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Cite as: [2007] UKVAT V20437

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Base Interactive Ltd v Revenue & Customs [2007] UKVAT V20437 (01 November 2007)

VALUE ADDED TAX — input tax – Appellant seeking credit on strength of invoices which omitted supplier's VAT number — supplier actually registered at date of invoices but subsequently retrospectively deregistered — relevance of deregistration — Commissioners' discretion to accept alternative evidence — VAT Regs 1995, reg 29(2) — credit refused — whether discretion correctly exercised — yes — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BASE INTERACTIVE LTD Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Colin Bishopp (Chairman)

Gilian Pratt

Sitting in public in Manchester on 3 and 4 October 2007

Timothy Thomas, counsel, instructed by Ashton Law LLP for the Appellant

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

© CROWN COPYRIGHT 2007

DECISION

On 9 July 2004 the Appellant, Base Interactive Limited ("Base") submitted its VAT return for the period 05/04. By that return, Base claimed credit for the input tax it said it had incurred in the purchase of consignments of mobile phones from KK Distributors Limited ("KK"), in two separate transactions on 8 March 2004. The evidence Base held to support its claim consisted of two invoices, one for each transaction, provided by KK, and both dated 8 March 2004. The invoices identified the goods, quoted the price to be paid net of VAT, the appropriate rate and amount of VAT and the aggregate of the two sums, and bore a sequential number. They included Base's name but not its address and, most importantly, did not give KK's VAT registration number.

On 10 September 2004, the Respondents wrote to Base to inform it that the credit claimed on the strength of those invoices was not to be allowed, and on the same day made an assessment for the amount of credit which Base had claimed. It was not a repayment trader and had paid, when sending in its return, less than the Respondents considered to be due in the light of their decision to disallow the claimed credit. The amount assessed is £87,076. As the objective criteria specified by section 63 of the Value Added Tax Act 1994 were met, the Respondents also imposed on Base a misdeclaration penalty of £13,061. Base now appeals against the assessment and the penalty. It accepts that if the assessment was correctly made, the penalty was properly imposed and we are, therefore, required only to consider one issue.

The formal requirements which a VAT invoice must satisfy are to be found in article 22(3) of the Sixth VAT Directive (77/388/EEC), the European legislation in force at the relevant time, and regulation 4 of the Value Added Tax Regulations 1995 (SI 1995/2518). Both provisions require an invoice to bear, among other items, the customer's address and the supplier's VAT registration number. Base, through its counsel Timothy Thomas, accepted that the two invoices failed to include those items and that, taking the provisions of the directive and of the regulations alone, they were invalid. However, Mr Thomas argued, the Respondents should have exercised their power to accept other evidence of the supply, and to allow the claim for input tax credit; and their refusal to do so was a decision at which no body of Commissioners, reasonably exercising their discretion, could have arrived. We should, therefore, set aside the Respondents' refusal and direct them to allow the credit.

The Commissioners' power on which Mr Thomas relied is to be found in article 18(3) of the Sixth Directive, which contains no more than an enabling provision, and in the concluding words of regulation 29(2) of the 1995 Regulations. That paragraph requires the taxpayer seeking to claim credit to hold the requisite document—in this case a valid VAT invoice—

"… 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."

The Respondents take no issue with the absence from the invoices of Base's address, but they do maintain that the absence of KK's VAT registration number, when taken with other features of the transactions and of Base's trading relationship with KK, justify their stance that they have properly exercised their discretion in refusing the claim.

We heard evidence about the Appellant's history, its trading with KK and the two relevant transactions from Base's only director, Noman Ahmed. We also had evidence from five officers of HM Revenue and Customs, Simon Winter, Carol Faulkner, Simon Kiefer, Alison Teal and Frances Clements. We had statements from all the witnesses save Mrs Clements (whose evidence was designed to deal with a matter which arose in the course of the hearing), which stood largely as their evidence in chief, and we had helpful skeleton arguments from Mr Thomas and from James Puzey, counsel for the Respondents. In addition, we were provided with copies of the relevant documents.

