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Plasma Trading Ltd v Customs and Excise [2005] UKVAT V18908 (17 January 2005)

18908

Application for appeal to be heard without payment or deposit of tax – whether appeal against an assessment or a decision regarding an amount of input tax to be credited – appeal lodged before any assessment made – whether appellant would suffer hardship – ability to raise necessary funds from those who had financed the transactions giving rise to the dispute

LONDON TRIBUNAL CENTRE

PLASMA TRADING LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Malcolm Gammie Q.C. (Chairman)

Mrs J M Neill

Sitting in private in London on 11th November 2004

Mr Jolyon Maugham of Counsel, instructed by Martin O'Neill of Chiltern plc, for the Appellant

Mr Kieron Beal of Counsel, instructed by the Solicitor of Customs and Excise, for the Commissioners

© CROWN COPYRIGHT 2005

DECISION

Introduction

This is an application by Plasma Trading Limited ("Plasma") for a declaration that it need not pay the outstanding tax due on an assessment prior to bringing its appeal. We heard the application in private but at the end of the hearing the parties indicated that they were content for our decision to be made public.

The application has the unusual feature that Plasma's first argument is that it has not appealed against the assessment in question and that it cannot therefore be required to pay the tax due under the assessment as a pre-requisite to its appeal being heard. The sense of this submission will appear in due course. If it has appealed against the assessment, however, Plasma says that it would suffer hardship if it were required to pay the tax in question. In this respect, it is clear that Plasma does not have the financial resources to pay the tax. The issue is whether it has been stripped of the necessary resources to pay the tax so that we ought not to accept its hardship plea. Alternatively, the issue is whether Plasma is in a position to obtain the financial resources that it needs to pay the tax by borrowing either from those who have benefited by withdrawing its cash resources or from those who financed the transactions that are the subject of the appeal.

In addition to the correspondence between the parties, we received certain financial details relating to Plasma and Mr Sam Cook, one of Plasma's directors, gave evidence before us. Based on the documents and Mr Cook's evidence, we record the following facts as found by us.

Plasma's financial position

We were told that Plasma was incorporated on 2^nd June 2002 but it apparently did not commence any business until the latter part of 2003. It has two directors, Mr Sam Cook and Mr Lee Cummins. The shareholders and shareholdings in Plasma were not fully explained to us but the principal source of finance for the transactions that give rise to the dispute with the Commissioners was Sunkist Limited, a company apparently registered in and operating out of Gibraltar. It lent Plasma £750,000, which broadly corresponds to the amount of input VAT that Plasma says that the Commissioners ought to repay.

Plasma's first VAT return was for the period 10/03. It showed no sales or other outputs but purchases and other inputs of £5,188 and sought repayment of £882.18 input VAT. The Commissioners duly paid this amount. Plasma's VAT return for 01/04 showed sales and other outputs of £362,596 and purchases and other inputs of £348,662. The output VAT due, however, was only shown as £2,060.80 while the input VAT was £60,562.58, leading to a repayment claim of £58,501.78. This was repaid to Plasma on 17^th March 2004. Plasma's VAT return for 03/04 showed sales and other outputs of £4,231,879 and purchases and other inputs of £4,190,748. The output VAT due was £2,141.08 and the input VAT was £730,164.81, leading to a repayment claim of £728,023.73. The Commissioners have refused to repay this amount.

Mr Cook explained these figures as follows. Plasma's method of trading principally involved the purchase of second grade "scrap" platinum in the UK for export sale. Plasma accordingly incurred VAT on its purchases but was not required to account for VAT on its export sales. Following the submission of its return for the period 01/04, Plasma was visited by one of the Respondent's officers who examined Plasma's books and records in detail and subsequently verified the repayment. Following submission of its return for the period 03/04, Plasma was subject to a further visit by the Commissioners' officers, following which repayment of the VAT claimed was refused.

In a decision of 29^th July 2004, Samantha Lee, a Senior Officer of the Commissioners, summarised the transactions that formed the basis of the 01/04 and 03/04 returns. She said that she had reached the conclusion that the sums of £60,248.81 and £727,828.81 claimed for those periods were not input tax and that no supply in accordance with the claimed invoice arrangements had occurred. Although something may have been exported from the UK, the evidence available to her indicated that on the balance of probabilities it was not platinum alloy and whatever had been exported was likely to have little or no market value. Accordingly, Ms Lee decided to refuse to pay the sum of £727,818.81 and indicated that she would issue an assessment to recover the £60,284.81 that had already been repaid.

