United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18836

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Heatley (t/a AGH Shopfitting) v Customs and Excise [2004] UKVAT V18836 (03 November 2004)

VALUE ADDED TAX — Assessment — Shop fitter and contractor — Whether assessment was made to best judgement — Whether bad debt relief applicable — Sections 73 & 36 VATA 1994 — Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

A. G. HEATLEY t/a AGH SHOPFITTING Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr I E Vellins (Chairman)

Mrs R Dean (Member)

Sitting in public in Manchester on 24 August 2004 & 1 September 2004

Mr T Nawaz, accountant for the Appellant

Mrs L Linklater, counsel, instructed by the solicitor for the Customs and Excise for the Respondents

DECISION

In this appeal the Appellant is Mr A. G. Heatley trading as AGH Shopfitting who carried on business as a shop fitter and as a contractor in the construction industry from premises at Harrogate. He appeals against the decision of the Respondents, the Commissioners of Customs and Excise, who, on 10 May 2001 assessed the Appellant to VAT, under Section 73 of the Value Added Tax Act 1994 ("VATA 1994") in the sum of £92246 plus interest representing VAT arrears for the period 01/07/2000 to 31/03/2001.

At the hearing of this appeal at Manchester on 24 August 2004 and 1 September 2004 the Appellant was represented by Mr T Nawaz accountant, and the Commissioners were represented by Mrs L Linklater, counsel.

The issues as set out in the Statement of Case and Notice of Appeal are as follows.

The Appellant is registered for the purposes of Value Added Tax as a sole proprietor under registration number 652120576 with effect from 1 December 1994. The Appellant, Mr Heatley, is also a director of AGH Shopfitting Limited and Omid Developments Limited, both of which were limited companies and registered for VAT.

An officer of the Commissioners, Mr Adams, initially visited the Appellant in March, April and June 2001 and inspected the Appellant's records and accounts. It appeared to him that the returns rendered by the Appellant were incomplete or incorrect in that output tax was under declared. The officer identified that input tax had been recovered by the associated company Omid Developments Limited in respect of supplies made by the Appellant AGH Shopfitting. No output tax had been declared by the Appellant in respect of these amounts. The amounts of input tax recovered by Omid Developments Limited totalled £45370 and consisted of amounts of £745, £9625, and £35000.

Various payments were identified in the bank account of the Appellant. The officer established that the payments related to supplies made to Omid Developments Limited. These payments were received by the Appellant direct form Capital Mortgages which had been appointed to supply finance to Omid Developments Limited in respect of the construction project. The officer established that output tax had not been declared in respect of payments received by the Appellant for the following amounts:-

09/1000-September 2000- Gross Bankings £139239.32 – VAT £20737

12/00 –October/December 2000- Gross Bankings £417279.87 – VAT £62148 03/01 – January/February 2001 – Gross Bankings £62854 – VAT £9361.

The total of the VAT on these payments amounted to £92246.

The officer wrote to the Appellant in May 2001 detailing his findings and detailing these various banking receipts.

The officer issued an assessment to the Appellant on 10 May 2001 in the sum of £92246.

In his Notice of Appeal dated 15 November 2001 the Appellant stated as the grounds of his appeal "the assessment is not agreed to the extent of £44625 in respect of bad debt relief which should be allowed against the assessment as the debts in question relate to invoices issued on 31 May 2000 and 3 August 2000 which are more than six months old and this relief should be reflected against the assessment".

The Commissioners contended that output tax was properly due in respect of the payments received for supplies made to the associated company Omid Developments Limited, that bad debt relief contentions were not relevant since output tax was calculated as a proportion of the consideration received, that an entitlement to bad debt relief had not been established by the Appellant, and that the assessment had been correctly made in accordance with Section 73 VATA 1994.

At the hearing of this appeal oral evidence was given on behalf of the Appellant by Mr Andrew Graham Heatley the Appellant, and by his accountant Mr T Nawaz, and on behalf of the Commissioners by the officer Mr David Vincent Adams.

During the course of the hearing various documents were referred to by both the Appellant and by the Respondents as follows.

The Commissioners documents consisted of :-

i) The Appellant's form VAT 1 (application for VAT registration.)

ii) Notice of assessments for VAT

iii) Letter from Commissioners dated May 2001.

iv) A "without prejudice" letter written by the Appellant's accountant to the Commissioners dated 17 August 2001.

v) A reply to the Appellant's accountants from the Commissioners dated 31 August 2001.

vi) Copy bank statements of the bank accounts of the Appellant at Lloyds TSB Bank Plc for the period from 31 August 2000 to 9 February 2001.

vii) In addition during the course of the hearing the officer produced a copy of a three page report on his visits to the Appellant.

The Appellant produced the following documents.

i) A copy invoice dated 31 May 2000 from the Appellant to Omid Developments Limited totalling £235000

ii) A copy invoice dated 3 August 2000 from the Appellant to Omid Developments Limited in the sum of £64625.

iii) A letter from the Commissioners to the Appellant's account dated 20 August 2004.

iv) A copy letter dated 23 August 2004 from the Appellant's accountant to Commissioners.

v) A copy letter dated 23 August 2004 from the Commissioners to the Appellant's account.

vi) A copy letter from the Appellant's accountant to the Commissioners dated 2 December 2001.

vii) A copy of the Appellant's accountants fax journal indicating the dispatch of the Appellant's accountant's faxed letter of 2 December 2001.

viii) A copy bank statement of the Appellant's account at Lloyds TSB for the period 17 July to 23 July 2001.

There was a dispute as to some of the facts in this appeal, and accordingly we set out in this decision details of the evidence given at the hearing of the appeal, together with our findings of fact, the principles of law involved and our conclusions.

Evidence at Hearing of Appeal.

Evidence of Appellant.

