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Cite as: [2007] UKVAT V20416

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Baba Cash & Carry Ltd v Revenue & Customs [2007] UKVAT V20416 (30 October 2007)

20416

VALUE ADDED TAX – Commissioners' decision to issue an assessment to disallow a deduction for input tax – no tax invoices to support the deduction – whether the Commissioners' decision to issue the assessment was reasonable – whether the Commissioners' decision that the Appellant did not hold other evidence of the charge to VAT within regulation 29 of the VAT Regulations 1995 was reasonable – held it was – Reisdorf v Finanzamt Köln-West considered – appeal dismissed

LONDON TRIBUNAL CENTRE

BABA CASH & CARRY LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: JOHN WALTERS QC (Chairman)

MRS. JO NEILL ACA

Sitting in public in London on 24 and 25 September 2007

Mr. T. Brown, Counsel, instructed by Vincent Curley & Co., for the Appellant

Mrs. P. Crinnion, Advocate, of the Office of the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This appeal by BABA Cash & Carry Limited ("The Appellant") is against an assessment in the amount of £154,231 VAT, plus interest, issued on 24 December 2003. The assessing officer of HM Customs & Excise (as they then were) was Mr. Ken Clark, who gave evidence before us. The assessment covers periods 10/02 to 07/03 inclusive and relates to Mr. Clark's disallowance (on behalf of the Respondent Commissioners) of the Appellant's claim for credit as input tax in respect of the VAT paid on a series of invoices, none of which showed the Appellant as the person supplied. Many of the invoices were effectively made out to "Cash", indicating cash purchases by an unnamed purchaser and some of them were made out to third parties whom the Appellant said were third parties purchasing goods on its behalf. The invoices all covered purchases of beverages, the supply of which attracts VAT at the standard rate.

The legal context in which the question for our decision arises

"Input tax" is, of course, relevantly VAT on the supply to the taxable person making the claim (the Appellant) of goods used or to be used for the purposes of a business carried on by him (section 24(1) VAT Act 1994 ("VATA")). Section 24(6) (a) VATA makes provision for Regulations to provide for VAT on such a supply to be treated as the taxable person's input tax "only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases".

The relevant regulation, to which both parties drew the Tribunal's attention, is regulation 29 of the VAT Regulations 1995, ("the VAT Regulations") which relevantly provide (at regulation 29(2)(a)) that "at the time of claiming deduction of input tax … a person shall, if the claim is in respect of a supply from another taxable person [this case], hold the document which is required to be provided under regulation 13, provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other evidence of the charge to VAT as the Commissioners may direct".

Regulation 13 of the VAT Regulations deals with the general obligation to provide a VAT invoice, and regulation 14 deals with the prescribed content of a VAT invoice provided in accordance with regulation 13, which includes several particulars, including, of course, (under regulation 14(1)(e)) "the name and address of the person to whom the goods or services are supplied".

The invoices in issue in this appeal do not include that required particular, and, accordingly, are not tax invoices which support (by themselves) a claim for the deduction of the tax stated on them as the Appellant's input tax under regulation 29(2)(a) of the VAT Regulations. This is obviously the position and it is common ground between the parties.

It is also the position that the Commissioners have not made any relevant direction under regulation 29. Such a direction, which would have enabled the Appellant to rely on "other evidence of the charge to VAT", would, if it were strictly to have been a direction within regulation 29(2), have had to have been made at or before the time when the Appellant claimed the relevant deduction of input tax. This follows from the wording of regulation 29(2) cited above.

Nevertheless the appeal was conducted (without objection from Mrs. Crinnion, who appeared for the Commissioners) on the basis that the Commissioners could, after the time of the claim, approve "other evidence of the charge to VAT", that is, evidence other than a tax invoice fulfilling the requirements of regulation 14, and that they had not done so. The Appellant's case was that the requirement for the Commissioners to act reasonably in their decision whether or not to accept the Appellant's claim for deduction of input tax in respected of the disputed invoices, could only have been satisfied by their approving such "other evidence", being the evidence which it produced to the Tribunal, and had earlier produced to Mr. Clark. The Commissioners' case was that they had acted reasonably in refusing to approve that evidence for the purpose of validating the Appellant's claim to deduct input tax in relation to the VAT recorded on the disputed invoices.