It is not part of our function in the current proceedings to reach any view on these transactions. Mr Cook said that Plasma held the necessary export documentation and Plasma complained that after several months of investigation the Commissioners had produced no evidence to support their allegations. In correspondence it was alleged on behalf of Plasma that the Commissioners had received payments of output tax from Plasma's suppliers. The Commissioners denied that any sums of VAT associated with these transactions had been accounted for and alleged that the first link in the supply chain had in fact supplied a false VAT registration number. We are unable to judge the truth of these various allegations, which will have to be examined properly in the substantive proceedings if the appeal proceeds. For our present purposes, we have assumed that transactions took place as recorded in the financial records before us.

The funding of those transactions by Sunkist Limited is, however relevant to the Commissioners' submission, in effect, that Plasma can or should be required to look to Sunkist to fund the tax it must pay if the appeal is to proceed. We saw two letters from Sunkist of 13 January and 20 February 2004. These make it clear that Sunkist had agreed to lend Plasma the funds that it needed to finance its platinum trading operations. They are unusual letters to form the basis for an ordinary commercial loan of £750,000. The January letter indicates that Sunkist has agreed initially to lend £300,000. This was advanced in three instalments on 20 January (£100,000) and 22 January 2004 (2 x £100,000). The February letter does not evidence any further loans as such but records that Plasma has agreed, "to pay us annually interest on a daily basis at 10 [ten] % per annum" so that, "for each £100,000 transferred, you will credit our bankers as above with £10,000 on a date convenient to you but not more than 365 days from the receipt of the funds."

The letters are otherwise silent as to the terms on which the money is lent, including when it should be repaid. Indeed the January letter under which the initial £300,000 was agreed to be lent states that, "we can discuss the exact commercial terms when we meet again shortly" while promising in the meantime to transfer the funds to Plasma. Subsequently, Sunkist lent a further £450,000 in four instalments on 20 February (£50,000), 24 February (£150,000), 12 March (£150,000) and 1 April 2004 (£100,000). Plasma paid Sunkist £9,000 on 10 August 2004.

The letters from Sunkist Limited give no indication of the nature of the organisation. It appears to have a sole director, Mr John Reynolds. It is obviously a matter of note that Sunkist was prepared to lend large sums to a new trading venture with no track record on informal (almost non-existent) terms and without any security or guarantee. Although both letters state that the loans are to finance Plasma's platinum stock, this has to be considered in the light of Plasma's actual transactions. In fact Plasma did not need to fund its platinum transactions as such because it always matched its acquisitions with immediate sales. In nearly all cases the purchase price was debited on the same day that the sale proceeds were credited and all Plasma had to finance was the VAT that it paid on acquisition but did not recover on sale. This is what the Sunkist loans substantially covered.

Apart from the lack of any formal agreement or loan terms, it is difficult to conclude that the money lent by Sunkist was lent as part of an ordinary commercial loan transaction. The January letter opens with Mr Reynolds noting that Plasma had done its homework, knew its market and customers and should be able to make a great success of its platinum trading operations. He concludes by saying that he is "looking forward to both of our families doing well out of the new business" and offering his assistance given his own background in precious metals. In his February letter, Mr Reynolds expresses his pleasure that the platinum trading is going well and that "the platinum stock financed by us is proving profitable". He then provides new bank account information for Sunkist. He says that while the original bank details that he had given in January "are still in the frame for our other activities", the nature of Sunkist's business with Plasma makes alternative bank details more appropriate. Mr Reynolds then asks that the new bank details be passed on to customers "to whom you sell 'our' platinum".

Mr Reynolds then confirms his discussions with Plasma for the financing of platinum stock, sets out the interest details (see paragraph 9 above) and concludes by "looking forward to lots of profitable business together". Commencing on 21 January and ending on 23 March 2004 Plasma entered into 19 platinum transactions all of which comprised purchases from a single customer matched by immediate sales to the same company, Hexagone Asia Limited. Why Plasma's customers would need Sunkist's bank details is unclear given Plasma's pattern of trading and the fact that Sunkist's funds only sufficed to finance the VAT difference between purchases and sales. As one deal was closed another was entered into broadly until the build up of VAT exhausted the available money.