The Appellant Mr Andrew Graham Heatley gave evidence that in 2001 when the officer of the Commissioners Mr Adams came to see him he was running the business AGH Shopfitters as a sole proprietor. It was not a limited company. He was also a director of a limited company Omid Developments Limited. He confirmed that he carried out a development for Omid Developments Limited at a site in Harrogate. Omid Developments Limited hit financial difficulties and the lenders chose to make payments direct to the Appellant. He confirmed that in 2001 Mr Adams the officer came to see him. He could not remember the date. He said that Mr Adams told him that he should have paid VAT of over £92000, but that it was not a problem, and the Appellant should raise an invoice to Omid Developments Limited who would reclaim it and pay it to A.D.H Shopfitters who could then pay the VAT to the Commissioners. He said that he then put in a VAT return but only received about one half of the claim. He said that he then phoned Mr Adams to ask what had happened and Mr Adams then advised that he should seek the advice of a VAT specialist. At that point he came to see Mr Nawaz with all the documentation which he had.

The Appellant was asked whether before Omid Developments Limited had problems he had raised invoices which had never got paid. The Appellant implied that he believed so but that it was so long ago and it was such a fraught time. He said that then the bank took over and started paying directly to the Appellant.

The Appellant said that prior to the visit from the officer he had been aware of no problems with the Commissioners in the past.

The Appellant said that he gave his accountant the information that was at his office, that there were two invoices that were dated 31 May 2000 and 3 August 2000, and that he that did not produce any other invoice other than these. He said that he had a bookkeeper but did most of the books himself. With regard to the two invoices produced by his accountant from the Appellant to Omid Developments Limited dated 31 May 2000 and 3 August 2000 respectively for £235000, including VAT of £35000, and for £64625, including VAT of £9625, he thought that he had accounted for or paid VAT at the relevant time. He could not think of any reason why he had not.

Mrs Linklater then produced to the Appellant a copy of a letter which the Appellant had written to the Commissioners on 4 June 2001 carrying the heading of the Appellant and its VAT number, which stated "with reference to the above company I enclose a copy of an invoice which we failed to invoice to an associated company Omid Developments Limited VAT number 734576022. This invoice is in the process of being claimed and when we receive the payment it will be forwarded to clear the outstanding debt." That letter was signed by the Appellant and the invoice enclosed was an invoice from the Appellant to Omid Developments Limited with the Appellant's VAT number relating to the property at Harrogate for works completed for £527127.19 and VAT of £92,246. The Appellant accepted that he wrote that letter and he accepted that he did not pay the Commissioners the VAT of £92246.

It was put to the Appellant that he had not put that invoice in his VAT returns. The Appellant replied that he was not sure, and he only knew that he did what Mr Adams asked him to do. He accepted that he was a sole proprietor and that the limited company Omid Developments Limited was a separate legal entity.

Mrs Linklater referred the Appellant to the letter from the Commissioners to the Appellant dated May 2001 which on the third page contains a sentence "you should now issue tax invoices to Omid to enable it to reclaim.." [the VAT]. She asked the Appellant if he accepted that he was advised that it would be Omid Developments Limited and not himself that should reclaim the VAT. The Appellant replied that he was not an accountant and the letter did not mean a lot to him. It was a shock to receive the letter but the officer told him that matters could easily be rectified.

The Appellant had never seen the letter that his accountant Mr Nawaz had written to the Commissioners on 17 August 2001, but he accepted that he instructed Mr Nawaz and gave him information, and forwarded to Mr Nawaz further information later on. He did not know when he had provided the two copy invoices to Mr Nawaz. There was no reference in Mr Nawaz's letter to those two invoices. The Appellant did not know if any notification had been sent to Omid Developments Limited but the Appellant was claiming bad debt relief, although he did not know if any claim for bad debt relief had been actually made by the Appellant.

The Appellant said that he thought that his secretary had dealt with Mr Adams initially but he could not recall exactly. He recalled that he did have a meeting with Mr Adams but he thought that there was only one meeting and that he had been late for the meeting.

Mrs Linklater asked the Appellant if he accepted that at that meeting Mr Adams had asked him why Omid Developments Limited had been claiming VAT but VAT was not being accounted for by the Appellant personally. The Appellant replied that he could not remember and that he did not really understand. He said that it was three years ago. He said he could not remember whether at the meeting there was a discussion about documents and whether or not they were invoices. He was asked by Mrs Linklater whether he accepted that he could not remember whether or not the documents were requests for payment or invoices. The Appellant replied that all he could remember was that he owed over £92000 VAT but that there was a way of reconciling it and sorting out the problems.

The Appellant said that he had not been paid the invoice which contained the £92246 VAT. He said that Mr Adams had asked him to raise an invoice to Omid Developments Limited and Omid Developments Limited would claim back the VAT so that the Appellant could pay the Commissioners. He said that Mr Adams had not raised any problems about any invoices being disallowed. He had not expected anything to be queried and had expected the £92246 to be paid to him. When he had only received about a half of that amount back he telephoned Mr Adams to query why he had received only about a half of the amount and was told that he should seek advice.

The Appellant agreed that the copy bank statements in the Respondents' bundle of documents were the bank statements relating to his sole proprietorship business.

Evidence of Appellant's Accountant Mr Nawaz

The Appellant's accountant Mr Nawaz gave evidence that he had written a letter to the Commissioners dated 17 August which he headed "without prejudice". He said that at that time he did not have a complete understanding of the matter and he wrote the letter without prejudice to have matters clarified. He said that not long before Mr Nawaz raised the actual appeal the Appellant had produced to him some further information which indicated that these invoices had been raised. He said that the officer had referred to these as requests for payment but Mr Heatley contended that these were invoices. Mr Nawaz considered that Mr Heatley had raised an invoice, Omid Developments had claimed it, Omid would pay the Appellant the VAT and the Appellant would pay it across to the Commissioners. He considered that this should be a pure technicality as far as the Commissioners and Omid Developments Limited and the Appellant were concerned. Mr Nawaz said that he had never had any proper guidance from the Commissioners to his request as to what had happened but he surmised that these invoices had been disallowed because Omid Developments Limited had never paid them. Mr Nawaz considered that there was no point in the Commissioners indicating to Omid Developments Limited that it should claim relief as the claim had already been disallowed. He considered that Mr Adams had already seen the invoices and Mr Nawaz indeed sent a further copy of those invoices to Mr Adams with a fax on 2 December 2001, which he could prove was sent because he kept a log of his faxes.

Evidence of Commissioners' Officer David Vincent Adams

At the hearing Mr Adams gave evidence that he was an officer in the VAT department of the Commissioners dealing with the VAT assurance audits. He had been an officer since 1972.