We were referred to the decision of the Court of Justice of the European Communities in Reisdorf v Finanzamt Köln-West (Case C–85/95) [1997] STC 180 in which it was held that pursuant to article 18(1)(a) of the Sixth VAT Directive, a taxable person seeking to exercise the right to deduct input tax must hold an invoice, drawn up in accordance with article 22(3) of the Directive. This is the normative precondition for entitlement to exercise the right to deduct input tax. In Reisdorf it was noted, further, that article 18(3) confers on Member States a power "to authorise a taxable person who does not hold an invoice in accordance with article 22(3) to make" an input tax deduction and, in such a case, the Member States "shall determine the conditions and arrangements for applying this provision". Member States also have the duty to determine the criteria for considering whether a document serves as an invoice for the purposes of article 22(3) – see: article 22(3)(c) – and the power to impose other obligations which they deem necessary for the correct levying and collection of VAT and for the prevention of fraud – see: article 22(8).

The Court of Justice in Reisdorf derived from these provisions the principle that the Sixth Directive "gives Member States the power to determine the rules relating to supervision of the exercise of the right to deduct input tax, in particular the manner in which taxable persons are to establish that right" (ibid. Judgment, paragraph [29]). This is a general proposition and is wider than actual decision in Reisdorf that such power (a) permits the Member States to regard as an invoice not only the original, but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves, and (b) "includes the power to require production of the original invoice in order to establish the right to deduct input tax, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place" (ibid. paragraph [31] and the dispositif).

From the general proposition stated at paragraph [29] of the Court of Justice's judgment in Reisdorf, it appears to us that in a case, such as the present, where a taxable person seeking to exercise the right to deduct input tax does not hold (and never has held) an invoice drawn up in accordance with article 22(3) of the Directive – it is to be noted that article 22(3)(b), at the fourth indent, requires such an invoice to state the full name and address of the taxable person and his customer – then the right of deduction can only be exercised where rules have been made by the Member State concerned (here, the United Kingdom) determining the criteria for considering whether a document other than the invoice may serve as one (see: the Advocate-General's Opinion in Reisdorf at paragraph [17]) and those rules have been complied with by the taxable person. Such rules can extend to criteria for considering whether a proof that the alleged supply took place, which is not itself a document which could be described as an invoice, may serve as the invoice, provided that such a proof satisfies the overriding objective of the Sixth Directive of ensuring the proper application of the Community VAT scheme (see: the Advocate-General's Opinion, ibid. at paragraph [25]).

Although a Member State's power to impose such rules must be limited to what is necessary to ensure the correct levying of VAT and permit supervision by the tax authorities (the application of the proportionality principle in this context), the Advocate-General stated that he considered that the power to determine conditions and procedures for the making of input tax deductions notwithstanding failure to hold a tax invoice is an exceptional provision which should not be interpreted broadly (ibid. at paragraph [26]).

Against the Community law background summarised above, the domestic provision, in the proviso to regulation 29(2)(a) of the VAT Regulations, that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other evidence of the charge to VAT [i.e. evidence other than the tax invoice] as the Commissioners may direct, gives only slight scope, as it appears to us, in the absence of mala fides, for a taxable person to appeal successfully to this Tribunal in a case where the Commissioners have considered the case and declined to make any such direction.

This view is reinforced by the consideration that, as Mr. Brown for the Appellant accepted, this Tribunal's jurisdiction on an appeal against an exercise by the Commissioners of a discretion, such as that contained in the proviso to regulation 29(2)(a) of the VAT regulations, is supervisory – see: Kohanzad v Customs and Excise Commissioners [1994] STC 967. Further, the supervisory jurisdiction is to be exercised in relation to materials which were before the Commissioners, rather than in relation to later material (ibid. at p.969e/f).

