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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> CISS Ltd v Customs and Excise [2004] UKVAT V18839 (11 November 2004)
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Cite as: [2004] UKVAT V18839
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CISS Ltd v Customs and Excise [2004] UKVAT V18839 (11 November 2004)
    18839

    VAT ADMINISTRATION — accounting and payment — factored debts — whether relief for VAT available in respect of the amount of "discount" on purchase of debts by factors — held that relief unavailable — Customs' Notices approved — appeal dismissed

    MANCHESTER TRIBUNAL CENTRE

    CISS LIMITED Appellant

    - and -

    THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

    Tribunal: Mr M S Johnson (Chairman)

    Mrs R Dean FCA (Member)

    Sitting in public in Manchester on 8 September 2004

    There was no appearance on behalf of the Appellant

    Mr N Mason, counsel, instructed by the Solicitor's for HM Customs and Excise, for the Respondents

    © CROWN COPYRIGHT 2004


     
    DECISION
  1. The appellant has appealed against a series of tax assessments dated 10 May 2000 amounting to £27,610 plus interest. The assessments, made under section 73(1) of the Value Added Tax Act 1994 ("VATA"), were for allegedly undeclared output tax said to be due from the appellant in respect of each of its VAT accounting quarters ending 02/97 to 11/98 and 05/99 to 11/99 respectively.

  2. The appellant, which carries on business in the field of staff recruitment, has been registered for VAT since 4 July 1994, in respect of "the supply of software systems and computer operating manpower" (to quote from the Form VAT 1 completed at the time of registration by the appellant's director, Mr William P Forde).

  3. The appeal was dated 28 November 2001. The expressed ground of appeal was that certain sales credit notes issued under factoring arrangements entered into by the appellant constituted allowable output tax adjustments, which had not been accepted, despite schedules showing the adjustments having been provided with a letter dated 24 March 2000, written to the Commissioners of Customs and Excise ("Customs") by the appellant's chartered accountants Hark Grimley & Co of Blackpool.

  4. We note that 10 May 2000 was more than 3 years after the end of period 02/97. However we have no information as to the date on which the assessments appealed against were made, as distinct from notified, and in the absence of an appeal on the ground of non-compliance with section 77(1)(a) of VATA, we make no decision with regard to time-limits.

  5. The principal of Hark Grimley & Co was Mr B Hark FCA. This is shown by the contents of the folder of documents helpfully provided to the tribunal by Customs for the purposes of the appeal ("the tribunal folder"). The tribunal folder not only contains a copy of the letter dated 24 March 2000, referred to in the Notice of Appeal, but also a copy of a letter dated 30 October 2000 written to Customs by Mr Forde, in which he states Mr Hark to have been both his fellow director and the appellant's accountant. Mr Hark lodged the Notice of Appeal on the appellant's behalf.

  6. The Notice of Appeal stated that the appeal had been lodged in time, i.e. within 30 days of the original decision. Manifestly this does not appear to have been the case. However we were informed by Mr Mason of counsel, representing Customs, that the appeal was not struck out but permitted to remain on foot pending discussions as to the computation of the assessment between the appellant and Customs.

  7. The tribunal folder shows that correspondence took place between Hark Grimley & Co and Customs between May and July 2002. On 24 July 2002, Customs amended the assessment in respect of period 11/99 from £723 to £565, resulting in a reduction of the overall amount assessed to £27,452. Thereafter the parties continued in correspondence, concentrating in particular on the issue identified in the Notice of Appeal. It is that issue which we have treated as being before us for decision.

  8. When the appeal was called on for hearing, it was apparent that no-one had attended to represent the appellant. This was despite the fact that Mr A W Keenan of Hark Grimley & Co[1] had been advised by the Manchester Tribunal Centre ("the Centre") that the hearing on 8 September 2004 would be going ahead. On or about 6 September 2004 Mr Keenan sent a "faxed" message to the Centre, requesting an adjournment of the hearing on the ground that Mr Forde was seriously ill and had suffered a number of life-threatening operations. That message promised that a doctor's medical certificate would be forwarded to the Centre on that day. That certificate did not arrive, so the Centre informed Mr Keenan that, in the certificate's absence and in accordance with the Chairman's instructions, the appeal would remain in the list.

