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Atlas Economy Hire Ltd v Revenue & Customs [2007] UKVAT V20472 (30 November 2007)

20472

VAT – second-hand margin scheme – whether necessary conditions met – no – whether concessionary treatment available – no, in absence of relevant documentation – appeal dismissed

LONDON TRIBUNAL CENTRE

ATLAS ECONOMY HIRE LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: JOHN CLARK (Chairman)

Sitting in public in London on 11 October 2007

Derek Eley, Managing Director, for the Appellant

Pauline Crinnion, Senior Officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Atlas Economy Hire Ltd ("Atlas") appeals against an assessment for £18,857 tax and £2,265.45 interest. Atlas accepts that some tax is due, but maintains that part of the assessment is inappropriate. Atlas argues that part of the assessment relates to the sale of used goods and should have been calculated on its seller's margin, rather than on full turnover.

The facts

The evidence consisted of a bundle of documents, statements made by Mr Eley in putting his case (which I accepted as evidence without requiring him to give formal sworn evidence from the witness box), and a witness statement from Miss Shagufta Chaudhary, an officer of the Respondents. (I refer to the Respondents as "HMRC".) Miss Chaudhary also gave oral evidence under oath. The 132 pages in the original bundle of documents were supplemented on the morning of the hearing by a further 64 pages of documents supplied by HMRC, by agreement between the parties; the start of the hearing was delayed to enable copies of these documents to be made and provided to Mr Eley and the Tribunal. Among these additional documents were notes prepared by Miss Chaudhary of the matters considered at the respective visits made to Atlas' premises; it is not clear when these notes were prepared, and the first contains annotations concerning what happened at the second, so they should not necessarily be treated as contemporaneous with the visits. From the evidence I find the following facts.

Atlas was incorporated on 24 September 2001, and was registered as a taxable person with effect from 1 July 2002. Its initial business was that of providing vehicles on hire. The managing director and sole beneficial shareholder was Mr Eley. Eighteen months from the start of the business, Mr Eley took the decision to start selling scooters. As this involved making supplies of goods, this differed from the initial (and continuing) hire business, which was treated as involving supplies of services. Mr Eley therefore sought advice from accountants.

The accountants' advice was that in respect of any stock purchased new, Atlas should claim input VAT on the purchases and should charge output tax on the full selling price. Mr Eley stated in evidence that he asked about stock which was purchased when not new and where VAT had not been charged by the seller. He indicated that the accountant's reply had been that there was no VAT on used vehicles, and that the accountant had not brought to Mr Eley's attention the existence of the margin scheme for second-hand goods. [I comment below on this evidence.]

After taking that advice, Atlas began to trade in motorcycles and scooters. It sold various types of scooters, of which some were non-road "mini-scooters", but the majority were scooters with engines of 50cc or greater, or motorcycles.

Atlas made all its VAT declarations up to and including period 12/06. In giving evidence, Mr Eley accepted that some errors had been made in the VAT returns. The Respondents ("HMRC") received an internal reference from an officer who had noted that Atlas had not declared VAT on the sale of a motorcycle. Mr Eley explained in evidence that this had been a complete error; a supplier to whom Atlas had sold a motorcycle had attempted to claim on a non-VAT invoice.

As a result of the reference, HMRC arranged a visit to Atlas' premises. The officer assigned to the visit was Miss Shagufta Chaudhary. Her initial visit was on 22 December 2005. She discussed the business activities of Atlas and the VAT liability in respect of its sales. In her witness statement she indicated that Mr Eley had confirmed that all sales of motorcycles were new. [This was disputed by Mr Eley at the hearing, and this conflict of evidence is considered below.]

Miss Chaudhary examined the "DOSH" computer system containing the VAT records. It quickly became apparent to her that, despite Mr Eley's statement that all scooter sales had been subject to VAT, VAT had not always been accounted for on the motorcycle sales, as the referenced invoice was not located in Atlas' accounting system and there were many instances of motorcycle sales in the records where no VAT had been accounted for.

In her note of the meeting, she recorded that there had been a purchase and sale of a "Swift" vehicle on the same day in May 2004 at a profit of £695. Mr Eley had told her that it was a one-off vehicle sale for a profit, having been purchased with the intention of selling it, but he had admitted that he had failed to account for VAT on the margin. Miss Chaudhary's note did not record the issue of VAT Notice 718 to Mr Eley, although this was mentioned in the Statement of Case, with which Mr Eley stated at the hearing that he broadly agreed. In addition, Miss Chaudhary stated in oral evidence when referring to the previous page of her notes that she had put the question to Mr Eley about not charging VAT and had issued the Notice to him. She had mentioned to him that as no stock book had been produced, she would expect to see one for the future.

