United Kingdom VAT & Duties Tribunals Decisions

Patel (t/a AF Fashions) v Revenue and Customs [2005] UKVAT V19246 (05 September 2005)

19246

VALUE ADDED TAX — input tax credit — did the invoices upon which input tax had been reclaimed reflect genuine supplies — no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

RASHID PATEL trading as A F FASHIONS Appellant - and - HER MAJESTY'S REVENUE AND CUSTOMS Respondents Tribunal: Lady Mitting (Chairman) John M Lapthorne

Sitting in public in Birmingham on 11 May 2005 and 1 August 2005

Zubair Sidat appeared for the Appellant

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION
1. Rashid Patel appeals against an assessment dated 28 May 2002 in the sum of £9,292 plus interest. The assessment was raised to recover input tax previously credited to Mr Patel, relying upon invoices, which upon later inspection, the Respondents believe did not relate to genuine supplies. For the period covered by these invoices, Mr Patel carried on business as sole proprietor of "A F Fashions", a garment manufacturer. In April 2001, A F Fashions was incorporated into A F Fashions Limited and a further assessment was raised against the limited company for similar reasons and which was similarly appealed. The company, however, went into liquidation and this appeal was struck out when the liquidator took no action to pursue it. The appeal before us therefore relates only to the assessment against Mr Patel as sole proprietor.
2. We heard oral evidence from Mr Patel and on behalf of the Respondents from Miss Fiona Blackshaw, the assessing officer and Mr Arvin Narshi.

The Legislation

3. The relevant legislation is as follows:-

"1) Section 4 of the Value Added Tax Act 1994 which provides that:

(1) VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

2) Section 24 of the Act which provides that:

(1) Subject to the following provisions of this section, "input tax" in relation to a taxable person, means the following tax, that is to say (a) VAT on the supply to him of any goods or services …

3) Section 25 of the Act which provides that:

(2) Subject to the provisions of this section [a taxable person] is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

4) Section 26 of the Act which provides that:

(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business
(a) taxable supplies …

5) Regulation 29(2) of the Value Added Tax Regulations 1995 which provides that:

At the time of claiming deduction of input tax … a person shall, if the claim is in respect of

(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13 …"

4. The effect of the legislation is that a trader is entitled to credit for input tax on a taxable supply made to him by a taxable person and for which he holds an invoice which complies with the regulations.