Base began trading in 2000, initially making computer software sales. It had been registered for VAT throughout its life. By October 2002, when Mrs Faulkner made a first visit, it had begun selling computer hardware. Some of those sales were by retail, but Base had engaged in one wholesale supply. Mrs Faulkner warned Sajid Zulfikar, Base's bookkeeper, whom she saw in Mr Ahmed's absence, of the dangers of such transactions, but as the visit report indicated, she found no other reason for concern and, indeed, recorded in her report that she considered Base at that time to be a "highly compliant trader".

On 22 October 2003, Mr Ahmed telephoned Mrs Faulkner and told her that Base was about to start wholesale dealing in mobile phones. He told us that he had recently taken on, as an employee, Sal Ibrasalim, who had previously worked for a freight forwarder (although, it transpired, for only two and a half months) and who had compiled a useful database of contacts in the mobile phone wholesaling business. Mr Ahmed believed, he said, that Base could benefit from the substantial volume of trade in that business. It is clear, and he agreed, that he was aware of the high level of fraud in the trade and that he was expected to notify the Respondents of Base's additional trading activity, and to take precautions. As a result of Mr Ahmed's telephone call, Mrs Faulkner arranged a prompt second visit, which took place on 24 October 2003, when she offered advice to Mr Ahmed about the precautions he should take. She found, however, that he had already informed himself about them. She asked that he provide her with details of each of the Appellant's transactions in mobile phones as they occurred.

In fact, Base did not do business with any of the contacts on Mr Ibrasalim's database, and it seems Mr Ibrasalim did not remain with Base for long. Certainly he plays no further part in the events relevant to this appeal, and he appears to have been no more than the catalyst for Base's embarking on mobile phone dealing.

In or about February 2004—the exact date could not be established—KK made its first communication with Base. It sent to it an undated letter of introduction, together with copies of its VAT registration certificate and its certificate of incorporation. There is a distinct oddity about these documents since, although KK indicated in its letter that it had been trading for some time and was looking for new suppliers and customers, nowhere did it state the nature of the trade in which it was engaged. Mr Ahmed's evidence was that KK's director had contacted him by telephone, when the nature of KK's trade was described, and when it was agreed that the two companies would remain in contact. He was unable to tell us whether the conversation took place before or after Base received KK's letter and his evidence about the establishing of trading relations between the two companies was very vague. KK's director gave his name as Yasmin Tractorwala which, Mr Ahmed agreed, was a most unusual name, one he had not encountered before, and which meant "tractor man" or "tractor owner". Mr Ahmed sent similar information—copies of Base's VAT registration and incorporation certificates—to KK and on 23 February 2004 he ascertained from the Respondents' office at Redhill that KK then had a valid VAT registration. Mr Ahmed made a search at the Companies Registry in order to check the identity of the directors, but he was unable to produce the result of that search. He agreed that he had made no enquiries at all into KK's history, trading record or creditworthiness. He told us that he had arranged to visit Mr Tractorwala but had cancelled the visit when an earlier appointment overran. He accepted that there were no contractual conditions governing the trading between the two companies, that he had never himself seen, or arranged a reliable third party inspection of, the goods (he relied instead on Mr Tractorwala's assurance that a third party inspection report existed, but did not ask to see it), and that he assumed, without checking, that the goods were insured by the freight forwarders at whose premises they were stored. The goods did not move: they were "released" by KK to Base, and by Base to Mobiles in Store Limited, to which Base sold each consignment, by simple instruction to the freight forwarder. Mr Ahmed accepted that in every case in which Base had bought goods from KK and sold them to Mobiles in Store, both the purchase and the sale took place on the same day and that Base had made a gross profit of £1 per phone; it was impossible, he said, to make a larger profit.

Mr Kiefer is responsible for the unit at Redhill which undertakes verifications of traders' VAT registrations at the request of other traders who ask for such verification. Dealers in mobile phones (and other commodities) are strongly encouraged to make such checks before entering into transactions, and we were shown evidence that Base had made similar requests in respect of others with whom it did, or had contemplated doing, business. The Redhill unit despatches standard letters to known traders, or intending traders, in various commodities including mobile phones, advising them about the precautions the Commissioners consider they should take before entering into wholesale transactions in those commodities. Checks on the validity of other traders' VAT registrations are one of the precautions suggested which, as Mr Kiefer agreed, were not enforceable by the Commissioners and were no more than their recommendations. He agreed too that the standard letter did not indicate that a trader should check his intended supplier's VAT registration before each deal; that, he thought, was a recommendation which should be made by local officers.