Miss Chaudhary noted that no sales invoices were available for the year ended 30 September 2004, as the accountant had retained them pending payment of his fees. A large part of this initial visit was spent discussing the business with Mr Eley and examining the build-up to the VAT account. Miss Chaudhary examined purchases and began looking at the sales records. She was unable to complete her checks during that visit.

On 3 January 2006 she telephoned Mr Eley to obtain further information concerning some of his suppliers for the motorcycles. On the same day she wrote to Mr Eley requesting further information. She referred to the apparent large difference between the sales declared to HMRC and the sales as shown on the annual accounts for Atlas for the years ending 30 September 2003 and 30 September 2004. She asked for any explanation which Mr Eley could give for these discrepancies to be provided by 13 January 2006. She also asked for information concerning motor vehicles purchased from new for Atlas' fleet. On 3 January she also raised two urgent references to Atlas' suppliers; her reason for doing this was her suspicion that some purchases might also have been omitted from Atlas' records.

Miss Chaudhary made arrangements for a second visit; this took place on 17 February 2006. On this occasion she was accompanied by Lawrence Patterson, a Higher Officer of HMRC. She sought clarification on a number of issues which had been discussed during the initial visit. She continued to look at the sales records and began to analyse the untaxed sales for each period. She examined the periods ended February 2003 to November 2003. She also carried out a cash reconciliation exercise for the period ended February 2003. She was unable to complete her checks during that visit.

On 5 June 2006 she received the results of the reference relating to one of Atlas' suppliers. (The reference relating to the other had not been taken up.) There was not enough information to act upon, and no further action was taken. On the same day she made arrangements with Mr Eley for another visit, to take place on 7 July 2006.

On this third and final visit, Miss Chaudhary went through the remainder of the records period by period (ie from period ended February 2004 to that ended May 2006) to identify the taxed sales and to calculate the VAT underdeclared on sales where VAT was due. She did this by examining the monthly cashbook figures from Atlas' DOSH computer system. Entries where no VAT was shown were identified and examined in more detail. VAT due on motorcycle sales was calculated as 7/47ths of the gross amounts recorded in DOSH.

On 17 July 2006 Miss Chaudhary wrote to Mr Eley. She confirmed that she intended to raise an officer's assessment based on the figures in the schedule attached to her letter. This showed a total potential underdeclaration of £18,391.88.

On 31 July 2006 Mr Eley faxed a summary of his findings to Miss Chaudhary. This showed used sales and used purchases figures in relation to the motorcycle sales. The total liability shown in the summary was £9,809.00, which included VAT calculated on the margin in the sum of £6,331.00.

On 7 August 2006 Miss Chaudhary received from Mr Eley a copy of her schedule of assessment annotated by Mr Eley, together with other documents listing sales, purchases and vehicle registrations, and 28 sales invoices. These documents were annotated to show Mr Eley's calculation of the VAT which in his view was due.

The next day, Miss Chaudhary telephoned Mr Eley to discuss the documents which he had sent. Mr Eley claimed that the motorcycles were second-hand vehicles. Miss Chaudhary regarded this claim as a new claim; I consider this below. Mr Eley referred to paragraph 19.4 of VAT Notice 718. He wanted the assessment reduced on the basis of that paragraph or on the basis of his calculations supplied to Miss Chaudhary. She asked his whether he had the purchase invoices to substantiate Atlas' claim that the vehicles were used. He did not.

Miss Chaudhary discussed this conversation with Lawrence Patterson. Their conclusion was that as Atlas had not operated the margin scheme, it was not eligible for the concession under paragraph 19.4 of Notice 718. Later that day she wrote to Mr Eley to confirm this. She also informed him that she would be raising the assessment, and supplied a schedule of assessment showing total underdeclaration of £18,871.31.

On 15 August 2006 the assessment was issued in the slightly different figure shown at paragraph 1 above. In his capacity as director, Mr Eley gave Notice of Appeal against the assessment on 16 September 2006. The Notice was endorsed as having been served on 21 September 2006. He applied to have the appeal determined without payment of the tax, on grounds of hardship; this was subsequently agreed.

In a letter to the Tribunal dated 23 March 2007 Mr Eley stated:

"May we also take this opportunity to advise you and HM Customs [ie HMRC] that Atlas Economy Hire Ltd has ceased trading as it became insolvent in December 2006 and has not traded since. The company can not appoint a receiver as it has no funds or assets to do so."

