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Cite as: [2005] UKVAT V19218

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Adams (t/a Windows By Wise) v Revenue and Customs [2005] UKVAT V19218 (24 August 2005)

19218

ASSESSMENT – Credit note – Whether document issued by supplier of goods to Appellant operated as credit note – No – Appeal allowed

LONDON TRIBUNAL CENTRE

S E ADAMS T/A WINDOWS BY WISE Appellant

and –

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

SHAHWAR SADEQUE, MBCS

Sitting in public in London on 8 August 2005

The Appellant in person

Mario Angiolini, counsel, instructed by the Acting Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

Mr S E Adams, trading as Windows By Wise, appeals against an assessment issued on 5 December 2002 in the amount of £7,972 plus interest. At issue is £4,065 plus interest out of the total assessment.

Background

Mr Adams has been trading as Windows by Wise in Southampton for some years. He deals in the supply and installation of double glazed windows, doors and conservatories.

One of the suppliers to Mr Adams was a company called R W Ltd based in Portsmouth. On 3 July 2002, following a visit to R W Ltd, a Customs officer from the Portsmouth VAT office noticed a note issued to Mr Adams, described as a C-NOTE. This note was dated 31 August 2000. It described the transaction to which it related as "turn over rebate from September 1998 31 March 2000" with a sub-total of £23,234.05 with VAT at 17½% of £4,065.95 to give a total of £27,300. R W Ltd, it appeared to the visiting officer had processed this credit note and reduced their output tax accordingly.

The Portsmouth officer got in touch with the Southampton VAT office which dealt with the affairs of Mr Adams. The Portsmouth officer asked the Southampton office to verify the transaction giving as the reason for requesting the visit that Mr Adams had received a retrospective discount from R W Ltd and asking whether Mr Adams had reduced his input tax accordingly. The Southampton VAT officer visited Mr Adams on 23 October 2002. Mr Adams provided him with a copy of the "credit note". The Southampton officer replied to Portsmouth that Mr Adams "contends that the sum involved was credited to him in respect of wages paid by R W Ltd to Mr Adams' wife". The Southampton officer went on to explain that there was no evidence to support this and that a VAT 641 had been raised.

The Southampton officer noted in his visit report that "credit note not adjusted in PE 9/00. Trader claimed that credit note was not proper as it was an adjustment for his (trader's) wife's wages received from his supplier. Credit note clearly relates to a "turn over rebate" and trader had no documentation to support his contention." The Southampton officer sent a letter outlining Mr Adams' apparent error. On 25 November 2002 Mr Adams responded making the point –

"As you have seen for yourself the £350 was paid as wages to my wife, no VAT was ever charged or claimed on this amount."

We will deal later with the reference to £350. This letter provoked a response from the Southampton officer who said of the credit note in a letter dated 28 November 2002 that:

"R W Ltd have adjusted their VAT account by the VAT credited (£4,065) and the credit note they have issued to you is unambiguous in the reason issued ("Turn over rebate")."

On 17 March 2003 Mr Adams wrote again to the Southampton office restating his contention that the credit related to a wages adjustment arising from his wife's involvement in R W Ltd. The letter made the point that as there was no VAT charged on the original transaction and no VAT charged to R W Ltd in respect of the wages he could see no reason why the credit note should attract VAT.

In his notice of appeal Mr Adams restated the contention that he had made to the visiting officer in October 2002.

The case for Mr Adams

The case for Mr Adams is in essence contained in his account of what he saw to have been the transaction leading to the issue of the so-called credit note. Mr Adams contends that the so-called credit note had nothing to do with supplies to him by R W Ltd of materials for windows. The amount said to have been credited to him (£27,300) for the period from September 1998 until 31 March 2000 and described in the note as turn over rebate exactly represented the aggregate amount, i.e. £350 a week, that had been paid by R W Ltd as "salary" in respect of Mr Adams' wife. The arrangement by which R W Ltd agreed to pay a salary to Mr Adams' wife came into being because, some years before, she had worked for a company called C W Ltd at a salary of £350 a week. A Mr G had been director of C W Ltd which had been placed in liquidation. Mr Adams had bought window materials from C W Ltd. Following the liquidation of C W Ltd, Mr G had set up R W Ltd and used it as his trading vehicle. Mr Adams continued to buy window materials, this time from R W Ltd. The arrangement between Mr G and Mr and Mrs Adams was that R W Ltd would pay £350 a week as "salary" to Mrs Adams. Mrs Adams was not required to do any work for R W Ltd and never did any.

R W Ltd was usually well behind in issuing its invoices to Mr Adams for windows materials. Mr Adams' practice, he said, had been to send a weekly account to R W Ltd recording (i) the amounts payable to R W Ltd plus VAT for window materials supplied and (ii) that £350 was payable to Mr Adams as "salary" for his wife's services to R W Ltd.

The so-called credit note had been received by Mr Adams in or about September 2000. He had not asked for it nor had he expected it. It was received, said Mr Adams, at about the time that he started buying materials from suppliers other than exclusively R W Ltd. He filed it away and thought nothing of it until asked about it when the Customs officer from Southampton visited on 23 October 2002. When he produced it to the Customs officer he explained (as already noted) that the £27,300 had been credited to Mr Adams in respect of wages paid by R W Ltd for Mr Adams' wife's services. Mr Adams repeated this explanation in his letters to the Commissioners of 25 November 2002 and of 17 March 2003 and in his Notice of Appeal.