Mr Adams stated that he had first visited the Appellant's premises on 27 March 2001, and had then visited the Appellant on 25 April 2001 and again in early June 2001. The purpose of his visit was to do a routine VAT audit of the sole proprietorship business AG Heatley. He said that on the first occasion he met the bookkeeper Mrs Street, but had not met anyone else as the Appellant was not present. In the course of his audit he decided to check on the inter-company transactions. He was initially concerned, as part of his audit, that no VAT had been accounted for for many months, he thought that from period 04.00 there had been no output tax declarations by the Appellant.

Mr Adams said that when he looked at the records he found three documents, but it was difficult to ascertain what exactly they were as to whether they were applications for payment or tax invoices. Two of the documents had the headings "invoices" but the third document which contained VAT of £35000 had a reference "APL 2", an application for payment.

Mr Adams was shown the two copy invoices produced by the Appellant at the hearing dated 31 May 2000 and 3 August 2000 which were headed "invoices," and were from the Appellant to Omid Developments Limited. Mr Adams was asked if these were the documents he saw. He replied that the document 3 August 2000 probably was the one seen by him as it had the same reference number "AGH0028", but the document dated 31 May 2000 with the heading "AGH0027", with the VAT of £35000 on the document was not recognised by Mr Adams as he had made a note of a reference number for the £35000 VAT document and he had noted the number of this "APL2."

At that stage Mr Nawaz asked to see the notebook of the officer. Mr Adams replied that he had a copy of his reports which referred to three documents for payment, but he did not have his original notebook with him, and it was unlikely that the original was in the Commissioners records now as they now used an electronic system and the original notebooks may have been destroyed. He stated that the copy of his report was in his handwriting and he had made a note on the day.

Mr Adams stated that on his first visit to the Appellant's premises on 27 March 2001 he saw various documents and discussed these with a Mrs Street, the secretary. The first thing he did was to follow the documents through into the records of Omid Developments Limited as Mrs Street did the records of both businesses. He saw that input tax had been claimed on the three documents by Omid Developments Limited. The three were posted into the purchase invoices records of Omid Developments Limited and input tax had been claimed, and VAT had been repaid on all three to Ovid Developments Ltd. Mr Adams could not see any output tax being accounted for on these documents in the records of the Appellant. This concerned Mr Adams as under normal VAT methods output tax from one party should equal the input tax from the other party. As one of the documents was an application for payment Mr Adams required to be satisfied, and he asked Mrs Street why input tax had been claimed by Omid Developments Limited but no output tax had been recorded for the Appellant. He said that Mrs Street told him in reply that she did not know why that was so, except that she did things under instructions.

Mr Adams said he met the Appellant on a subsequent visit on 25 April 2001. Mr Adams put the same questions to the Appellant but the Appellant replied in words to the effect that the Appellant could not comment on what had happened with Omid Developments Limited.

Mr Adams said that he had to establish if any VAT was due by the Appellant, and the VAT that would have become due if the Appellant had issued tax invoices. That would have created a tax point and tax would have become due at that tax point. Mr Adams said that the Appellant then told Mr Adams that these documents were requests for payments and that is why the Appellant had not accounted for tax on them. Mr Adams concluded that if they were requests for payment no tax point had been created in the Appellant's business and no assessment could be raised at that stage. He said that on stage payment contracts the tax point was the earlier of the receipt of the money or the issue of the tax invoice. If no money had been received and no tax invoices issued there was no tax point. Mr Adams said that he concluded at that point that Omid Developments Limited had made an improper claim for input tax as it did not have tax invoices to support any input tax claim. He said that if the Appellant had told him that these were tax invoices, the position in Omid Developments Limited was correct but he would have raised an assessment on the Appellant for the £45000.

Mr Adams said that he looked next at the banking receipts of the Appellant and noticed substantial sums of money coming in to the Appellant's bank account on a regular basis. These were the amounts shown in the copy bank statements of the Appellant at Lloyd TSB produced in the Respondents' bundle. Mr Adams asked the Appellant about these receipts in the bank account, and the Appellant told Mr Adams that these were loans from Capital Mortgage. Mr Adams was not sure who the Appellant had stated they were loans to. Mr Adams asked to see the documentation relating to the loans which showed Mr Adams that the loans were being made to Omid Developments Limited but on the condition that on a monthly basis the loans were paid direct to the Appellant dependant on credit balances. The loans were being made to Omid Developments Limited by Capital Mortgage who was providing the loan to Omid Developments Limited. Mr Adams concluded that Capital Mortgages were providing the loans to Omid Developments Limited who were then using these loans to pay their subcontractor, the Appellant. Mr Adams therefore determined that they related to a standard rate of taxable supply of construction services, because under the stage payment rules the receipt of money created a tax point. He recalled that he saw that there was a condition in the loan agreement that the money had to be paid direct to the Appellant, and the loans were based upon the work done on a monthly basis by the Appellant. It was the money that the Appellant had in turn to pay to his subcontractors. Mr Adams said that he then made a calculation which he set out to the Appellant in May 2001 totalling the payments that came in from Capital Mortgage into the bank account of the Appellant and the undeclared VAT.

Mr Adams said that he told the Appellant that Mr Adams would be raising a notice of assessment for output tax due on these receipts which Mr Adams considered related to payments for standard rated supplies of construction services. Mr Adams said he advised the Appellant that the Appellant should raise a tax invoice to Omid Developments Limited to enable Omid Developments Limited to recover the input tax on this taxable supply. If the Appellant did not raise the tax invoice Omid Developments Limited would not be in a position to make an input tax claim.

Mr Adams confirmed that in relation to the two documents dated 31 May 2000 and 3 August 2000, he had first seen the document dated 3 August 2000 on his visit to the Appellant's premises, but he had only first seen the document dated 31 May 2000 at the hearing of this appeal.

When questioned by Mr Nawaz about his notes of the reports on his visit to the Appellant, the officer was asked to explain why he had not kept his original notebook and produced this, why he had only produced a photocopy of his reports, and why he had signed and dated the second page as 27 March 2001 and the third page as 25 April, when the report referred to three visits which ended on 4 June 2001. Mr Adams replied that his original notebook had probably no longer been kept by the Commissioners, as he could not find the notebook in the archives of work. There was not a copy of the original notebook. He had prepared the report in his own handwriting which was a true report of his various visits to the Appellant. He could not exactly remember but he thought that the last visit on 4 June 2001, which was for only for twenty minutes, was merely to return papers to the Appellant's premises.