The Commissioners' refusal to repay £727,828.81 of input VAT put an end to Plasma's platinum trading. There were in fact no platinum transactions after 23 March 2004, that is some time before Plasma submitted its VAT return for 03/04 and before it became apparent that the Commissioners would not repay the input tax claimed. Despite what Mr Reynolds' had written in February Plasma either did not approach him to finance further platinum transactions or he declined to do so for the time being. The final amount of £100,000 borrowed from Sunkist was credited on 1 April 2004 but was not followed by further transactions. In cash terms this can be said to have replaced (with something over) Plasma's initial equity represented by the sums derived from Broadstone Holdings (see paragraph 16 below), which had by that time been consumed through Plasma's trading or in wages. Mr Cook said that with substantially no working capital Plasma has had to subsist by buying demolition rights every couple of months. Its only transaction of substance since the platinum trading ceased was the purchase and sale of 15 tipper trucks which is was able to buy on credit and sell on at a profit shortly thereafter. It appears that the company that assisted in this transaction and received commission for its part was the same company from which Plasma had bought its platinum in the January to March 2004 period.

The draft financial statements for the period ending 30 June 2004 show turnover of £4,612,885 and cost of sales of £4,554,164, leaving a gross profit of £58,721. With administrative expenses of £18,617 and interest receivable of £768, the profit on ordinary activities before taxation is £40,872. The administrative expenses do not include cash wages withdrawn (see below). The profit is shown as shareholders' funds in the draft balance sheet but the balance sheet contains no figure of share capital as such. The draft balance sheet lists as an asset cash at bank of £65,084 but by 29 October 2004 this figure had been reduced to £6,152.37.

In correspondence Plasma claimed that the directors, Mr Cummins and Mr Cook, together with Mr Cook's father, had initially invested approximately £35,000 each into Plasma. This sum did not come directly from the three individuals. Plasma's initial funds came from a company called Broadstone Holdings. It transferred £5,000 to Plasma's account on 27 August 2003. Broadstone Holdings made further small transfers on 28 October (£500), 5 November (£390) and 10 December 2003 (£700). It then provided the larger sum of £84,000 on 21 January 2004 and £1,000 on 24 February 2004. Between 19 March and 31 August 2004 Broadstone was repaid £2,350. The draft financial statements at 30 June 2004 show a total of £90,740 owed to a connected company, which we assume is Broadstone Holdings. However, Plasma no longer had cash or assets representing this amount.

On 26 January 2004 Plasma made a payment of £17,422.50 to Soundset SA. This is listed as a Director's loan. Between 12 February and 26 March 2004, some £31,500 was drawn as cash wages. Between 1 April and 20 August 2004 a further £33,320 was withdrawn largely as cash wages but also in part to pay commission on the tipper lorry deal. Other large cash withdrawals are explained by the cash nature of its "truck-trade" scrap metal business. The directors, however, also made withdrawals of £207 for Mr Cummins and £12,937 for Mr Cook, both described as loan refunds although in neither case is there a record of when these amounts had originally been lent to Plasma. In correspondence the amount paid to Mr Cook was described as a refund of start up costs.

There were also payments totalling £25,000 in respect of a property in France owned by Mr Cook's father and a sum of £13,000 was paid to Mr Cook's mother on 20 October 2004. Mr Cook said that these were made to discharge a loan to Plasma by his father. Again, there is no evidence to show when any such loan was made unless it is represented by the funds that originated from Broadstone Holdings.

Mr Cook said that he had approached his bank to seek a further line of credit but, unsurprisingly, the bank was unwilling to extend any credit given Plasma's current financial position. It is unsurprising because Plasma has never used its bank to fund its trading activities and it seems to us that no banker acting in a commercial manner would now agree to lend Plasma the sum in question. Mr Cook also said that he was unable to pay the tax due himself as he did not have the personal funds available to do so and this was case for the other shareholders.

The law and the decision appealed against

Under section 84(3)(a) of the Value Added Tax Act 1994 an appeal against a decision with respect to any of the matters mentioned in section 83(b), (n), (p), (q), (ra) or (zb) shall not be entertained unless the amount which the Commissioners have determined to be payable as VAT has been paid or deposited with them. Such appeals may be entertained, however, if the Commissioners or the Tribunal are satisfied that the appellant would otherwise suffer hardship and that the appeal should therefore be entertained notwithstanding that the amount has not been paid or deposited (s.84(3)(b)). The relevant provision of section 83 in this case is paragraph (p), namely an assessment under section 73(2) to recover an amount of tax that has been paid or credited in a period that would not have been paid or credited had the facts been known to the Commissioners.

The amount in question that is sought to be recovered by assessment is the sum of £60,284 credited in the period 01/04 together with interest of £1,483.46, making £61,767.46 in total. As previously noted, Ms Samantha Lee wrote on 29 July 2004 to notify Plasma that she had decided to refuse payment of £727,818.81 and issue an assessment to recover the sum previously repaid. Mr Martin O'Neill of WJB Chiltern plc accordingly lodged a notice of appeal on 2 August 2004. In doing so he ticked the box to indicate that he was appealing on Plasma's behalf against an assessment of tax and that the disputed decision was issued on 29 July 2004. The approximate sum of money in dispute was stated as £788,113.62 and an application was made for a direction that the appeal be entertained without payment or deposit of the tax in dispute. The grounds of appeal were stated to be, "In regard to the Assessment of VAT for the VAT periods ending 31 January 2004, and 31 March 2004 and the Commissioners decision to disallow input tax".

