United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19772

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Intarsia Ltd Crispin David Vaughan (t/a The Design Co-Operative v Revenue & Customs [2006] UKVAT V19772 (15 September 2006)

19772

VAT ASSESSMENT – Appellants supplying design services to a company controlled by the owner of the Appellants – Respondent's assessment on draft accounts supplied by the Appellants – satisfied that the Appellants' accountant assured the Respondents that there would be no material alterations to the draft accounts – replacement returns inaccurate – Appellants have failed to satisfy the Tribunal on the balance of probabilities that the assessments were incorrect – Appeal dismissed.

LONDON TRIBUNAL CENTRE

INTARSIA LIMITED Appellant One

CRISPIN DAVID VAUGHAN Appellant Two

T/A THE DESIGN CO-OPERATIVE

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

CYRIL SHAW FCA (Member)

Sitting in public in London on 27 July and 28 July 2006

Timothy Brown, counsel for the Appellant

John O'Flaherty, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

Appellant one was Appealing against an assessment for unpaid VAT in the sum of £47,832 in respect of accounting periods 07/99 and 10/99.

Appellant two was Appealing against an assessment for unpaid VAT in the sum of £65,200 in respect of accounting periods 04/98 and 04/99.

The parties consented to the Appeals being heard together.

We granted the Appellants' application to amend the ground of Appeal to that the amount assessed was incorrect.

In the decision we refer to Appellant one and Appellant two as the Appellants because they share the same issue in dispute.

The Issue in Dispute

The Appellants were part of a group of companies and businesses controlled by Mr Vaughan. As at 25 September 2000 Mr Vaughan was involved as a director or sole proprietor of 14 known companies, of which nine were registered for VAT. There was no VAT group registration in force. Mr Vaughan considered that his companies would not benefit from a VAT group registration

Mr Vaughan's principal business was the design, refurbishment and construction of premises. All his companies and businesses effectively serviced one client, a Saudi Arabian Sheik (hereinafter called the client), who owned various London properties and an estate of 100 acres on the western sector of the M25.

In 1996 the client instructed Holt Estates, one of Mr Vaughan's businesses, to carry out a complete renovation of a listed property in London. Holt Estates engaged Caswell Limited, another of Mr Vaughan's businesses, to undertake the design and construction work. Caswell Limited sub-contracted the design work to the Design Co-operative which was taken over by Intarsia Limited in June 1998. The Appellants were required to account for output tax on the design services provided to Caswell Limited and their other clients.

In 1997 Mrs Maureen Carroll, a VAT visiting officer, visited Mr Vaughan's premises at Salcombe Park which housed his various businesses in connection with a missing VAT return. She soon realised that this was not a straightforward matter because of the number of businesses controlled by Mr Vaughan. In the next three years Mrs Carroll pursued her enquires through a series of visits to and requests for information from the Appellants. She enlisted the support of Mr Bracken and Mr Pearson. Mr Bracken was called in because of his expertise in protected buildings, and would make his own visits to Salcombe Park as well as with Mrs Carroll. Mr Pearson was the Respondents' Regional Accountant, whose expertise was required to shed light on the Appellants' accounting systems. In July 2000 Mrs Carroll raised vAT assessments against the Appellants on the draft financial accounts prepared by Howard Graham Wood, the in-house accountant for Mr Vaughan's enterprises and company secretary for Appellant one. Mrs Carroll accepted the Appellants' representations that the sales figure had been carried forward in each trial balance, and issued revised assessments in October 2000. In October 2002 it was necessary to issue a second revised assessment because parts of the first revised assessment were out of time.

On 31 May 2001 the Appellants submitted revised VAT returns for the periods in question based on final accounts which showed that they had no VAT liability. In their view the Respondents' assessments were incorrect because they were compiled from incomplete information in the draft accounts.

The dispute was essentially one of fact, namely, whether the Appellants have satisfied us on the balance of probabilities that the VAT returns of 31 May 2001 were correct.

Evidence

We heard evidence upon oath or affirmation from:

(1) Howard Graham Wood, the Appellants' in-house accountant and Company Secretary for Appellant one. Mr Wood dealt with the Respondents' enquiries into the VAT affairs of Mr Vaughan's firms.

(2) Maureen Carroll, the assessing officer in respect of the assessments raised against the Appellants.

(3) David Pearson, the Regional Accountant, who had specific expertise in accounting matters.

Each party produced a bundle of documents.