Mr Adams' reports stated that the Appellant had of late been acting as the main contractor to Omid Developments Limited on the conversion at a site of a hotel into luxury flats. When Mr Adams had examined the records of the Appellants he had identified three invoices which had been claimed but not accounted for in the Appellant's records. These were AGH0027 of 1 May 2000 with £745 VAT, AGH0028 of 3 August 2000 with £9625 VAT, and APL2 dated 31 May 2000 with £35000 VAT. The report stated that with regard to bankings no income had been declared since 06.00. The Appellant had told Mr Adams that Omid Developments Limited the developer had gone into financial difficulties due to the other director John Lancaster removing money from the business. John Lancaster had left. In order to complete the development the Appellant had become the sole director of Omid Developments Limited. Omid Developments Limited had negotiated funding with Capital Finance on the condition that the funding went directly to the Appellant. It was based on the payments due by the Appellant to subcontractors and suppliers.

Mr Adams confirmed that to the best of his knowledge he had not seen the Appellant himself on the first visit as the Appellant had not returned to the premises but Mr Adams had seen the Appellant on his next visit in April. He was not sure if he saw the Appellant on the third visit, although he thought that he must have seen the Appellant on that third visit as he would not have discussed raising the assessment with Mrs Street.

Mr Adams said that on the second visit one of his colleagues Mr Gordon Jenkins came with him from the Commissioners Investigation team. It was put to Mr Adams that the Appellant did not recollect ever meeting Mr Jenkins, but Mr Adams replied that Mr Jenkins had come along to see the Appellant at the request of Mr Adams.

Mr Adams said that he did not recall receiving a phone call from the Appellant, saying that the Appellant had not received money and during which Mr Adams advised the Appellant to contact a VAT specialist. Mr Adams did not recall such a telephone call and stated that it was not up to Mr Adams to tell a trader to contact a tax specialist.

Mr Adams report indicated that he discussed the position with Mr Gordon Jenkins who wished to attend the next visit. He agreed that Gordon Jenkins did in fact attend the Appellant but there is no reference in Mr Adams notes to Mr Jenkins being at the second visit, and Mr Adams did not have any notes from Mr Jenkins on his file. Mr Adams confirmed that the records of Omid Developments Limited were on the same premises and in the same office as those of the Appellant and that was why Mr Adams was able to trace the invoices through the records of the two businesses. He had known that no income had been declared by the Appellants since 06.00 because there had been nothing in this respect on the Appellant's VAT returns. He was of the view that the Appellant himself had told him that Omid Developments Limited had got into financial difficulties because of the problems with a director of Omid Developments Ltd Mr Lancaster, as the book keeper Mrs Street would not have given him the information. Mr Adams denied that he had told the Appellant that Mr John Lancaster had cost the Commissioners millions. Mr Adams said that he had never met John Lancaster and did not know him. Mr Adams said that the audit of the Appellant had led him into the records of Omid Developments Limited. He had ascertained that VAT was incorrectly reclaimed by Omid Developments Limited because he had inspected the VAT records for Omid Developments Limited and he had seen that input tax had been claimed by Omid Developments on the documents received from the Appellant, and there had been a claim from the Commissioners of £35000 which had not been accounted for by the Appellant. Mr Adams had not gone to the premises in order to audit Omid Developments Limited, but the audit of the Appellant had led him to make inquiries of the records of Omid Developments Limited.

Mr Adams denied he had received a fax from Mr Nawaz of 2 December 2001 sending copies of two invoices. He said that if the three documents had been invoices, and proper tax invoices, on the audit Mr Adams would have looked to raise an assessment on the Appellant. Mr Adams had been persuaded by the Appellant that these were not tax invoices but requests for payment, and as a consequence the Appellant's records with regard to these invoices were correct. The problem was that if they were not tax invoices Omid Developments Limited had no entitlement to claim £45000 VAT. Mr Adams had an obligation to the revenue to follow these into the records of Omid Developments Limited to see what had happened to them. So what had started out as an audit of the Appellant had lead Mr Adams into the records of Omid Developments Limited. At the end of the day the Commissioners were down on by £45000 and Mr Adams had an obligation to see who was at fault, was it the Appellant or Omid Developments Limited?

Mr Adams accepted that he had taken copies of the bank statements but had not taken copies of the documents for his file (the documents that the Appellant's representative was arguing were invoices). He said he would have written up his notes on the day. He stated that to the best of his knowledge he had written down exactly the headings of the three documents as stated in his report. He denied that he had incorrectly noted "APL2" to the invoice of 31 May 2000 which had £35000 VAT. Mr Adams was adamant that the Appellant had told him that the three documents were not tax invoices but applications for payment. He had not photocopied the three documents for his file as he had not felt the need to do so as the Appellant had been insisting that they were requests for payment.

Mr Adams had suggested to the Appellant that the Appellant should issue tax invoices to Omid Developments Limited to enable it to reclaim tax, and this was to help enable Omid Developments Limited to get the Input tax back. If Omid Developments Limited had had a clear ledger balance with the Commissioners and had not owed money to the Commissioners, Omid Developments Limited would have had a one hundred percent VAT reclaim. As Omid Developments Limited did not have a clear ledger balance with the Commissioners it still owed the Commissioners £45000 and this was offset against Omid Developments Limited on the ledger. This was why Omid Developments Limited was not repaid in full by the Commissioners.

Mr Nawaz put to Mr Adams that the payment by the Commissioners to Omid Developments Limited came into the Appellant's bank account on his bank statement of 17 July 2001. Mr Nawaz produced that copy bank statement of the Appellant's bank account at Lloyds TSB to Mr Adams. Mr Adams had not seen that document before. This showed a payment of £41191.22 having been paid by HM Customs VAT into the Appellant's bank account on 17 July 2001 which two days later was transferred by the Appellant to another account. This was shown in the bank statement sent by Lloyds TSB to the Appellant on 2 August 2001.