Evidence

5. The assessment relates to eight invoices dated between 3 November 2000 and 31 January 2001, purportedly issued by G M Fashions ("GM") and 12 invoices dated between 9 February 2001 and 10 April 2001 purportedly issued by R S Fashions ("RS"). The GM invoices display an address, 88a Wyken Road, Wyken, Coventry, CV2 2JT, and the firm describes itself as "MANUFACTURERS OF LEISUREWEAR, Merchants of Stretch Fabrics and all kinds of Yarns". The RS invoices show an address, "194a Cross Roads, Foleshill, Coventry, CV6 5GS" and RS also on those invoices describes itself as "MANUFACTURERS OF LEISUREWEAR, Merchants of Stretch Fabrics and all kinds of Yarns".
6. Both sets of invoices would appear to be written in the same hand. Their content is brief. They each consist of one line only, giving a quantity (usually 2 or 3,000 odd), a description of the goods, a unit price and a total price. At the foot of the invoice is the usual addition of the price for the goods plus VAT being totalled to give the invoice total. The description of the goods is, on occasion left completely blank, on occasion given merely as "garments" and otherwise a one word description such as "leggings" or "tops". Later production of Mr Patel's bank statements would show that cheques for all but four of the invoices went through Mr Patel's bank account.
7. The Respondents' records show GM as having been registered from 16 August 1999 to 1 February 2001 when it deregistered. The address on the application is given as "164 Cross Road, Edgewick, Coventry". In late 1999 and throughout the first part of 2000, the Respondents tried repeatedly to make contact with GM and we note in particular that all correspondence from February to July 2000 was returned and GM was registered as a missing trader. At some stage, GM must have registered a change of address with the Respondents because the Respondents' later record shows GM's address as c/o Sachdevs Accountants. No returns were submitted by GM for their first three trading periods. Returns were received for 08/00, 11/00 and a final return. RS was registered from 1 August 2000 and deregistered on 1 March 2002. The business address on registration was given as "21 Larchwood Road, Exhall, Coventry" and on 2 March 2001 a change of address was notified to 194 Cross Road, Coventry. No returns were submitted until 04/01 and it appears that returns were then submitted until deregistration.
8. Mr Puzey pointed out one unusual feature of the returns for both GM and RS. On everyone of them, inputs pretty well matched outputs, leaving only a few hundred pounds of tax payable on each return. Mr Puzey thought it strange that a CMT sub-contractor would be making more than minimal purchases at all and certainly not to the levels declared.
9. Mr Patel was registered for VAT with effect from 20 May 1994. He carried on business as a manufacturer of garments from premises at 92 Ashfordby Street, Leicester. We were told nothing of his VAT history before the period of these invoices and we assume that it was acceptable and unremarkable.
10. Both Miss Blackshaw and Mr Narshi were members of the JOFIT team. This is the Joint Operation Fashion Industry Team and was made up of representatives from (the then) Customs and Excise, the Inland Revenue and Department of Works and Pensions. The purpose of the team was to assist and monitor the fashion industry in the Leicester area. Miss Blackshaw represented Customs and Mr Narshi the Inland Revenue. We had before us the written notes of both officers and Miss Blackshaw's visit report. Miss Blackshaw had written to AF Fashions Limited on 11 January 2002 advising the company of a JOFIT visit on 18 February 2002 at 10.00 am at the company premises. She set out all the records and documentation which the team would need to see. When Miss Blackshaw and Mr Narshi attended at 92 Ashfordby Street on 18 February, Mr Patel was not there but they were given ready access to the premises and looked around. They were told the business was CMT, employing some 30 full time and part time workers occupying three floors. The officers then left and went round to the offices of the company's accountants, Mr Kotecha where they examined the business records. Mr Narshi noted the records produced to them as being the purchase invoices, sales invoices, payroll records, bank statements and cheque stubs.
11. One area of dispute over this meeting was whether or not Mr Patel was present. Mr Patel told us that he had been present for a part of the meeting but as his wife was having a cancer operation, he could not stay for the entirety. He did, however, he told us, tell his accountant, in the presence of the officers that a representative from RS was going to be at his premises that afternoon and Miss Blackshaw could therefore visit Ashfordby Street that day and interview the representative. Neither Miss Blackshaw nor Mr Narshi had any recollection of Mr Patel being present. Miss Blackshaw was as certain as she could be that he had not been there because had he been, she would have referred to him as being the person interviewed, whereas in fact her visit report names Mr Kotecha as the person interviewed and nowhere, either in her visit report or in her notes, is there any reference to Mr Patel being present. Mr Narshi was even more adamant that Mr Patel could not have been there because, he told us, the Inland Revenue were exceptionally strict on naming everyone present at interviews and the absence of Mr Patel's name in his notes was to Mr Narshi conclusive evidence that he could not have been there.
12. On going through the records, Miss Blackshaw noted the RS invoices. She picked up on these because she had had experience with another trader who had had two RS invoices which he had admitted were false and upon which he paid an assessment to tax. Miss Blackshaw was therefore concerned with the validity of these particular invoices. She also picked out the GM invoices because not only were they so similar in format but on the face of them, they had been written in the same hand as the RS invoices, such was the similarity in handwriting. She had not come across GM before. She noted nothing else of concern in Mr Patel's records and had no concerns over his remaining suppliers.
13. After the meeting with Kotecha, Miss Blackshaw set about checking out both RS and GM. GM had by this time de-registered but Miss Blackshaw approached Sachdevs, who told her that they had never heard of GM. She also visited RS's invoice address – 194a Cross Road. She found Cross Road to be a row of terrace houses, which apart from one dry cleaners, appeared to be wholly residential. There was no such number as 194(a). Miss Blackshaw left a card at number 194 but received no response.
14. By now, Miss Blackshaw had been unable to make contact with either GM or RS, having drawn a blank at the only addresses which she had for them. She was aware of the previous incidence of false invoices supplied by RS. The invoices from both were in the same style and appeared to have been written in the same hand. For all these reasons, she believed neither set to be genuine and the input tax on them should be disallowed. Her visit report records "both sets of invoices disallowed as not taxable supplies".
15. She described to us a typically fraudulent scheme which existed at that time within the fashion industry. A trader would be offered for sale a paper invoice which would show the net value of a "supply" and the VAT upon it. The trader would pay a cheque to the provider of the invoice for the gross amount. The provider would then refund to the trader, in cash, the amount of the invoice less the VAT and the trader would claim back the amount of VAT shown as input tax. The trader would therefore not be out of pocket at all but the purpose of the scheme would be to give him cash in hand to fund off record wages.
16. We also had produced to us a visit report dated 17 May 2001 recording an unannounced visit to RS at 194 Cross Road. The report, of which Miss Blackshaw was unaware, read:

"Unannounced visit. Residential address … no-one at home. Left letter asking to contact me".