  9. The tribunal sympathizes with what we have been told about Mr Forde's ill-health. However, having considered the contents of the folder, we cannot see that his personal attendance was necessary for the resolution of the issue between the parties. We can see from the tribunal folder how the appellant puts its case. We are conscious of the considerable delay that there has been in this case, that the tax in dispute in this appeal goes back as far as the latter part of 1996, and that the Notice of Appeal itself was lodged as long ago as November 2001. In what appeared to us to be a comparatively straightforward case, principally concerning the interpretation of VATA, we felt that it was high time that a decision should be reached with regard to the matter in dispute.

  10. For the above reasons we determined to proceed with the hearing in the absence of anyone to represent the appellant, which we are enabled to do pursuant to rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended).

  11. The evidence put forward on behalf of Customs consisted of a Witness Statement dated 23 September 2003 by Jane Katherine Dawson, an officer of Customs based in Cheadle, Cheshire. In her capacity as review officer, she was responsible for most of Customs' correspondence appearing from the tribunal folder, upon the contents of which Customs also relied. Ms Dawson did not give oral evidence.

  12. The correspondence in the tribunal folder shows that the appellant had factored certain receivable debts to various factoring companies ("the factors"). In the tribunal folder are copies of specimen invoices rendered by the appellant to debtors, which indicated on their face that the invoiced debts had been purchased by and were to be paid directly to the factors.

  13. In a letter to Customs dated 14 March 2003, Mr Hark stated that the appellant was "unable to find any factoring agreements" and so could not provide Customs with copies. Consequently no such agreements have been reproduced in the tribunal folder, and the tribunal is not in a position to verify the details of the factoring arrangements between the appellant and the factors. However in a previous letter, dated 8 August 2002, Mr Hark had explained the straightforward nature of the factoring arrangements.

  14. Those arrangements were that the appellant had assigned the receivable debts to the factors. The factors then pursued the recovery of the debts, and recovered their fees from the appellant, also charging the appellant interest for debts paid late. When purchasing the debts from the appellant, the factors "discounted" the debts, as factors do. In other words, the factors paid the appellant less than the face value of the debts. This produced, so Mr Hark contended, an entitlement for the appellant to claim relief for VAT in respect of the "discount", equivalent to what might be available in cash accounting or by way of bad debt relief.

  15. In other words, the argument of the appellant is that, because the full amount invoiced to debtors is not received by the appellant, by virtue of the "discount" applied between the appellant and the factors, the obligation to account for output tax in respect of the "discounted" debts ought to extend to the "discounted" sums only, and not the full amount invoiced to debtors.

  16. Customs agree that, in the case of a so-called "recourse" factoring arrangement, where the debt reverts from the factors to the creditor if not paid by the debtor, the debt may become a bad debt in the books of the creditor for purposes of bad debt relief. However in the case of "non-recourse" factoring arrangements, where the assignment by the creditor to the factors is absolute, Customs say that this possibility would not arise. If there is no right of reassignment, the relevant output tax is that shown in the tax invoices rendered by the appellant to its customers. It is irrelevant, Customs say, that the right to recover the invoiced amounts has been assigned to a third party.

  17. There is nothing in the information before the tribunal to show whether the factoring arrangements in the present instance were "recourse" or "non-recourse". Equally, however, there is nothing to show that reassignment from the factors to the appellant took place or was ever contemplated.