Mr Adams was asked a number of questions by Mr Nawaz about what he told the Appellant to do. He insisted that he had only told the Appellant that he may issue a tax invoice to Omid Developments Limited, and did not tell the Appellant that he would receive all the VAT back.

Mr Adams insisted that he had not received a fax from Mr Nawaz dated 2 December 2001. He said that there was another Mr Adams in the Commissioners offices, but that Mr Adams was based at Middlesbrough and would not have received an invoice that had been faxed to the Mr Adams' Leeds office. Mr Adams was quite sure that he had never received that fax. Mr Adams denied speaking to the Appellant on the telephone, after the Appellant had received the refund of VAT to Omid Developments Limited which amounted less than half the amount assessed against the appellant.

Mr Adams did not know the date when Omid Developments Limited went into liquidation but Mr Nawaz indicated that that occurred in December 2003. Mr Adams had been told that the same bookkeeper had dealt with the accounts and book keeping for both the Appellant and Omid Developments Limited. He did not know if both businesses had the same VAT quarters. Mr Adams thought at his first visit in March 2001 the development of the site had been nearly finished, because the audit was carried out in one of the rooms of the premises which had been converted into flats. Mr Adams was asked if the development had been zero rated or standard rated. He replied that it would have been zero rated if there was a sale or leases of over 21 years in length, but that Omid Developments Limited would have had a problem if it intended to rent out the flats for a lesser period where there would have been an exempt supply. Mr Adams however was satisfied that that had not arisen because Omid Developments Limited was a fully registered business which enabled it to claim input tax back. It was not a partly exempt business.

The Appellant's application for VAT registration dated 23 January 1995 requested registration from first 1 December 1994.

The notice of assessment for VAT was calculated on 8 May 2001 and was for £92246 tax. The assessment for the period 09.00 was for £20737, for the period 12.00, £62148, and for the period 03.01, £9361.

The letter from Mr Adams to the Appellant dated May 2001 which enclosed the notice of assessment indicated that there had been output tax errors and that stage payment income had not been accounted for, namely income received from Capital Mortgages. Mr Adams had stated in that letter that he understood that Omid Developments Limited obtained finance from Capital Mortgages but that finance was paid directly to the Appellant. It was based on the Appellant's creditors balance each week and was used to pay the creditors. Mr Adams also understood that the Revised Terms Contract with Omid Developments Limited was that their contracting services were at cost. In Mr Adams opinion VAT liabilities for these transactions were as follows..

i) Omid Developments Limited /Capital Mortgages was a loan of finance outside the scope of VAT;

ii) The Appellant/Omid Developments Limited was a payment for standard rate of supplies of construction services by the Appellant as main contractor to the developer Omid Developments Limited. In respect of staged contracts the tax point, that is the time when the VAT becomes due, is the earlier of the issue of a tax invoice or the receipt of payment. As no tax invoices were issued the tax point for this income is when the funds cleared the Appellant's bank account. All amounts treated as tax inclusive.

In the letter Mr Adams set out the receipts into the Appellant's bank account from Capital Mortgages. There were four payments during the period 09/1000 totalling £139239.32 in respect of which the VAT was £20737. In respect of the period 12.00 there were twelve payments credited to the bank account totalling £417279.87 in respect of which the VAT was £62148.00, and there were two payments into the bank account for the period 03/01 totalling £62854 where the VAT was £9361. The total under declared tax was therefore £92246.

In the letter Mr Adams pointed out that normally there would have been a mis-declaration penalty of 15% but because of the complexities of the case in that the income appeared to represent a loan to the appellant, Mr Adams had inhibited the penalty. Furthermore although default interest was normally payable, as there had been no loss to the Commissioners in that no input tax had been reclaimed by Omid Developments Limited, Mr Adams inhibited an interest charge. He indicated that the Appellant should now issue tax invoices to Omid Developments Limited to enable it to claim the above.

Mr Adams had written on 31 August 2001 in reply to a "without prejudice" letter from Mr Nawaz dated 17 August 2001. In that letter Mr Adams indicated to Mr Nawaz that if he was satisfied that standard rated services to the value of £259257 (ex VAT) had been provided by the Appellant to Omid Developments Limited and that these suppliers had not already been accounted for in the notice of assessment to the Appellant, the Appellant may issue a tax invoice to Omid Developments Limited. Mr Adams pointed out however that on stage payments contracts the tax point was the earlier of the issue of the tax invoice and the date of payment. Therefore unless it could be shown that a tax invoice was issued, that is sent to Omid Developments Limited after the work was done, the tax point would be the date that the invoice was issued. This would mean that Omid Developments Limited could reclaim the VAT in the period in which it received the tax invoice and the Appellant could not claim bad debt relief until six months from the date that Omid Developments Limited was due to pay that invoice. Additionally if Omid Developments Limited did not pay when the Appellant made his bad debt claim, the Appellant must advise Omid Developments Limited that he was claiming the relief and advise Omid Developments Limited that it should now disallow any VAT claim. Mr Adams stated that he could not cancel or withdraw his assessment against Omid Developments Limited because Omid Developments Limited could only reclaim the assessed VAT when it was in possession of a tax invoice and at the time of his audit it was not.

The bank statements of the Appellant at Lloyds TSB were crossed- checked against Mr Adams calculations, and his calculations as to the monies paid into the Appellant's bank account from Capital Mortgages with regard to Omid were correct, although there was an extra payment on 16 October of £17605.27 which Mr Adams did not appear to have added into his calculations and total. There was no explanation at the hearing as to why this was.

Submissions by Representatives at Hearing.

Submissions of the Respondents' Representative

Mrs Linklater submitted on behalf of the Commissioners that the key point was that the Appellant and Omid Developments Limited are two distinct entities with two distinct VAT registration numbers. It was disclosed at the hearing that Omid Developments Limited was now in liquidation. The person with standing to take any action for Omid Developments Limited was the liquidator, and the people who would be entitled to any payments by Omid Developments Limited were the creditors of Omid Developments Limited. This appeal was not however an appeal by Omid Developments Limited, and the assessment under appeal was not against Omid Developments Limited. The appeal before the tribunal was an appeal by the Appellant. However in any event there could not be a case for a set off. There could not be a set off between two distinct trading entities, and any set off could not be against the Commissioners. The grounds of appeal in the Notice of Appeal were that the assessment was not agreed to the extent of £44625 in respect of bad debt relief. The Appellant has apparently not taken the £745 into his calculations in the appeal. The grounds of the appeal related to less than one half of the assessments and the remainder of the assessment in any event had not been paid by the Appellant to the Commissioners at all.