17. Mr Narshi's interest was mainly in the payroll and to ensure that PAYE was being properly operated in respect of staff wages. He was aware of the use of false invoices to fund cash payments of off record wages and he was also therefore interested in the bank statements to check the withdrawals to pay the wages matched the wage bill. He had never personally seen any GM or RS invoices but he was aware of both as their names featured on an internal list circulating within the team as suppliers of fraudulent invoices. Mr Narshi carried out a sample check of the payroll records and he summarised his findings on his visit notes in the following terms:

"A sample check of the net pay for the following dates (on the accountants papers) showed that the total amounts of the net pay is not withdrawn directly from the bank account and that where a cheque was shown as cashed around these dates there was a substantial shortfall in the cashing compared to the net wage due."

There followed two examples. In the week 22 October 2001, the wage bill was £3,576.08 but the wages cheque cashed was only £1,500. On 22 June 2001, the wages bill shown was £3,497.63 but the cheque cashed only £1,000. These examples were both taken from the limited company records and Mr Narshi could not remember whether he had had access to the sole trader records as well. These matters are all concerns which Mr Narshi would have taken up with Mr Patel had he been present.

18. Mr Patel gave his evidence, with the agreement of Mr Puzey, with the assistance of Mr Sidat who took the interpreter's oath. Mr Patel described his business as CMT, making mainly ladies wear for one customer. His customer supplied the cloth with patterns and instructions as to the number and nature of garments, leaving Mr Patel to cut and sew. Occasionally, if Mr Patel had more work than he could cope with during, for example holiday periods or if staff were off sick, he would subcontract out the sewing and completion of the garments. Subcontract work would always be accompanied by a delivery note.
19. Mr Patel told us that his first contact with both RS and GM had been when they responded, on different occasions, to an advertising board which he placed outside his premises advertising for CMTs. Before dealing with either company, he told us, he took a note of their VAT numbers and he got his accountant to check them out and he also asked for, and was shown, a VAT return from each. RS, we were told, also used to buy and sell fabric and on one occasion some weeks after he had begun trading with them, Mr Patel had visited their premises to check out some fabric which he was thinking of purchasing. He could not remember the address to which he went but he described it as factory premises on two floors, with a CMT operation on the first floor. He never visited GM. He paid each of the suppliers by cheque. At GM, Mr Patel dealt with someone called Mick and at RS he dealt with a Tony or a Bill. The procedure was, with each of them, that Mr Patel would cut his own garments and when they were ready for completion, he would call either GM or RS who would collect the garments and then deliver them back when they were ready. There could be as many as three or four collections a week and they would be incorporated into a weekly invoice which Mr Patel would pay about a week later when he had received payment from his customer.
20. That an offer was made for Miss Blackshaw to see an RS representative, is repeated in correspondence from Mr Patel to the Respondents dated 19 June 2002 and from Mr Kotecha dated 18 October 2002. The latter letter also refers to an offer which Mr Patel said he made to obtain the registration number of the van which RS used to collect work from him.

Submissions

21. It was Mr Puzey's submission that the invoices from RS and GM did not represent genuine supplies and that the Appellant was not therefore entitled to recovery of his input tax. It was Mr Sidat's submission that Mr Patel had traded with RS and GM in good faith. He had carried out the checks suggested by the JOFIT guidelines before entering into a business arrangement with either and he knew that both companies were registered. He had received what he was entitled to believe were genuine invoices which he had demonstrated from his banking records that he had paid. Mr Sidat further contended that Customs should have undertaken credibility checks with regard to RS and GM. Had they done so, Mr Patel would have been entitled to rely upon those checks and if they had not done so, they ought to have done. Both companies also operated bank accounts. Their banks would therefore have carried out credibility checks on which Mr Patel was also entitled to rely. Mr Patel had received genuine supplies from bone fide registered traders.