The test for the exercise of this Tribunal's supervisory jurisdiction is whether, in relation to the materials which were before the Commissioners when they made their decision, their refusal to allow the input tax deductions was a decision that no reasonable commissioners would have taken (ibid. p.971a/b). In order to be successful in its appeal, the Appellant has to show that the Commissioners' decision was unreasonable (including disproportionality as a type of unreasonableness) having regard to their legitimate requirements both to be satisfied that the alleged supplies to the Appellant took place and also to operate procedures which appear to them to be necessary to prevent fraudulent claims (compare the Advocate-General's Opinion in Reisdorf at paragraph [26]).

Having stated the legal context in which the question for our decision arises, we turn to the facts.

The facts

The Tribunal was provided with bundles of documents by both the Appellant and the Commissioners. These bundles were largely identical and it was possible to extract the relatively few extra documents provided by the Appellants and add them, together with the witness statements of Jatinder Singh Johal and Avtar Singh Ghumman, to the bundle prepared by the Commissioners. We heard oral evidence from Mr. Johal and Mr. Ghumman, for the Appellant, and from Mr. Clark, the Higher Officer of the Commissioners who took the decision and caused the assessment to be issued.

From the evidence we find the following facts.

On 29 July 2003, several excise officers (from the Respondent's REACT team) and two VAT officers (one of whom was Mr. Clark) made an unannounced visit to the Appellant's wholesale warehouse premises in Hayes, Middlesex. There, a consignment of allegedly stolen wine was identified, for which Mr. Clark said that he was told (by unnamed colleagues) that the Appellant had been unable to produce purchase invoices. Mr. Johal in evidence said that he had been in India at the time, but he found the story hard to accept. He suggested that the Appellant had produced invoices but that the Respondents had lost or misplaced them. The documentary evidence includes an internal email between two officers of the Commissioners dated 1 August 2003 in which it is stated that Mr. Chokkar from the Appellant telephoned Mr. Cordwell (an officer) asking about the wine seized only a few days before. He (Mr. Chokkar) stated that one of his employees informed him that he had been told that it was stolen. He also stated that there were another 50 cases of the wine on the premises that had not been seized. He provided the batch number and Mr. Cordwell told him that the goods should not be sold pending further contact from the Commissioners' REACT (Excise) team. On the basis of this evidence we find that the Appellant had not produced purchase invoices and that the Respondents had not lost any invoices handed over to them. But we also find that this was an unusual occurrence in the Appellant's business and that it would be unreasonable to form the view that there was any serious risk of tax or duty loss through stolen goods in the Appellant's stock.

At the time of the visit on 29 July 2003, the Excise officers undertook a stock check, whilst Mr. Clark and his colleague (the VAT officers), examined purchase invoices and the cash controls that were in place at the business. From Mr. Clark's evidence, we find that this was a fairly desultory examination and that in fact he saw two or three "daypass" invoices, and asked Mr. Chokkar about them. A "daypass" invoice is an invoice from another cash and carry beverages warehouse (such as Bestway Cash & Carry Limited), which is to all appearances otherwise a valid VAT invoice for a supply of drink, but which has the words "Day Pass" and a reference, where there should be the name and address of the purchaser. Mr. Clark recognised that these were irregular invoices if they were used to support claims for input tax deduction as valid tax invoices and he asked Mr. Chokkar about them. He was shown original invoices in this form and asked for the production of further invoices used to support claims for input tax. The Appellant eventually produced all its purchase invoices for the periods 07/02 to 07/03 and Mr. Clark examined them in depth. He identified well over 100 invoices not addressed to the Appellant, but instead addressed to "Day Pass" or otherwise in the names of other businesses, for example, Wine Cellar, M. Patel of Gwent, Sutton Wines or Regal Wines. The input tax referable to these invoices totalled some £154,000 and was the basis of the assessment in dispute.