On 25 and 27 February 2004, shortly after its successful verification of KK's VAT number, Base bought consignments of mobile phones from KK, selling the consignments intact to Mobiles in Store, also a United Kingdom trader, which, it emerged, was the only customer to which Base had ever sold any mobile phones. Base did not make a further verification request of the Redhill office before it entered into the two transactions with which we are concerned, on 8 March 2004. Mr Ahmed told us he did not think there was any need to do so. There is no evidence before us on which we might find that Mr Ahmed was mistaken in so thinking, and we do not so find, although a further check would have been a prudent precaution.

On 8 March 2004 KK did, in fact, have a valid VAT registration. However, on 4 March 2004 Mr Winter had visited KK's premises. KK had already attracted the Respondents' attention because of problems which had arisen in the clearing through docks of consignments of soft drinks supposedly destined for KK but of which KK's then director denied any knowledge. It was also known that KK's VAT registration had been verified by traders (not Base) in November 2003, suggesting that it was now engaged in dealing in computer components and mobile phones, although the director—still Mr Tractorwala's predecessor—denied that this was so. The immediate cause for Mr Winter's visit in March 2004, however, was that the Respondents had very recently become aware that the directors of KK had changed: Mr Tractorwala had replaced the former director, and another man had become company secretary. It is conspicuous that, both before and after the change of directors, KK had failed to render its VAT returns, a failure which the Commissioners had made little apparent effort to remedy.

When he arrived at KK's premises, Mr Winter found that they were, or appeared to have been, abandoned. He left on the premises a letter indicating that, if the company did not contact him within the next seven days, its VAT registration would be cancelled on the grounds that it appeared no longer to be making taxable supplies. The letter was one of several pre-prepared letters Mr Winter had taken with him; the letters were designed to deal with various possible outcomes of the visit. When he returned to his office, Mr Winter decided that, rather than allow KK seven days' grace, he would instead arrange for the immediate cancellation of its registration. That afternoon he sent an email to the Commissioners' VAT registration section asking for cancellation of the registration with effect from that day, 4 March.

Mrs Clements' evidence was directed to the mechanics of the cancellation of KK's registration. Although, as the Respondents' records show, Mr Winter's email was opened by an officer at the registration section on the following day, the request was almost certainly not actually processed until 11 March when KK's registration was cancelled with effect from 4 March. We say "almost certainly" because the Respondents' records do not show, incontrovertibly, when the cancellation was effected but (as Mrs Clements agreed) they point to that date and, in so far as it is necessary to make a finding on the point, we find that the cancellation was in fact effected on 11 March 2004. We should add that KK did not contact Mr Winter during the period between 4 and 11 March, but he received a call from Mr Tractorwala some days later, when Mr Winter was away from his office. There was further contact between the two in the course of which Mr Winter arranged to visit KK on 25 March, but when he attended the premises on that day, no one was present. Mr Winter made some further attempts to establish contact, but they were unsuccessful. The Commissioners say that the company has now vanished without trace; Mr Thomas did not concede as much, but he did accept that it had defaulted in its accounting for VAT.

None of KK's four invoices, as they were sent (apparently by fax) to Base, contemporaneously with the transactions, bore KK's VAT number. Credit was, however, allowed to Base for the input tax included in the first two invoices, relating to the February transactions. Mrs Teal, who by then had taken over from Mrs Faulkner as the Respondents' officer responsible for Base, visited Mr Ahmed on 15 April 2004. Base's relevant return had not then been submitted—the prescribed accounting period had a further fortnight to run, and the return was not due until a month later. Mrs Teal did, however, review Base's records, largely because it had not provided details of each of its transactions as they occurred to the Commissioners, as Mrs Faulkner had requested and as Mr Ahmed (as he acknowledged) had agreed to do. He accepted that he had failed to honour that promise but told us that, as he was checking on VAT registrations with the Redhill office, he assumed that the local office would be given the relevant information by Redhill. That assumption, if genuine, was wholly unjustified, since Mr Ahmed was not providing the detail Mrs Faulkner had requested to Redhill.