Conclusions

22. It was accepted by both parties that the burden of proof lies upon Mr Patel to satisfy us on a balance of probability that he had received taxable supplies from taxable persons.
23. Besides Mr Patel's oral evidence, the only material produced in support of his case were his bank statements showing that all but four of the invoices had been paid. We know from both Miss Blackshaw and Mr Narshi, and this aspect of their evidence was not challenged, that payment of invoices by cheque does not prove the supply was made. That there could have been a fraudulent purpose here gains weight in the light of Mr Narshi's evidence of the wages record he looked at. Clearly there was a substantial cash input into the payment of wages in the sample periods he looked at, albeit with the limited company. This evidence of Mr Marshi's was not challenged and Mr Patel gave no evidence on the matter.
24. Crucially, however, no evidence has been produced to show the physical existence of RS or GM as trading entities or that they did the work which the invoices purport to reflect. There is no record of any supply of cloth or cuttings to them by Mr Patel or delivery notes back to Mr Patel of the completed garments. Mr Patel never visited GM, although he claims to have visited RS on one occasion, but not before he began to trade with them. Even then, he could not remember where the premises were which he visited. This, in itself, we find strange but we find it quite incredible that Mr Patel would commit thousands of pounds worth of cloth to companies he had not previously traded with and whose physical operation he had not checked out with some care beforehand. He told us he had checked the registration status of both and had seen VAT returns for each before he traded with them. This cannot be true of RS because the first invoice is dated 9 February 2001 and RS did not submit a return until the period 04/01. Mr Patel would therefore have been trading with them for some three months before RS submitted its first return.
25. Looking at RS and GM, just about everything about them is suspect. They were both on an internal JOFIT list of suppliers of fraudulent invoices; Miss Blackshaw knew of a previous trader who had accepted the RS invoices in his possession had been false and he had repaid the input tax he had previously claimed; the address on the RS invoices did not exist; Ravinder Singh, the proprietor of RS, had never been registered as living at the address for RS which they had registered with the Commissioners; both had connections with properties in Cross Street – an almost exclusively residential street; GM had been registered as a missing trader; GM had never been heard of at the accountant's address which had been supplied to the Commissioners; the oddity of the VAT returns submitted by each. The invoices themselves are on the face of it equally suspect. There is the similarity of the printed format of each set and that both sets appear to have been completed in the same hand. Mr Sidat told us for the first time in his closing submission that Mr Kotecha had been able to reconcile the RS and GM invoices with the remainder of Mr Patel's records. Although we pressed him on this point, he did not make at all clear exactly which records had been reconciled and unfortunately this point had not been put to Miss Blackshaw or Mr Narshi. The only comment we can make is that we would be amazed, given the lack of any detail whatsoever in the invoices, that they were capable of being reconciled with anything.
26. We cannot accept, on the information before us and the evidence which we heard, that Mr Patel had attended the meeting with Miss Blackshaw and Mr Narshi, even briefly. His presence is not referred to in either set of notes and given that both officers were conducting an interview for which there are official guidelines, we would have thought that at least one of them and almost certainly both would have made a reference to his presence, however fleeting. He wished us to be persuaded of his presence at that meeting because it was his case that he had told Miss Blackshaw that he had a representative of RS visiting him that afternoon and he extended an invitation to her to come and see him. If this had been the case, Miss Blackshaw would surely have jumped at the opportunity, especially as RS were known to her to be the suppliers of fraudulent invoices.
27. It is most unfortunate that Mr Patel was not able to produce any documents or records to us. He told us that his accountant had them all and he had not been able to get them back but whatever the reason, the end result is that on the basis of what we had before us, Mr Patel has not discharged the burden upon him of satisfying us that he received genuine supplies from RS and GM.
28. The appeal is therefore dismissed. Mr Puzey made an application for costs. The grounds of his application were first that what Mr Patel had done was, in effect, dishonest. Secondly, this case had been listed previously and had been heard in the absence of any representation on behalf of Mr Patel. That decision was set aside because, we understand Mr Patel had not been aware of the hearing date. We were told that when that decision had been set aside, Mr Patel was put on notice that on a re-hearing, the Commissioners would apply for costs if they were successful. Mr Sidat objected to any application for costs on the basis that it would not have been the Commissioners' policy to apply for costs had this been the first hearing, and indeed this is borne out by the fact that they had not applied for costs on that first hearing. As this was now in effect the first time the appeal had been properly heard, an award of costs would therefore be unreasonable.
29. On balance, we do not believe an award of costs against Mr Patel would be appropriate and no order is made.

LADY MITTING

CHAIRMAN
Release Date: 5 September 2005

MAN/03/0214