At this point we mention certain inaccuracies in the schedule of disallowed input tax, which Mr. Clark in cross-examination accepted were inaccuracies. A comparison of the invoices (from which Mr. Clark drew up his schedule of disallowable deductions) and the Appellant's purchase ledger (from which its original VAT returns were prepared) showed that, in the case of two of the disputed invoices, the deduction claimed as input tax was (due to clerical inaccuracy) less than the amount shown on the respective invoices. Any disallowance must of course reflect only the amount claimed by the Appellant in its VAT returns. We find that on this account the assessment is too high by £1,337.32 and we direct that it be amended accordingly (with a consequential reduction of interest and/or penalties).

There is in evidence a VAT Audit report made by Mr. Clark on 20 November 2003 in which he stated that during the visit on 29 July 2003 he had pointed out to the trader (presumably Mr. Chokkar) that the Appellant was claiming input tax on invoices which were not addressed to him and that such tax was not deductible. Mr. Clark's report states that he (presumably Mr. Chokkar) explained that he had a bad name in the industry and could not buy from other cash and carry organisations and would therefore get his friends to buy for him, using his money.

Indeed that, in substance, has been the Appellant's case throughout, and was the case it presented to the Tribunal. We find from Mr. Johal's evidence that he has been a director of the Appellant continuously since April 2002 and that in mid 2002 the Appellant was not able to purchase goods directly from breweries as it was not part of a buying group and that other cash and carry businesses, which had stock for sale at very competitive prices which would have allowed the Appellant to make a profit on resale, would not open an account for the Appellant as a matter of policy, because the Appellant was a competitor business. Bestway Cash and Carry Ltd., Booker Cash and Carry Ltd., Imperial Cash and Carry Ltd., Costco Cash and Carry Limited and Hothi Cash and Carry Ltd. were mentioned as examples.

However these cash and carry businesses had a "day pass" system, to Mr. Johal's knowledge, and this allowed customers to purchase goods on a daily basis for cash. It was thus possible for businesses to purchase goods on a one-off basis without the need to open an account, providing payment was made in cash. Mr. Johal's evidence, which we accept, was that the Appellant made purchases in this way. At first, before any relationships between the Appellant and managers of the respective cash and carry businesses had been established, the Appellant arranged that certain retail shopkeepers, who were its customers, would approach the cash and carry businesses and make "daypass" purchases for the Appellant. Among these were Mr. C. Leung of Wine Cellar, and Mr. Avtar Ghumman of Regal Wines. Once relationships with the managers had been established, then the managers were approached direct by the Appellant (either through Mr. Johal or through Mr. Chokkar) and "daypass" purchases were made by the Appellant without the intervention of any third party. The importance of establishing relationships with the managers was that it was sometimes in their individual interests to sell to the Appellant, notwithstanding the central policy of the cash and carry business that it should not sell to competitors, because the managers had an incentive to move stock and meet targets. Sometimes also the Appellant profited by being able to acquire stock at special discounts in this way.

Mr. Johal stated, and we accept, that where third party businesses were used in this way, the Appellant provided the respective third parties with the necessary cash to make the purchases. He stated, and we accept, that the purchases in the name of M. Patel, Gwent, were purchases made through the manager of the Bestway Cash and Carry outlet at Cardiff, who used this name as, in effect, an alias for the Appellant, as it was the name of an old customer whose account was no longer active.

Some of the invoices made out in the names of third parties had had white blank sticky labels applied to obscure the third party's name and address. We find that this was a procedure carried out in the Appellant's organisation and was not intended to deceive, but simply to recognise that the third parties concerned were acquiring the goods purchased on behalf of the Appellant.

Goods were sometimes collected by Mr. Johal personally, sometimes by employees of the Appellant, and sometimes by independent carriers retained by the Appellant. One of these was JCH Transport Limited, and we have seen in the papers invoices for transport services rendered by that company to the Appellant.

