken by HMRC and hence it is the decision that can be appealed and it is the decision that the tribunal should address."
"In appeals of this kind, the First-tier tribunal should address only the decision
which is before it, namely HMRC's decision that, in the absence of the VAT receipts, they were not prepared to exercise their discretion to accept the alternative evidence provided by the taxpayer as to whether there had been a taxable supply. The test that the First-tier tribunal applies in reviewing that decision is the test set out in Kohanzad."
"We do not consider that there is an inconsistency between the obligation on Member States to allow input tax deduction when the substantive requirements have been satisfied on the one hand and the discretion conferred on HMRC by regulation 29(2) to decline to accept alternative evidence in a particular case on the other hand. It is true that the European Court and the Advocates General have emphasised in the cases we have cited that the Member State must not place additional obstacles in the taxpayer's path when the substantive requirements for deduction have been fulfilled. But that discretion on the part of the tax authority where the taxpayer cannot produce a compliant VAT invoice is clearly contemplated by the Directives. Provided that HMRC focus on the relevant question, namely has the taxpayer established that the substantive conditions for deduction are in place, the exercise of that discretion does not, in our judgment, amount to the imposition of an additional formal requirement. In a case where HMRC have taken a decision that they are or are not satisfied, the tribunal will examine that decision and decide whether that decision was reasonable."
"In our judgment Petroma is authority for the proposition that where the Member State tax authority adopts a decision refusing the right to deduct VAT because the information provided by the taxpayer is incomplete or irregular, the Sixth VAT Directive did not require the tax authority to revisit that decision when further information was provided after the decision has been taken. The position should be no different where the further information is provided to a tribunal in the context of an appeal against the initial refusal. This must apply equally to the PVD as to the Sixth VAT Directive. The fact that the FTT did, despite its misgivings about the relevance of the exercise, actually examine the facts in detail and conclude that there was a supply does not allow Scandico to side step the exercise of HMRC's discretion, or to require that discretion to be exercised by reference to the later information before the FTT."
The Appellant's submissions
"It is also important to bear in mind that decisions about the application of the VAT system are highly dependent upon the factual situations involved. A small modification of the facts can render the legal solution in one case inapplicable to another."
Discussion and analysis
The facts
Application of the law to the facts
"What the case officer decided is that, in the absence of VAT invoices from Apple to Scandico, there was not enough information provided by Scandico for HMRC to decide whether there has been a taxable supply or not. HMRC
has therefore exercised the discretion conferred on it by regulation 29(2) of the VAT Regulations 1995 by declining to direct that the alternative evidence that Scandico provided should be treated as sufficient evidence of the supply of the iPhones to Scandico. That is the decision which has been taken by HMRC and hence it is the decision that can be appealed and it is the decision that the tribunal should address."
(1) The case officer in Scandico decided that "in the absence of VAT invoices from Apple to Scandico there was not enough information provided by Scandico for HMRC to decide whether there has been a taxable supply or not". The position in the Appellant's case is the same: Officer Mills made the decision because he had received "insufficient information to evidence the input tax deducted". The reasoning in Scandico does not turn on whether the invoices did or did not exist, but on the evidence provided by the appellant to HMRC in the period leading up to the decision.
(2) As a result of that lack of evidence, the case officer "exercised the discretion conferred on it by regulation 29(2) of the VAT Regulations 1995 by declining to direct that the alternative evidence that Scandico provided should be treated as sufficient evidence of the supply". Similarly, in this case, in the absence of the Verity invoices, Officer Mills exercised his discretion under regulation 29(2).
(3) The UT held in Scandico that the jurisdiction of the FTT was limited to deciding whether to uphold or set aside that decision. In the Appellant's case, for the same reasons, the FTT's jurisdiction was limited to deciding whether or not to uphold Officer Mills' decision not to exercise the discretion.
"where the Member State tax authority adopts a decision refusing the right to deduct VAT because the information provided by the taxpayer is incomplete or irregular, the Sixth VAT Directive did not require the tax authority to revisit that decision when further information was provided after the decision has been taken."
Observations
The Gora principle
"In respect of the decision that the Appellant cannot rely upon invoices not 'produced' to HMRC, this conflicts with CNM Estates (Tolworth) Ltd v Revenue and Customs [2019] UKFTT 45 (TC) ["CNM Estates"], which is accepted was not brought to the attention of the FTT."
"…it is well established that we can only consider the facts as they were at the time the decision was taken. We cannot take into account subsequent events. We can consider facts which existed at the time the decision was taken but which were ignored by HMRC, either at the time of the decision or at the time of the subsequent review, but we cannot take into account new facts."
"the Appellant will rely upon Bluechipworld Sales & Marketing Ltd v. HMRC
[2019] UKFTT 705 (TC) ["Bluechipworld"] at para. 31 as authority that in exercising its supervisory jurisdiction, the FTT can take into account all the facts that existed at the date of the assessment regardless of whether or not they were known to the decision maker i.e. that the Appellant had in its possession valid VAT invoices when it submitted its VAT returns."
"We reject HMRC's submission that in exercising its supervisory function, the Tribunal is able to take into account only those facts known to the decision maker. In our view, the Tribunal can take into account all facts that existed as at the date of the decision under appeal (regardless of whether or not they were known to the decision maker)."
(1) the Appellant had conceded before the FTT that this principle did not apply, and had not asked for, or received, permission to withdraw that concession, see FII Group v HMRC [2020] UKSC 47, [2020] 3 WLR 1369 at [85]-[90]; and
(2) the Appellant had been refused permission to appeal to the UT on the ground that Bluechipworld should be followed.
The substantive appeal
(1) The Appellant's Grounds did not include a ground which stated that it was relying on the fact that it held the invoices to support its input tax claims.
(2) The FTT's jurisdiction when hearing the substantive appeal is supervisory, so the FTT can only consider whether Officer Mills' decision was reasonable.
(3) In exercising that jurisdiction, the only facts which can be considered by the FTT are those which were before Officer Mills at that time he made the decision.
Implications
(1) Admitting evidence which was not before the HMRC decision-maker would allow appellants:
(a) to provide all kinds of evidence for the first time to the FTT;
(b) to refuse to provide evidence to HMRC which they would otherwise be required to provide only for it to be produced on appeal to the FTT; and
(c) to delay or withhold the payment of VAT properly due.
(2) Permitting taxpayers to side-step the effect of HMRC exercising a discretion over the sufficiency of evidence provided in support of a VAT claim would permit tactical avoidance and delay, and result in wasteful litigation.
(3) It would also undermine HMRC's ability to manage the VAT system, by signalling that lawful and reasonable requests for the production of valid VAT invoices can be either ignored or delayed.
Conclusion