The assessment issue

Mr Maugham's first submission on behalf of Plasma was that the nature of the appeal in this case was not such as to require it to make any deposit of tax. The basis for this submission was that the decision conveyed by Ms Lee on 29 July 2004 was a decision made pursuant to section 83(c) of the Act, which is not one of the appeal provisions listed in section 84(3) as entitling the Commissioners to require Plasma to deposit the tax as a pre-requisite to pursuing its appeal. An appeal within Section 83(c) is one that concerns the amount of any input tax which may be credited to a person.

Mr Maugham noted that the letter of 29 July 2004 did not constitute an assessment. He said that it was in fact a decision that the sums of £60,284 and £727,828.81 claimed by the Appellant were not amounts of input tax that Plasma could credit. The appeal was made on 2 August 2004, at which time there was no assessment in existence against which any appeal could be made. The assessment was only made on 4 August 2004 and was subsequently notified on 12 August 2004. Plasma had never appealed against that assessment.

In reply Mr Beal for the Commissioners pointed out that Plasma had stated that it was appealing against an assessment. The Commissioners were not asking Plasma to pay £727,828.81 but only £60,284.81, being the amount that had subsequently been assessed and notified and by virtue of section 73(9) was therefore deemed to be tax due from Plasma. In his submission the appeal had been made against the decision to assess Plasma and therefore implicitly against the Notice of Assessment that followed on 12 August 2004.

Mr Beal relied upon the Tribunal's decision in Safegold Fashions Limited v Commissioners of Customs and Excise (1992) VATTR 105. In that case the Commissioners applied for a direction that the appeal should be dismissed on the ground that the Appellant had not paid or deposited the tax. The tax in question was due under an assessment made to recover input tax previously credited. The Appellant argued against the direction on the basis that it was entitled to appeal a decision as to the amount of any input tax which could be credited without first paying the tax demanded. His Honour Judge Medd QC answered this point as follows—

"[This argument] seems to me to be based on a fallacy, namely, that an appeal under Section [83(c)] as to the amount of any input tax which may be credited to a person cannot at the same time be an appeal under Section [83(p)] against an assessment under [Section 73(2)]. The two are not in my view mutually exclusive. That this is so becomes clear, it seems to me, when one considers the effect of not appealing against an assessment which is made under [Section 73(2)]. It is clear from [Section 73(9)] that unless the assessment is reduced or discharged on an appeal or is withdrawn or reduced by the Commissioners themselves the amount assessed is recoverable from the Appellant as tax due. It follows from this that if a person has been assessed under [Section 73(2)], and even if the issue turns on the amount of input tax which may be credited to the Appellant, the amount assessed will be recoverable from him as tax due unless he appeals against the decision of the Commissioners with respect to the assessment.

The same proposition may be put in a different way. If a taxpayer has been assessed under [Section 73(2)] in order that input tax wrongly credited may be recovered and he appeals only against the decision not to allow the input tax then, even if he succeeds in his appeal against the Commissioners' decision as to the deductibility of the input tax, the assessment, not having been reduced an appeal must stand.

It therefore seems clear to me that the appeal of the Appellant in the present case must be regarded as an appeal against the matter mentioned in [Section 83(p)] (i.e. against an assessment under [Section 73(2)]) and, as such, one that cannot be entertained without the prior payment or deposit of the tax assessed.

That the Appellant Company so regarded its appeal is shown by the terms of the letter attached to the notice of appeal which stated:

". . . our client disagrees with the assessment and has requested us to write to you to reconsider the assessment. Please accept this as our formal appeal on behalf of our client".

If I am right in what I have said above it does not follow that there can be no occasions when an appeal may be brought as to the amount of any input tax which may be credited to an Appellant without the necessity of first paying the tax which the Commissioners say should be paid. There can be, and quite often are, occasions when the Commissioners simply issue a decision that a certain amount of input tax is not recoverable and do not allow the credit claimed. In such a case there will be no need for an assessment to recover input tax wrongly paid or credited to the taxpayer because no amount will have been paid or credited. In such a case if the taxpayer considers that the input tax is recoverable he must, in order to get the decision changed, appeal against the decision as to the amount of input tax with which he is entitled to be credited."