The cash to make these purchases was, we find, derived from the cash taken by the Appellant at sales at its cash and carry warehouse. In the correspondence passing between the parties before the appeal, Vincent Curley & Co., on behalf of the Appellant, undertook a cash reconciliation exercise which showed that the difference between sales declared in the relevant periods of £14,998,427.90 and bankings of £11,845,822.09 was £3,152,605.81, and that that was amply sufficient to cover cash purchases of the gross amount of £1,035,551, to which the assessment relates. In cross-examination, Mr. Clark said that he did not dispute this exercise and Mrs. Crinnion expressly accepted on behalf of the Commissioners, that there was in the business sufficient cash to make the purchases covered by the disputed invoices.

Mr. Avtar Singh Ghumman's evidence, which we accept, was that he is the sole proprietor of the business trading under the name of Regal Wines. This is a retail business with two outlets, one in Clapham, and the other in north London, and is a much smaller business than the Appellant's. He has known Mr. Johal for a number of years and in 2002 Mr. Johal asked him if he would assist with the problems which the Appellant had in making purchases from cash and carry businesses which were not willing to supply the Appellant direct, because it was a competitor. Because of his retail business, Mr. Ghumman was on good terms with the local Bestways cash and carry depot managers and he knew them personally. He agreed to assist Mr. Johal by purchasing goods for the Appellant on the day pass system. He said, and we accept, in relation to the invoice in dispute in the name of Regal Wines (value £4,885), that the goods concerned were purchased for the Appellant, using the Appellant's funds, and the transaction was not recorded in the books of Regal Wines. Regal Wines did not claim input tax in respect of the purchase.

There was also in evidence a statement from Che yee Leung, the proprietor of the business trading under the name of Wine Cellar at an address in Hanwell, London, W.7. He confirmed Mr. Johal's evidence as to the arrangements subsisting between 2002 and the middle of 2003, when Wine Cellar would purchase stock on behalf of the Appellant from Bestway using day passes, and that the Appellant sent cash to meet the cost of the purchases and collected the stock and the invoices from Bestway. Mr. Leung did not give oral evidence, and so his statement was not tested by cross-examination. We have, however, no reason to doubt the truth of the statement as it describes generally the dealings in which Wine Cellar was involved.

There was also evidence, which we accepted, about trading transactions between the Appellant and Wine Cellar, which recorded purchases by the Appellant from Wine Cellar of beverages stock at a mark up of 10 pence per case. We find that this was a commercially negotiated arrangement.

Mr. Clark in evidence said that he had seen no evidence which proved to his satisfaction that the VAT on the disputed invoices had in fact been paid by the Appellant. The form of the invoices was not probative of the Appellant's entitlement to any input tax deduction and, while he would have overlooked the matter if the amount of VAT in issue had been small (given the Appellant's explanations), he was not willing to do so, given the amount of VAT actually in issue. He was not alleging that there had been any fraud committed using the disputed invoices, but their form made them liable to be so used. He stated, and we accept, that if he had seen an audit trail – that is, documentary evidence proving that the Appellant had in fact paid to the suppliers the amounts stated on the disputed invoices, then he would have allowed the deduction. He had to justify his actions to his superiors, and on the state of the evidence he had seen, he would have been unable to justify allowing the input tax deduction sought.

We record that during the appeal hearing an attempt was made to produce cashbook evidence that the payments in question had been made by the Appellant. However such evidence could not be produced.

Mr. Clark accepted in oral evidence that the transactions between the Appellant and Wine Cellar at a profit margin of 10 pence per case, although they struck him as "odd", did not play a primary part in his reasoning regarding the issue of the assessment. This was despite the fact that the point had been mentioned in his (short) VAT audit report made on 20 November 2003, with the comment that he felt the transactions were not viable economic transactions and that they needed further examination, possibly throughout the chain of supply.

Mr. Clark admitted in cross-examination that the fact that wine had been found on the Appellant's premises, for which he believed no acquisition invoice could be produced (stolen wine), was "just an indicator" that it would be unsafe to regard the disputed invoices as validly supporting a claim to deduct input tax. This was despite the fact that in his letter dated 22 July 2004 to PKF Accountants, then acting for the Appellant, he had cited this fact as reinforcing his view that the Appellant may not have legitimately incurred input tax on the purchases necessary to support its demonstrated volume of sales.