Mrs Linklater submitted that there could be no claim for bad debt relief allowed against the assessment. She submitted that the position of the Commissioners was that output tax had been found to be under declared when the Commissioners had audited the Appellant. The officer discovered that input tax was being declared by Omid Developments Limited to the extent of £44370 but there was no corresponding output tax. She submitted that much of the evidence on behalf of the Appellant had related to different invoices which the Appellant claimed came into existence but in actual fact those invoices had no bearing on the assessment on the Appellant. The assessment was based on actual receipts, because Capital Mortgages had paid to the Appellants substantial sums in the period September 2000 to February 2001 as listed by Mr Adams and as shown on the bank statements of the Appellants, and these receipts led to the assessment. She submitted that accordingly the whole suggestion by the Appellant that bad debt relief was relevant to the appeal was without foundation, because the assessment was based on actual money that had been received by the Appellant. The actual position was that substantial sums of money were received by the Appellant and VAT was not declared and paid to the Commissioners on those receipts.

Mrs Linklater submitted that in any event the Appellant had not complied with the provisions of Section 36 of VATA 1994 and a Regulations 165-168 of the Value Added Tax Regulations 1995. These set out conditions for relief. A claimant had to supply goods or services and accounted for and paid the VAT on the supply, the consideration for the supplier must have been written off in the accounts as a bad debt, and six months must have elapsed from the date of supply and the time and when the consideration became due unpayable. For supplies made before 1 January 2003 a claimant had to give written notice to the customer. These procedures had not been carried out by the Appellant, and the Appellant had produced no evidence that the Appellant had complied with these procedures.

Mrs Linklater submitted that the narrow point in the appeal was the claim by the Appellant to bad debt relief of £44625. She submitted however that none of the evidence at the hearing by the Appellant had been directed to this narrow point. She reiterated that the assessment had been made in relation to monies actually received by the Appellant and it was not a case where bad debt relief was appropriate.

She submitted that the "Without Prejudice" letter by Mr Nawaz dated 17 August 2001 had been headed with the names of both the Appellant and Omid Developments Limited. However for whatever reason a decision had been made not to pursue any appeal by Omid Developments Limited. In any event it was clear on the Appellant's own admission that the tax which was the subject of the assessment had not been paid or accounted for. No records or other documents had been produced by the Appellant to show that VAT had been accounted for and paid in relation to the assessment. No records or other documents showing that the Appellant had accounted for and paid VAT thereon had been produced as required by regulation 167 of the VAT Regulations 1995. There was no basis for bad debt relief on the facts of the case.

She submitted that the Commissioner's case was relatively straightforward. The Appellant was registered for the purposes of VAT. The Appellant had provided taxable supplies to Omid Developments Limited for which the Appellant had received payment but had not accounted to the Commissioners for VAT in the sum of £92246. She submitted that the appeal should be dismissed. She indicated that the Commissioners would not apply for costs if successful in this appeal.

Submissions by the Appellant's Representative

Mr Nawaz submitted on behalf of the Commissioners that the case law imposed a duty on the tribunal to consider all the facts and see what the proper amount of the assessment was. The tribunal should ask "what amount of tax was properly due from the taxpayer?", and the tribunal had to investigate and may come to the view that the proper course was to discharge the assessment. He submitted that the primary task was to find the correct amount of tax so far as possible on the material properly available to the tribunal.

Mr Nawaz in his submission set out the issues and background, the documents, the chronology, and his view of the evidence.

He submitted that the Respondents' officer Mr Adams had not been credible and there were a number of issues in the appeal where the credibility of Mr Adams had become an issue. These issues had been dealt with in Mr Nawaz's cross-examination of Mr Adams. He submitted that the evidence of the Appellant himself should be preferred to that given by the officer. He indicated that the issues in relation to bad debt relief were the following questions. Had valid VAT invoices been issued at the appropriate time by the Appellant'. Did Omid Developments Limited pay the sums due on the basis of those invoices? Is bad debt due relief due to the Appellant in respect of those invoices? Is it correct that the invoice for £92246 VAT raised on the advice of the officer remains unpaid, or at least the extent of the difference between the VAT charge £92246, and the sum of £41191.22 refunded to the Appellant. Mr Nawaz submitted that Mr Nawaz's Without Prejudice letter of 17 August 2001 had been written by him under the misapprehension that the invoices had not been accounted for. He confirmed that he had sent the Commissioners copies of the two invoices on which bad debt relief was claimed, with his faxed letter of 2 December 2001. He submitted that the Appellant had been told by the officer that he should raise an invoice to Omid Developments Limited charging £92246 VAT, and that Omid Developments Limited would be refunded this sum which he could then pay over. He submitted that it had been the evidence of the Appellant that he had paid all his VAT liabilities including those that were subsequently copied. He submitted that the evidence of the Appellant that should be preferred to the officer that the Appellant arrived late on the first visit with his secretary having dealt with Mr Adams until he arrived and that he was not aware of any more meetings. The Appellant had denied telling Mr Adams that the documents were requests for payment. The Appellant's evidence should be preferred that these were actually invoices. The report notes of the witness for the Commissioners Mr Adams could not be relied upon. The original notebooks had not been produced and there were flaws in the report.

Mr Nawaz confirmed that the grounds of the appeal had been and remained a claim for set-off in respect of bad debt relief. He submitted that that was entirely appropriate to the Appellant as the Appellant had lost out. The Appellant had not admitted that he had not paid the VAT on the two invoices in question.

Mr Nawaz submitted that the Appellant's claim for bad debt relief had been notified within the required period of three years and six months. The Appellant had ceased to trade and the Commissioners had stipulated no form or manner for submitting the claim for bad debt relief and therefore could not complain. He submitted that there was no need to notify Omid Developments Limited as it was inappropriate as the VAT in question had already been disallowed by the Commissioners. He submitted that copies of the relevant VAT invoices had been supplied to the Commissioners. He therefore submitted that the Appellant had fulfilled the requirements relating to bad debt relief. He further submitted that notwithstanding this where requirements were oppressive tribunals could substitute reasonable requirements.