At the conclusion of her visit Mrs Teal took the records away with her for analysis. She returned them on the following day when she spoke again to Mr Ahmed about the transactions. In one case Base's customer, Mobiles in Store, had paid it £5000 less than the amount due; the balance followed some time later. Mr Ahmed explained that he had, in turn and with Mr Tractorwala's agreement, paid KK £5000 less than the amount due, and that he had paid that sum to the account of another trader in Hong Kong when he received it from his customer. In this case, as in all the others, Base paid KK only when its own customer had paid it. Mr Ahmed accepted that he had been warned by Mrs Faulkner that it was unwise to make payments to third parties, but thought that the risk in this case was minimal because of the modest amount of the payment. He maintained that she had warned him only against making payments to third party accounts overseas whereas she told us she had not so limited her advice. On this issue we prefer Mrs Faulkner's evidence: we can see no reason why she would have confined herself to payments overseas. In fact Base made other third party payments, though not to overseas accounts, and we are satisfied that Mr Ahmed's evidence was coloured by his realisation that he could not otherwise explain his disregard of the advice.

By the time of her visits Mrs Teal knew that KK had been deregistered with effect from 4 March 2004. On 19 April she wrote to Mr Ahmed informing him that the invoices for the 8 March transactions might require verification. Further exchanges of correspondence and documents ensued, and Mrs Teal made a third visit on 30 April, specifically to discuss her concerns about Base's purchases from KK.

Mrs Teal told us that at the end of the visit, she indicated to Mr Ahmed that Base might not be allowed the credit it had claimed in respect of the two invoices. Mr Ahmed said he was left with the clear impression that Mrs Teal had already made up her mind. We are satisfied that Mrs Teal had not reached a concluded view—for reasons to which we are about to come, she could not do so—but it is clear to us, from her evidence and from her visit report, that she left Mr Ahmed in no doubt that she was very concerned about the claim, and it is not surprising that he formed the impression that the credit would not be allowed. Nevertheless, he included a claim for the credit in Base's VAT return for the period, which was submitted some weeks after Mrs Teal's third visit.

Although Mrs Teal was the officer responsible for Base's VAT affairs, she could not decide, alone, whether or not its claim should be met. She was required to, and did, prepare a submission (described as an "authorisation template") setting out the factual background to the claim, for consideration by a specialist officer, the Respondents' solicitor's office and a senior policy adviser. The purpose of a submission of this kind is to seek confirmation of the officer's view, effectively a decision subject to ratification, that the claim should be disallowed; thus although, as the form itself made clear, Mrs Teal had concluded what the decision should be, she could not put it into effect without the necessary authorisation. In fact, her submission might be regarded as premature since she prepared it, and the resulting endorsement of her decision was given, before the return was submitted, although the decision was not communicated to Base until September.

The preceding outline represents our findings of fact on the matters described. We must next deal with an issue of law which arises from the manner and timing of the cancellation of KK's registration.

Mr Puzey argued that its cancellation on (as we have found) 11 March, but backdated to 4 March, had the effect of retrospectively invalidating any invoices issued by KK after 4 March even if, on the date of the invoices, the mechanical process of cancelling KK's registration had not yet been completed. The invoices issued by KK to Base on 8 March were, irrespective of the date on which its registration was cancelled, invalid for the reasons we have given; but even if they had been in due form, containing KK's VAT registration number, they would, Mr Puzey said, be rendered invalid by the cancellation of the registration with effect from an earlier date. Since the invoices were, and were accepted to be, invalid for other reasons it might be though irrelevant whether the retrospective cancellation of KK's registration also rendered them invalid, but their belief that KK was, or was be treated as, an unregistered trader on 8 March influenced the officers' reasoning when they decided that Base's claim should be rejected—had KK been registered it may well be that the claim would have been allowed despite the formal deficiencies of the invoices—and the matter is, therefore, of some importance.

The Commissioners' power to cancel a trader's registration is contained in paragraph 13(2) of Schedule 1 to the Value Added Tax Act 1994, which is in these terms:

"(2) Subject to sub-paragraph (5) below, where the Commissioners are satisfied that a registered person has ceased to be registrable, they may cancel his registration with effect from the day on which he so ceased or from such later date as may be agreed between them and him."