In the same letter he stated that the invoices issued by the Bestway outlet in Cardiff "bore out" his opinion that the disputed invoices could have related to purchases by some individual or business other than the Appellant. In the face of the evidence produced at the hearing, which the Tribunal accepts, that goods purchased from the Bestway outlet in Cardiff were collected and delivered to the Appellant (Mr. Johal's oral evidence to that effect and the carrier's invoices), Mr. Clark admitted that his comment was not made after any in-depth enquiries, but was "more a commonsense view in his opinion".

The submissions

Mrs. Crinnion, for the Respondents, submitted that the acceptance of evidence other than a tax invoice complying with the requirements of the VAT Regulations as supporting a deduction of input VAT was a matter for the discretion of the Commissioners. She submitted that in this case Mr. Clark had exercised that discretion reasonably. She cited Van Boeckel v Commissioners of Customs and Excise [1981] STC 290, Rahman (t/a Khayam Restaurant) v Commissioners of Customs and Excise (No. 2) [2003] STC 150, and Kohanzad (q.v. supra), together with the decisions of this Tribunal in Curry Inn Restaurant v Commissioners of Customs and Excise (1998) and Jaytot Limited v Commissioners of Customs and Excise (1998). Her main submission was that there were no cash records going back to the relevant periods, which could prove that payment of the disputed invoices had been made by the Appellant. The value of the invoices was so high, she submitted, that there was a real concern for the protection of the integrity of the VAT system if a deduction had been allowed to the Appellant on the basis of them.

Mr. Brown, for the Appellant, submitted that paragraph [29] of the Court of Justice's judgment in Reisdorf must be interpreted widely to cover this case. He submitted that the Appellant had produced cogent evidence that it paid for the purchases recorded on the disputed invoices and that therefore, consistently with the Commissioners' duty to act reasonably, they ought to have exercised their discretion to allow the deduction of input tax on the basis of that evidence.

He cited Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd. [1980] STC 231. He referred to Lord Lane's comment (bid. p.239) with regard to a supervisory jurisdiction, that the Tribunal could only properly review the Commissioners' discretion if it were shown that the Commissioners had acted in a way in which no reasonable panel of commissioners could have acted; "if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight".

He submitted that Mr. Clark had taken into account irrelevant matters. The presence on the Appellant's premises of one consignment of seized wine was cited by him in correspondence as a reason for disallowing the input tax on over 100 purchase invoices. The assumed non-viability of purchasing stocks in Cardiff was cited as a reason for disallowing the input tax, yet Mr. Clark admitted that he had not enquired into the matter.

Mr. Brown submitted that the fact that another person might have claimed an input deduction by reference to the disputed invoices was irrelevant if the evidence showed that the Appellant had purchased the goods recorded on them. When encouraged by the Chairman to do so he, with some reluctance, modified this submission to one where the input tax deduction should be allowed if the evidence that the Appellant made the purchases recorded on the disputed invoices was so compelling that it outweighed the possibility that the supplies so recorded were not made to the Appellant.

Mr. Brown also submitted that Mr. Clark had given no weight in reaching his decision to issue the assessment to the following relevant matters.

First, the disputed invoices record goods to the value of over £1m. having been purchased. It was highly unreasonable to suppose that the Appellant acquired stock of that volume otherwise than by way of taxable supplies made to it. Secondly, no sufficient weight had been given to the statements from Wine Cellar and Regent Wines, which corroborated the Appellant's account given. Thirdly, no sufficient weight was given to the fact that the invoices produced by the Appellant were all original invoices and highly unlikely to have been used by another trader to obtain an input tax deduction. Fourthly, insufficient weight was given to the documentary evidence of the transport arrangements supplied to the Commissioners under cover of Vincent Curley & Co.'s letter of 18 August 2006.