Mr Nawaz accepted that the onus of proof of having paid the VAT on the two invoices for which he claimed bad debt relief rested on the Appellant. He submitted that the Appellant's case was that the Appellant had accounted for all liabilities due from him. He submitted that as there was no documentary evidence the Tribunal should base its decision on the other evidence before it and should reject the evidence for the Commissioners and accept that the evidence given by the Appellant that he had accounted for the VAT on his liabilities which would include the two invoices. He suggested that it was probable that VAT had been accounted for by the Appellant.

He submitted that the Appellant had invited the tribunal to accept his claim for bad debt in its entirety by allowing relief in respect of the two invoices which amounted to £46625.

He submitted that a Tribunal had to consider the correct amount of tax. The Appellant was being asked to pay £92246 VAT but the actual sum of VAT received by the Appellant from Omid Developments Limited was £41191, a shortfall of £51055. He submitted that the Appellant was being asked to pay more than he had received.

Mr Nawaz further submitted that at the very least the tribunal should allow the fraction of VAT relating to the shortfall of £51055, which amounted to £7604.

Findings of Fact.

We have set out in detail the evidence given by the witnesses in this appeal as there was an issue as to the facts in this appeal. The Appellant was challenging the evidence of the officer Mr Adams, and his credibility and was inviting the Tribunal to prefer the Appellant's version of events to those stated by the officer.

We find that on 27 March 2001 an officer of the Commissioners Mr Adams made a routine VAT audit visit to the Appellant who was the sole proprietor of a registered VAT business. When he called he interviewed the Appellant's secretary and bookkeeper Mrs Street. He ascertained that there were two associated businesses of which the Appellant was a director namely Omid Developments Limited with its own VAT registration, and AGH Shopfitting Limited with its own VAT registration. He ascertained that Omid Developments Limited was converting the site of a hotel into luxury flats and that the Appellant had been acting as the main contractor to Omid Developments Limited. He examined the VAT records of the Appellant and his other documentation. As the same bookkeeper dealt with the bookkeeping of Omid Developments Limited, which was on the same premises, the officer examined those records of Omid Developments Limited. He found that input tax had been recovered by Omid Developments Limited in respect of supplies made by the Appellant. No output tax had been declared by the Appellant in respect of these amounts. He found that Omid Developments Limited had recovered input tax totalling £45370, consisting of three items of £745, £9625, £35000.

The officer identified payments in the bank account of the Appellant. Various payments had been made direct from Capital Mortgages into the bank account of the Appellant, although Capital Mortgages were supplying finance to Omid Developments Limited in respect of the construction project. On examining the records of the Appellant Mr Adams established that output tax had not been declared in respect of those payments received by the Appellant from Capital Mortgages into the Appellant's bank account at Lloyds TSB. The officer then visited the Appellant's premises next on 25 April 2001. There was a dispute between the parties as to when the Appellant himself talked to Mr Adams. The Appellant believed that he was only present during one of Mr Adams' visits. Mr Adams recollection was that the Appellant himself may not have returned to his premises on Mr Adams' first visit when the bookkeeper Mrs Street had shown the Officer the records. The officer was unable to produce his original notebooks or even a copy of those notebooks, stating that his original notebooks were not currently held by the Commissioners. He produced a report on his visits, but this report does not make it clear exactly who Mr Adams talked to on those two visits. It was apparent that Mr Adams third visit on 4 June 2001 was merely to return documents to the Appellant's premises. We are concerned that the original notes of the officer have not been produced either in their original notebook or in a copy of the notebook. Mr Adams' report leaves much to be desired. He has not indicated in the report precisely who he had talked to at the various visits. Although a reference was made by the officer to another officer Gordon Jenkins attending with him on the second visit, Mr Jenkins has not signed the report although the report form indicates that each officer taking part in a visit should append his initials and name.

Mr Heatley himself was vague as to his recollections relating to his meeting with Mr Adams. He could not remember the date of any meeting. He believed that he had only been present on one occasion when Mr Adams had called. He produced no evidence to show that he had accounted for the VAT on the 2 invoices. He accepted that he had not paid the £92246. He did not know if he had made any claim for bad debt relief. He said in his evidence that he thought he had a meeting with Mr Adams but that he thought that he had been late for the meeting. When asked if he accepted that at a meeting with Mr Adams, Mr Adams had asked him why Omid Developments Limited had been claiming VAT and that VAT was not being accounted for by him personally. The Appellant had replied that he could not remember. He did not understand. It was three years ago. He said he could not remember discussions about documents as to whether or not they were invoices. Although there are shortcomings in Mr Adams report, on all the evidence in this appeal, we find that we prefer the recollection of Mr Adams as to what was told to him by Mr Heatley and his bookkeeper, to the recollection of the Appellant himself in his evidence at the hearing. We are satisfied that Mr Heatley did talk to Mr Adams during the course of Mr Adams first two visits to the premises. We find that Mr Heatley told Mr Adams that he had arranged for Capital Mortgages to pay loan monies due to Omid Developments Limited direct to the Appellant himself. We are satisfied that Omid Developments Limited recovered input tax in respect of supplies made by the Appellant and that no output tax had been declared by the Appellant in respect of these amounts totalling £45370. We find that when Mr Adams questioned Mr Heatley about the three amounts of £745, £9625, £35000 Mr Heatley told Mr Adams that these were requests for payment and not invoices.

We find that Mr Adams identified payments made by Capital Mortgages direct to the Appellant in the Appellant's bank account at Lloyds TSB, namely sums of £139239.32 in the VAT period 09/00, £417279.87 in the period 12.00, and £62854 in the period 03.01, and that the VAT percentage on such bankings amounting to £92246. Mr Adams concluded that the VAT liabilities in respect of these transactions were that the loans by Capital Mortgages to Omid Developments Limited were a loan of finance outside the scope of VAT, that the Appellant was paid for standard rated supplies of construction services by himself as main contractor to the developer Omid Developments Limited, and as no tax invoices were issued the tax point for the income was when the funds cleared the Appellant's bank account. Mr Adams notified that Appellant that no mis-declaration penalty would be made against him, nor any default interest claimed. Mr Adams suggested that the Appellant should issue tax invoices to Omid Developments Limited to enable Omid Developments Limited to reclaim the VAT.