  18. We find that the position can therefore be analysed as follows. When the appellant sold the receivable debts to the factors, the price paid by the factors would be VAT exempt [2]. The factors would then seek to recover the full amount of the debts as invoiced by the appellant [3]. The factors may well recover the full amount, the factors' profit if any being a function of the extent to which they succeed in doing so. In that case, it would be quite wrong for the full amount of VAT shown on the invoices not to be accounted for, simply because, in purchasing the debts, the factors paid the appellant a "discounted" amount. The fact remains that the appellant made supplies at an agreed price for which it has invoiced its customers, the customers have paid the invoices, including VAT, and the liability to account for the tax has arisen. The "discounted" price paid by the factors to the appellant is irrelevant.

  19. Say, however, that the factors do not recover the full amount of the debts. Hopefully the factors still recover some part of the debts, and some part of the VAT due (if nothing is recovered, or very little, one imagines that the factors would go out of business). The VAT still needs to be accounted for. Its amount has nothing to do with the amount of the "discount" paid by the factors to the appellant on purchase of the debts. At that point, it may be possible to write down some part of the money owed as bad debts. But the tribunal has no evidence that the appellant should receive any credit for that. The loss is that of the factors, which have agreed with the appellant for payment of a "discounted" price, irrespective of the factors' ability to recover the debts in full, or not, as the case may be.

  20. It is therefore hard to see what output tax adjustment could be called for, on the facts of this case. Say that the facts were that the factors had been largely unsuccessful in recovering the debts, had then reassigned the debts to the appellant, and that the appellant had written off the irrecoverable money. Bad debt relief might then be sought [4], but otherwise would not be available. For all the tribunal knows, the factors have been very successful in recovering the amount of the debts. If the factors are good ones, that will be the case. The appellant is unable to show, whether in principle or in point of a particular amount, that a credit should arise in respect of irrecoverable tax.

  21. For Customs, Mr Mason drew our attention to sections 1(2) and 2(1)(a) of VATA, regarding the basis of the liability of the appellant to charge VAT on its supplies. He then referred us to section 19(2), which provides that, where there is a monetary consideration for a supply, the value of a supply is to be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration. He pointed out that debtors will, prima facie, have paid the full amount of the consideration on the facts of this case. There was, he said, no evidence before the tribunal to suggest otherwise.

  22. VATA is silent, Mr Mason said, as to any credit arising to suppliers in consequence of factoring arrangements, but accords relief in other situations, for instance, under Schedule 6, paragraph 4(1) (valuation: special cases) [5] . By contrast, VATA provides for factoring by distinct provisions, namely Schedule 9, group 5, item 1. Factoring is, Mr Mason submitted, a common business practice, in respect of which one would reasonably expect the Act to have made additional provision expressly, had any such provision been intended. No such provision had been made.

  23. Mr Mason submitted that to allow the appeal would be to threaten the integrity of the VAT system, and he invited us to uphold the amount of the assessments as amended, namely £27,452.

  24. The submissions of counsel appeared to us to be entirely correct, in the light of the matters that we mention in paragraphs 18 to 20 above. The facts that we have found, such as they are, do not bear out any right of the appellant to have its value added tax account adjusted. We concluded that the appeal was not made out.

  25. After discussion between ourselves, we accordingly decided to dismiss the appeal, and announced our decision at the conclusion of the hearing. We indicated that we would publish our reasons in writing at a later date, in the form of a written decision, which we now do.

  26. No application was made for costs, and none are awarded.

    27. M S JOHNSON
    CHAIRMAN
    Release Date: 11 November 2004
    MAN/2001/0973

Note 1    It appears from his letterhead that Mr Keenan is now principal of Hark Grimley & Co, with Mr Hark being shown as “Consultant”. The tribunal folder shows that this change must have happened not earlier than 2003.    [Back]

Note 2    under VATA, Schedule 9, group 5, item 1.     [Back]

Note 3    the tax point having occurred upon issue of the invoice.    [Back]

Note 4    We think that this position is well stated by the first three sentences of paragraph 4.2.5 of Customs & Excise Notice 701/49/02, which we approve. Paragraph 3.12 of Notice 700/18/02 is to the like effect.     [Back]

Note 5    “4(1) Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms”.     [Back]

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