Mr. Brown made the point that Mr. Clark's evidence had been that he was really only concerned with evidence of payment of the invoices by the Appellant (the cash audit trail). It followed that he had effectively closed his mind to all other evidence and that made the decision unreasonable.

Our decision

We have set out, in paragraph 14 above, what, in our view, the Appellant must show in order to be successful in this appeal. It has to show that the Commissioners' decision was unreasonable (including disproportionality as a type of unreasonableness) having regard to their legitimate requirements both to be satisfied that the supplies recorded on the disputed invoices were supplies which were actually made by the respective suppliers to the Appellant, and also to operate procedures which appear to them to be necessary to prevent fraudulent claims.

We reject Mr. Brown's submission that the fact that another person (apart from the Appellant) might conceivably have claimed an input tax deduction by reference to the disputed invoices was irrelevant if the evidence showed that the Appellant had purchased the goods recorded on them. The protection of the revenue, and the integrity of the VAT system, in the operation of which the role of the invoice was described by the Advocate-General in Reisdorf as "pivotal" (his Opinion at paragraph [18]), is in our view clearly, as a matter of law, a relevant consideration for the Commissioners to take into account in deciding whether to exercise their discretion to allow a deduction in the absence of tax invoices within the meaning of the VAT Regulations.

We also note that the statements from Wine Cellar and Regent Wines were given (in April 2005) long after the assessment was issued (on 24 December 2003) and so do not fall within the categories of evidence which we can take into account in deciding the reasonableness of Mr. Clark's decision. The same comment applies to the evidence of the transport arrangements submitted by Vincent Curley & Co. under cover of their letter dated 18 August 2006.

We consider that Mr. Clark's insistence on being shown documentary evidence that the disputed invoices had been paid by the Appellant to the supplier (a cash audit trail) was reasonable. That evidence was never supplied. In the circumstances, notwithstanding powerful evidence to the contrary that the Appellant was highly likely to have paid some or all of the invoices to the respective suppliers, we hold that Mr. Clark's decision to issue the assessment was reasonable in all the circumstances, and dismiss the appeal, subject to our direction in paragraph 20 above for a reduction in the amount assessed.

Afterword

Having said that, we express our unease at the possible consequences of our decision. The VAT system is, of course, designed to be neutral so far as its incidence on a fully taxable trader is concerned. VAT ought not to be a cost to be absorbed by such a trader. It may well be difficult for the Appellant to absorb as a cost the financial burden of the assessment which we have upheld.

This unease is sharpened by the fact that we have accepted as generally true the Appellant's version of the facts as to the circumstances in which the disputed invoices came to be issued, came to be in the Appellant's possession, and came to be relied on by it to support a claim for input tax deduction.

Although we have not been through the invoices one by one and cannot express a view as to whether in all probability the Appellant paid each and every one of the disputed invoices – which would have been an exercise which was not appropriate for us in the exercise of our supervisory jurisdiction – we consider it highly likely that it paid many, or even all, of them, particularly those which were most closely examined by Mr. Brown in the course of his cross-examination of Mr. Clark.

We also record that it is common in our experience for best of judgment assessments, when made on traders who have allegedly underdeclared their takings, to include a fair allowance for deductible input tax, notwithstanding the absence of any tax invoices to support the deduction.

In all the circumstances we express serious misgivings at the prospect of the assessment which we have upheld being enforced. We urge the Commissioners, as a matter of good administration rather than of legal obligation, to arrange for an officer other than Mr. Clark to look again at the disputed invoices and the evidence that the Appellant paid them, in the light of our findings on the generality of the Appellant's evidence, in order that a solution which would in all the circumstances be regarded by both parties as clearly fair to both to them may eventually be reached. We note that Schiemann J made comments along these lines at the conclusion of his judgment in Kohanzad at ibid. p. 971f/g.

The Commissioners did not apply for their costs in the event of their being successful in the appeal and so we make no order as to costs.

JOHN WALTERS QC

CHAIRMAN

RELEASE DATE: 30 October 2007

LON/2004/2315

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