Subsequently the Appellant issued an invoice to Omid Developments Limited on 31 May 2001 for £527127.19 with VAT thereon of £92246. The Appellant wrote to the Commissioners on 4 June enclosing a copy of that invoice which he stated in his letter he had failed to invoice to Omid Developments Limited before. He indicated in the letter to the Commissioners that when the Appellant received payment the Appellant would forward payment to the Commissioners to clear the outstanding debt. In fact when the VAT on that invoice of £92246 was claimed, the Commissioners were only liable to pay part of this sum in view of monies owing by Omid Developments Limited to the Commissioners. The result was that Omid Developments Limited was paid only £41191.22 by the Commissioners by a payment which was in fact paid into the bank account of the Appellant at Lloyds TSB.

After Mr Heatley found that he had not received a full £92246 he consulted his accountant. There is a dispute between the parties as to whether Mr Heatley was advised to do so by Mr Adams or not. Nothing turns on this.

The Appellant's accountant Mr Nawaz wrote to the Commissioners "without prejudice" on 17 August 2001. That letter appeared to relate to both the Appellant and Omid Developments Limited. It is evident that Mr Nawaz was writing on the basis of limited information given to him by the Appellant, and we do not have to decide in this appeal whether that Without Prejudice letter is admissible as evidence in this appeal although it was included in the Respondent's bundle. The contents of that letter and the reply by the Commissioners do not affect the decision in this appeal, and we have given no weight to that correspondence either way.

The Appellant appealed against the assessment by Notice of Appeal dated 15 November 2001. In that Notice of Appeal he indicated that the assessment was not agreed to the extent of £44625 in respect of bad debt relief which he claimed should be allowed against the assessment.

We find that Mr Nawaz forwarded to the Commissioners a copy of two documents dated 31 May 2000 and 3 August 2000 which purported to be invoices issued by the Appellant to Omid Developments Limited with VAT of £35000 and £9625 respectively. We find that these documents were sent by fax by Mr Nawaz to the Commissioners on 2 December 2001. We accept that Mr Adams himself did not receive these documents, although they must have been received by the Commissioners. We find that these two amounts set out in the documents were the same amounts as in the documents which Mr Heatley told Mr Adams when he met Mr Adams were requests for payment and not invoices.

We find that no claim for bad debt relief has been made by the Appellant as required under the provisions of the VATA, 1994 and the VAT Regulations 1995. We find that there is no evidence in this appeal that the Appellant has complied with the conditions for bad debt relief which required him to supply goods or services and account for and pay VAT on the supply, required him to write off the consideration in his accounts as a bad debt, and to give notice of the claim for bad debt relief to Omid Developments Limited.

We find that the assessment to VAT was made by the Commissioners to the best of their judgement. We find that the Appellant has not satisfied us that he is entitled to claim bad debt relief against any part of the assessment. We find that the Appellant has no grounds for reducing the amount of the assessment.

The Law

Sections 73(1) of the Value Added Act 1994 deals with the law in relation to the VAT assessment as follows:

"… where it appears to the Commissioners that… returns [required under this Act] are incomplete or incorrect, they may assess the amount of Vat due from him to the best of their judgement and notify it to him".

This section has been interpreted by the Courts in a number of established authorities.

In Van Boeckel v Customs and Excise Commissioners [1981] STC 290 at 292 Woolf J stated as follow:

"Therefore it is important to come to a conclusion as to what are the obligations placed on the Commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment. As to this, the very use of the work "judgement" makes it clear that the Commissioners are required to exercise their powers in such a way that they can make a value judgement on the material which is before them. Clearly they must perform that function honestly and bona fide. It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek on appeal to reduce that assessment. Secondly, clearly there must be some material before the Commissioners on which they can base their judgement. If there is no material at all it would be impossible to form a judgment as to what tax is due. Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to best of their judgement is due. In the very nature of things frequently the relevant information would be readily available to the taxpayer but it would be very difficult for the Commissioners to obtain that information without carrying out exhaustive investigations. In my view the use of the words "best of their judgment" does not envisage the burden being placed on the Commissioners of carrying out exhaustive investigations. What the words "best of their judgement envisage, in my view, is that the Commissioners will fairly consider all material places before them, and on that material come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the Commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

In Rahman v Customs and Excise Commissioners [1998 [ STC 826 (Rahman number 1) Carnwarth J examined the Van Boeckel case and said in relation to it at page 863:

"The tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment has been reached "dishonestly or vindictively or capriciously"; or is a "spurious estimate or guess in which all elements of judgment are missing" or is "wholly unreasonable"… short of such a finding there is no justification for setting aside the assessment.

Once the grounds for making an assessment are established, then the tribunal's primary function is to examine the amount. Since the assessment is the starting point of that exercise, the tribunal will need to consider whether the judgment made by the Commissioners was sound or not. If it is shown to be wholly unreasonable or not bona fide there would be sufficient grounds for setting the assessment aside because it would not be fair for the taxable person to be required to answer a case which has been formulated in that way. However, that kind of case is likely to be extremely rare. In the normal case it should be assumed that the Commissioners have made an honest genuine attempt to reach a fair assessment. The debate before the tribunal should be concentrated on seeing whether the amount of the assessment should be sustained in the light of the material then available."

In Rahman v Customs and Excise Commissioners (Rahman number 2) [2002] EWCA 18A1, Lord Justice Chadwick stated at paragraph 45:

"It is in cases where the amount of tax found by the tribunal to be properly due is substantially different from the amount assessed by the Commissioners that the tribunal may think it appropriate to investigate why there is that difference; and to seek an explanation. That investigation may – but, often (as in the present case) will not – lead to the conclusion that the Commissioners did not exercise best judgement in making their assessment. The tribunal may take the view, in such cases, that the proper course is to discharge the assessment. But even in cases of that nature, as it seems to me, the tribunal could choose to give a direction specifying the correct amount – with the consequence that the assessment would have effect pursuant to section 84(5) of the 1994 Act. It could not be criticised for doing so. The underlying purpose of the legislative provisions is to ensure the taxable person accounts for the correct amount of tax."