Sub-paragraph (5) provides that

"The Commissioners shall not under sub-paragraph (2) above cancel a person's registration with effect from any time unless they are satisfied that it is not a time when that person would be subject to a requirement, or be entitled, to be registered under this Act."

There can be no doubt, in our view, that those provisions authorise, but do not compel, the retrospective cancellation of a trader's registration when the relevant conditions are satisfied. What neither they, nor any other provision of the 1994 Act or regulations made under it, do is specify the consequences of retrospective cancellation. Absent a statutory provision that retrospective cancellation, on the Commissioners' own initiative, of a trader's registration also retrospectively invalidates invoices which he may have issued in good faith, and which may have been accepted by his customers in good faith, we are unwilling to conclude that retrospective cancellation does have that effect; we accept Mr Thomas's argument that it would be remarkable if the Commissioners could retrospectively cancel a registration in a manner which was detrimental not merely to the registered trader, but to others with whom he may have dealt, even though they may have been entirely ignorant of the Commissioners' doubts and of their actions. Mr Puzey suggested that any detriment to other traders could be overcome by the Commissioners' accepting, as he assured us they usually would, an invoice issued after the effective date of cancellation but before the date of actual cancellation as sufficient evidence of the customer's entitlement to input tax credit. That may be so, but a customer should be entitled to rely on an invoice valid at the moment of its issue, and not be thrown back on the Commissioners' exercise of a discretionary power.

We do not, therefore, accept the Commissioners' argument that the invoices were additionally invalid because of the retrospective cancellation of KK's registration. We should add that it was also by no means clear to us that the condition on which the Commissioners might cancel KK's registration was satisfied. The only evidence we heard to support the conclusion that KK had ceased trading on or before 4 March 2004 was Mr Winter's finding, when he attended its premises, that there was no-one in attendance. Subsequent events suggest, but no more, that he may have been right in his conclusion. But if the supplies on which the Appellant relies were genuinely made KK plainly was still trading on 8 March, and if that was the case the cancellation of its registration with effect from 4 March would be a nullity. As we shall shortly explain, the genuineness or otherwise of the relevant supplies is the fundamental issue on which we must make a finding and it is unnecessary for us to make a separate finding on the question whether the Commissioners validly cancelled the registration (an issue on which, of course, we had no representations from KK itself) in the light of our conclusion that the cancellation could not also invalidate, or further invalidate, the invoices.

In addition to their—as we have found, incorrect—belief that the cancellation of KK's registration had an additional adverse effect on the validity of its invoices, the Commissioners rely on other features of Base's trade with KK in support of the manner in which they have exercised their discretion. The Commissioners' published guidance, particularly a Statement of Practice issued in July 2003, make it clear that, when the Commissioners are satisfied, despite technical or other failings in the documents produced to them, that a supply took place and an input tax credit was properly generated, they will normally allow the claim; but where they are not so satisfied, they will normally refuse it. The policy is more strictly applied to supplies of, among other items, mobile phones in bulk, but the policy is essentially the same for all classes of goods. That the VAT directives allow member States to take such steps is apparent from the decision of the Court of Justice in Reisdorf v Finanzamt Köln-West (Case C-85/95) [1997] STC 180. In our view the Commissioners' policy, provided it is applied fairly and consistently and with proper regard to the facts of each case, is reasonable, and does not go beyond what it authorised by the directives. Mr Thomas did not argue the contrary; his complaint was that the policy had been applied unfairly, if it had been applied at all.

One step the Commissioners' Statement of Practice asks traders holding invalid VAT invoices to take is to ask the supplier to provide a replacement, valid invoice. Mr Ahmed said that he had done so, at Mrs Teal's instigation, and copies of what he said he had obtained, following a telephone call to Mr Tractorwala, were included in the bundle of documents made available to us. The replacement invoices are identical to the originals, save for the addition of KK's VAT number. Mr Ahmed said he had arranged for copies of the replacement invoices to be sent to Mrs Teal as soon as he received them, while Mrs Teal told us she had not seen them until after this appeal had been brought. Mr Ahmed's evidence about how and when he received the replacements and how and when he sent them to Mrs Teal was very vague and we are not persuaded they were sent to Mrs Teal until much later. We have no reason to suppose that they were not supplied to Base by KK, though it would not have been difficult for Base to have produced simple computer-generated invoices, as these were, itself, and we accept Mr Puzey's point that, by the time they were prepared, KK's VAT registration had undoubtedly been cancelled.