Mr Adams said he could only guess why R W Ltd had sent the so-called note to him. Some light was shed on this by a letter from a firm of accountants (J B & Co). J B & Co acted for both Mr Adams and for R W Ltd. J B & Co wrote a letter dated 29 September 2003. The 29 September 2003 letter starts with these words:

"As accountants to [Mr Adams] we can confirm that up until 8 September 2000 our above-named client's accounts contained journal entries debiting purchases for the sum of £350 per week and crediting drawings for the same amount."

We take that sentence to mean that Mr Adams' record of purchases contained entries for purchases from R W Ltd of the gross amounts due to R W Ltd (i.e. the price of the goods plus £350 a week). Those entries were then adjusted downwards to exclude the £350 per week.

The J B & Co 29 September 2003 letter goes on to explain:

"The reason for these entries were to reflect sums owing to our client's wife by R W Ltd for wages, which R W Ltd had accounted for by crediting our client's sales ledger balance with themselves rather than by making a payment. As these entries did not relate to purchase credits received by the company but were instead to deal with the manner by which the payment was made there was no need for them to be processed as credit notes as there was no reduction in the input value added tax made to the company. We trust that this clarifies matters."

We do not find the letter as clear as the writer hoped. But, for what it is worth, it supports Mr Adams' explanation that the £350 a week had to do with the "salary" arrangement and was not consideration for supplies of window materials from R W Ltd to Mr Adams.

Conclusion

The central question for us is whether the amount of £4,067.95 described as VAT on the so-called credit note represented over-claimed input tax on the part of Mr Adams. If so, the assessment designed to recover that amount as over-claimed VAT will be good.

The so-called credit note describes the transaction as "turn over rebate". This would make sense if, e.g. R W Ltd's terms of business entitled customers, such as Mr Adams, whose purchases reached certain levels to a rebate related to the level of sales; until the purchases reach those levels it would not be known whether the purchaser in question qualified for a rebate nor would the amount of the rebate be known. The present "credit note" gives no indication as to how the rebate has been calculated, e.g. as to what period it relates or as to what volume of sales it relates. The Customs officer from Portsmouth covering R W Ltd's affairs appears to have made no enquiries about the credit note and has simply taken it at face value. The Customs officer from Southampton responsible for Mr Adams' affairs concluded in his visit report, as already noted, that the credit note "clearly relates to a turn over rebate" and in subsequent correspondence says "it was unambiguous in the reason issued".

In Mr Adams' hands the credit note was not treated as either an amount owing to him by R W Ltd or an amount to be credited against the price of future purchases. Mr Adams explained, and this was not challenged, that he continued to buy materials from R W Ltd for a further two years. Had the credit note been what it purported to be we would have expected £27,300 to have been set off against purchases in that later period. As it was the credit note, once issued, was totally ignored.

We disagree with the view expressed by the Customs officer from Southampton that the credit note was clearly and unambiguously stating that R W Ltd acknowledged that it owed Mr Adams £27,300 as a rebate on account of past purchases. There is no apparent consideration moving from R W Ltd to Mr Adams or vice versa to justify the issue of the credit note. In particular, as already noted, there is no evidence that gives indication of any rebating or discounting arrangement as between R W Ltd and Mr Adams.

Mr Adams' explanation was that the credit note related to the arrangement whereby R W Ltd undertook to pay £350 a week as fictitious salary for the services of his wife. It was designed to show the "salary" payments as rebates on turnover. That explanation is borne out by the figures. £350 a week from September 1998 until 31 March 2000 works out at £27,300.

We should mention that Mr Adams came to the hearing with another "To whom it may concern" letter dated 5 August 2005 from J B & Co. This reads as follows:

"Further to our letter of 29 September 2003. We confirm that not only do we prepare the accounts of Windows by Wise but also for R W Ltd. We can confirm that the credit note raised for £27,300 was not requested by Windows by Wise. The amount of £350 per week was for our client's wife's wages and in past years we believe it has been put through the accounts with PAYE and tax deductions. The credit note was probably issued by R W Ltd avoiding paying NI and tax and we would like to state that the sums involved are identical and one relates to the other."

The writer was not called and we therefore treat the letter with some caution. But it was written by the accountants who acted for both Mr Adams and R W Ltd and, for what it is worth again, we read it as express corroboration of Mr Adams' explanation which he has been consistently advancing since the date of the Southampton Customs officer's visit in October 2002. Moreover it goes some way to explain why R W Ltd chose to issue the so-called credit note. This was not to give Mr Adams any credit; it was to prevent R W Ltd having to account for national insurance and PAYE tax on a fictitious salary.

Taking all the circumstances into account, we think that the so-called credit note was not designed to give Mr Adams credit. The more likely explanation is that it was designed to counteract the tax disadvantages, to R W Ltd, of the fictitious "salary". Unravelling any fictitious arrangement presents difficulties. We are, however, satisfied from the evidence that we have summarized above that the so-called credit note did not operate as a credit note; in particular it did not relate to the supply of any goods or services by R W Ltd to Mr Adams. Mr Adams, quite properly, did not adjust (downwards) his input tax account in respect of the amount shown in the "credit note".

For those reasons we allow the appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 24 August 2005

LON/04/1613