Appellants' Evidence

Mr Wood was a Chartered Accountant but had not practised. Mr Vaughan employed him as a book-keeper not as a Chartered Accountant. Mr Wood was aware of basic VAT requirements but did not have specialist expertise in VAT matters.

The contract with the client was on a cost plus basis. Mr Vaughan required the costs of his various enterprises to be prepared in a particular manner which related the costs incurred to specific areas of the renovated building. Mr Wood engaged a computer software firm to design accounting software to accommodate Mr Vaughan's requirements. Unfortunately the designed software was not fit for purpose which meant that Mr Wood had to find an alternative software package resulting in significant delays with the inputting of accounting data and the production of the Appellants' invoices for work done.

Mr Wood was reluctant to supply accounting records to Mrs Carroll and Mr Bracken until the problems with the computer software had been resolved and after the accounting information had been entered on to the computer. In the early part of 2000 he gave them the draft accounts on the proviso that they were draft and would require amendment once all the information had been entered.

In May 2001 Mr Wood considered there was sufficient information on the computer system to prepare and submit replacement VAT returns for all Mr Vaughan's businesses. The Appellants' replacement VAT returns for the periods in question were submitted on 31 May 2001 and sent by courier to Mr Bracken. Mr Wood was insistent that Mr Bracken told him to submit the replacement VAT returns when the accounts were up to date. Mr Wood did not know the correct procedures for amending previously submitted returns. He believed that he could amend them by submitting replacement VAT returns.

The amounts recorded as sales in the May 2001 replacement VAT returns corresponded with the amounts for the fees receivable in the final accounts for the Appellant companies which were signed off by Mr Vaughan in November 2000, January 2001 and May 2001.

The Respondents had accepted the final accounts for the purposes of income tax and corporation tax.

The replacement VAT returns declared that the Appellants had no VAT liability for the periods under assessment.

On 11 July 2006 Mr Wood supplied Mr Pearson in response to his fax of 9 May 2006 a list of journal entries for each Appellant company to explain the changes in the replacement returns.

The Respondents' Evidence

The Respondents considered Mr Vaughan's business arrangements and the group structure of his companies and businesses highly suspect and a serious threat to the protection of the Revenue. Mrs Carroll set out the risks in her note number 36 and 37 in the Respondents' bundle for Appellant One:

"4. Failure to raise sales invoices, and to account for VAT where applicable. The trader avoids his responsibility to account for VAT by two simple expedients:

a. sales invoices are rarely raised.

b. The client provides Mr Vaughan with large sums of money which are described as expenses in advance of work. These sums are kept in a client account and distributed between all companies. Receipt of money creates a tax point at which time VAT should be brought to account on standard rated supplies. However, this has never been done since the accounts are treated as working capital and according to VAT guidelines can be viewed as money held in trust for a client. Thus multi thousands of pounds are seen to enter the records of all companies, but little or no VAT is declared. These amounts of money are also placed in call accounts to utilise their investment potential. When payments in respect of supplies are received, VAT is still not brought into account. Tax point principles are thereby totally ignored, and effectively this means that the companies are reclaiming input tax on costs but failing to pass on these costs as invoiced sales. The ongoing failure to produce sales invoices has been consistently blamed on the inadequacies of the computer system. However, it is noticeable that the same problems do not affect the reclaiming of input tax, which is collated on a spreadsheet basis.

It is symptomatic of most of the companies that inputs exceed outputs in varying degrees. This is because output tax is not brought to account and input tax on invoices raised by suppliers outside the group are reclaimed. Invoices between associated companies are seldom raised due to the fact that VAT would need to be brought into account. However, when an assessment is raised, Mr Wood immediately states that inter company purchases must be offset against it. Mr Wood appears to implement the same damage limitation exercise continually, thus manipulating the situation to his own advantage".

Mrs Carroll was unable to verify the sales figures in the VAT returns and the Appellants' annual accounts because the Appellants failed to keep the required records for VAT purposes, in particular copies of all VAT sales invoices. Where the Appellants retained sales invoices, those invoices did not use consecutive numbering, instead they used a cross referencing system with prefixes which Mrs Carroll did not understand.

On 25 September 2000 and 30 October 2000 Mrs Carroll requested the Appellants to supply an analysis of all sales covering the years 1997, 1998 and 1999 and clarification of the invoice referencing system. The Appellants did not respond to Mrs Carroll's request.

Mr Pearson was brought in to discover what the problem was in relation to the accounts. He identified that Mr Wood was using the wrong software. Mr Pearson advised Mr Wood to purchase software dedicated to the work of quantity surveyors and to apply for group VAT registration. Mr Pearson found Mr Wood unreceptive to his suggestions.