Mr Thomas's argument was that the Commissioners had not exercised their discretion at all: Mrs Teal had made up her mind, at the third of her April visits, that the claim was not to be met and all that followed thereafter was no more than the endorsement of her decision by officers with closed minds. There was, he said, no evidence that anyone had truly directed his mind to considering whether, despite the absence, initially, of valid invoices, and despite the subsequent (and in his submission correspondingly irrelevant) cancellation of KK's registration, the claim should be allowed. Mrs Teal, he said, had wrongly thought that KK's registration had already been cancelled on 8 March, and that erroneous belief had influenced her and the other officers' decision to refuse the claim. The discretion had been exercised, if at all, on the basis of an error and the decision was therefore flawed.

Mr Puzey relied not only on the invalidity of the invoices and on KK's deregistration, but also on the manner in which Base traded with KK. The information KK supplied to Base at the outset was, as we have already said, somewhat odd. Mr Ahmed could produce no evidence of any but the most superficial due diligence enquiries, a simple search at the Companies Registry, showing that it held information consistent with what, he said, Mr Tractorwala had told him, but that information was very limited in scope. He had no accounts or any other trading information. Mr Ahmed had never met Mr Tractorwala or any other representative of KK, and had made no enquiries of any kind into KK's creditworthiness. He did not inspect the goods, or even see them. There were no contractual conditions of any kind which might protect Base should the goods be found to be missing or defective. No insurance of the goods was arranged. Mr Ahmed made payments of very large sums of money without, the Commissioners say, taking even elementary precautions. As he told us himself, he relied on trust.

We may allow this appeal only if we are persuaded that the Commissioners could not reasonably have reached their conclusion, because they have taken into account the irrelevant, have disregarded the relevant, or have misdirected themselves on the law: see Kohanzad v Customs and Excise Commissioners [1994] STC 967 at 971a. We should also not allow the appeal, even if there was an error in the manner in which the discretion was exercised, when, if the Commissioners were required to consider the matter afresh, they would inevitably come to the same conclusion: see John Dee Ltd v Customs and Excise Commissioners [1995] STC 941.

We have found that they did make an error about the law, but that error is peripheral and in our view it does not undermine their conclusion. At the time the decision was taken, Base did not hold valid VAT invoices or, if it did, had not produced them to the Commissioners: as we have indicated, we are satisfied they were not produced until after this appeal had been brought. But even if they had been produced much earlier, the Commissioners would have been entirely justified in viewing them, and their provenance, sceptically. Mr Tractorwala was no longer in contact with them and, as we are satisfied, KK was by then to be regarded as a defaulting, even if not missing, trader. Deficiencies in the invoices, taken alone, might arguably not amount to sufficient justification of the Commissioners' decision, but we agree with Mr Puzey that the manner of Base's trading with KK must cast serious doubt on the genuineness of the transactions. No prudent trader, entering into true arm's length deals, would buy consignments of goods worth, as in this case, several hundred thousands of pounds, unseen, from another trader whom he had never met and about whom he knew as little as Mr Ahmed knew of KK. Mr Ahmed had no evidence that the goods ever existed; he could, wittingly or unwittingly, have merely been the tool of others, engaging in what were no more than paper transactions. The manner in which the payments were made and the complete absence of even the most elementary precautions suggests that that is exactly what they were. There is nothing before us from which we might conclude that the Commissioners' discretion was exercised incorrectly. There is, on the contrary, every reason to suppose that transactions entered into in such a manner were not genuine. Save for the replacement invoices, on which we have already expressed doubts, Base has produced nothing which was not before the Commissioners when the decision was made and, even if that decision might be regarded as technically flawed (which in our judgment it was not), it is inevitable that, if the Commissioners were required to reconsider, they would come to the same conclusion.

The appeal must be dismissed. Mr Puzey did not seek a direction in respect of costs.

COLIN BISHOPP

CHAIRMAN
Release Date: 1 November 2007

MAN/04/0551