Mr Pearson discovered that the arrangements set up by Mr Wood had the hallmarks of maximising VAT repayments and minimising the payments of output tax. All the companies and businesses under the control of Mr Vaughan were on different VAT staggers for their returns. Output tax from one company was transferred as costs to another company controlled by Mr Vaughan.

Mr Pearson and Mrs Carroll were not impressed with Mr Wood's explanation about the problems with the computer software for not keeping accurate VAT records. Mrs Carroll pointed out that the Appellants had a legal responsibility to maintain manual records, if it was not possible to hold them on computer.

Mr Pearson and Mrs Carroll denied that Mr Bracken told Mr Wood that he could send in amended VAT returns when the accounts were finalised. Mr Pearson recalled Mr Bracken in April 2000 telling Mr Wood not to send in duplicate VAT returns. Mrs Carroll and Mr Pearson accepted that Mr Bracken paid visits to Mr Wood on his own.

Mr Pearson and Mrs Carroll stated that replacement returns were not the accepted method for making amendments to previously submitted VAT returns. In respect of amounts over £2,000 taxpayers were expected to make voluntary disclosures which had the benefit of giving a full explanation for the amendment to an earlier return.

Mr Pearson and Mrs Carroll were adamant that when Mr Wood provided them with the draft accounts for the Appellants, he assured them that there would be no material alterations to those accounts when they were finalised.

In view of the assurance given by Mr Wood, Mr Pearson advised Mrs Carroll to carry out a best judgment assessment on the draft accounts, particularly as they had been waiting three years for Mr Wood to supply accurate accounts.

When Mr Wood advised Mrs Carroll that he made in an error with the draft accounts by carrying forward the sales figure from one trial balance to another, Mrs Carroll issued revised assessments taking into account the error made.

Mr Pearson and Mrs Carroll, however, were not prepared to accept the figures in the May 2001 replacement vAT returns because:

(1) When Mr Wood was asked to justify the changes in the May 2001 returns, he produced a print out for each of the Appellant companies. The print out provided minimal detail, listing the changes with a standard explanation for each change, namely a credit note had been issued for fees and disbursements. In Mr Pearson's view the print outs had no provenance. Each of the changes should have had a date, related to a taxable event, a reversed batch number and a full explanation for the change. Further Mr Wood supplied no original documentation, such as a taxable invoice or the credit note, to back up the journal entries.

(2) Although Mr Wood reduced the value of the Appellants' supplies, he did not carry the reduction through the linked transactions. Thus the charges made by Caswell Constructing UK Limited to Holt Estates had not been correspondingly reduced. Likewise, Holt Estates had not reduced their bill to the client. Mr Pearson described this form of accounting as "cost plus plus plus" and was totally artificial. In Mr Pearson's view, Mr Wood was reverting to form by minimising the Appellants' liability for output tax whilst maximising the benefits for Mr Vaughan's other companies from the zero-rating of their supplies. The client ultimately paid an inflated bill.

Mr Pearson was aware that the Respondents accepted the Appellants' final accounts for income and corporation tax purposes but in the context of a back duty claim imposed by the Special Compliance Office. Mr Pearson did not verify the accuracy of the final accounts.

On 10 February 2003 Ms Piper of the Respondents' Appeals Team advised Mr Miller, the Appellants' then representative, that the Respondents were not prepared to accept the replacement returns of May 2001 because any errors or omissions should be corrected by completing a voluntary disclosure if the tax was in excess of £2,000.

Reasons for Our Decision

Under section 73 of the Value Added Tax Act 1994 the Respondents may assess the VAT due to the best of their judgment where it appears to them that the returns are incomplete or inaccurate. Best judgment requires the Respondents to consider fairly all the material put before them and on that material reach a reasonable decision as to the amount of tax due. The Appellants did not dispute that Mrs Carroll's revised assessments, subsequently amended for out of time periods, were to best judgment rather they asked the Tribunal to find that the figures recorded in the May 2001 replacement VAT returns were accurate. Our responsibility is to decide the correct amount of VAT due on the evidence before us bearing in mind that the burden of proof on the balance of probabilities rested with the Appellants.

We consider that the outcome of this Appeal will be determined by our findings of fact on the following issues:

(1) Did Mr Wood provide a credible explanation for not keeping proper VAT records?

(2) Did Mr Wood give his assurance to Mrs Carroll and Mr Pearson that there would be no material alterations to the draft accounts when they were finalised?