Having received a copy of that letter, Mrs Crinnion wrote to Mr Eley on 29 May 2007 to ask whether Atlas was in liquidation. If Atlas had merely ceased trading, she asked Mr Eley to advise how Atlas would pay the tax due if HMRC were successful at a hearing. She also asked him to advise which legal entity was currently trading from the company premises.

Mrs Crinnion also asked Miss Chaudhary to look at the premises from which Atlas had been carrying on its business. Miss Chaudhary did so by walking past the premises on 30 May 2007. She noticed a large sign above the shop window reading 'Atlas Car & Van Hire Ltd' and showing a website address, telephone and fax numbers. There was also a paper sign on the door window; 'Runabout Rentals self drive hire 1^st floor'.

On 31 May 2007 Miss Chaudhary undertook some Companies House checks. Atlas was still shown as a live company, but the registered address shown was that of a firm of accountants elsewhere in the area. The Companies House search also showed that the registered address for Runabout Rentals Ltd was the same as the principal place of business address of Atlas.

In a letter dated 31 May 2007 headed "Atlas Economy Hire Ltd (ceased trading)", Mr Eley stated:

"The Company ceased trading in December following telephone advice from a local insolvency practitioner. Letters were sent to all creditors advising them of the situation. The company has insufficient funds to appoint a liquidator and has no assets as these were under hire purchase agreements.

The company currently trading from the rented office is Runabout Rentals Ltd."

On 5 June 2007 Mrs Crinnion wrote to Mr Eley to explain that she had been in contact with the local VAT office, which had confirmed that according to the information from Companies House, Atlas was still trading and the address shown was that of what she believed to be a firm of accountants. She asked Mr Eley to advise whether the accountants were Atlas' accountants and why it was recorded as trading from their address. She mentioned that she had been informed that Runabout Rentals Ltd was currently trading from the premises which had been used by Atlas and that Mr Eley had been appointed as a director of Runabout Rentals Ltd on 30 August 2006.

Mr Eley wrote on 13 June 2007 to confirm that Atlas had ceased trading in December 2006 following insolvency advice from a local insolvency practitioner, and that letters had been sent to all creditors advising them of the situation. Atlas had insufficient funds to appoint a liquidator and had no assets, as these were under hire purchase agreements. The address mentioned in Mrs Crinnion's letter was Atlas' registered address, and also that of Atlas' accountant. Atlas had never traded from that address; this was evident from the fact that all VAT returns had been sent to Atlas' former trading address.

Mr Eley confirmed in evidence that Atlas had not engaged in any transactions since December 2006 other than to meet its statutory obligations.

Arguments for Atlas

Mr Eley did not dispute the fact that there were discrepancies in Atlas' accounts and VAT. The only dispute was as to the amount of the assessment. The majority of what was in HMRC's Statement of Case was an accurate outline. The issue of the discrepancies had arisen from some incomplete advice from Atlas' former accountants. He referred to the history of the matter and to that advice, and accepted that ignorance of the VAT rules was not an excuse.

When the enquiry had been started, he had provided open access to Atlas' accounts, both printed and on computer, to Miss Chaudhary. There was no suggestion that Atlas or Mr Eley had made any attempt to evade VAT. The discrepancies were plain to be seen. All sales had been accounted for. It was clear that entries had been put into the accounts, which tallied with those sent to Companies House, and that the entries were made prior to the assessments; there was a proper match.

He took issue with the amount of the assessment. The accounts showed purchases of new goods, on which VAT had been claimed; there had been an equal amount of VAT paid sales. There was a discrepancy of approximately £100,000 of sales; invoices had been issued for these, and they had been reflected in the accounts. He emphasised that 99 per cent of these sales had been to the general public, and therefore that it was unlikely that any VAT would have been reclaimed by the purchaser in any of these cases.

If the "VAT sales" were extracted from the accounts, this left £46,000 purchases in respect of which Atlas had not made any claim for input VAT. He accepted that the records were not entirely compliant. All purchases had been accounted for, as had all sales. Where there were absences of purchase invoices and sales invoices, these transactions were reflected in Atlas' accounts. The reference number in the majority of cases was the vehicle registration mark, which indicated that the item was second-hand. In many cases, the sale had been made under the same reference. The records showed that the item sold had been registered prior to sale.

He accepted that there had been some errors in relation to new vehicles where input VAT had not been claimed when it should have been, or output VAT charged on sale; the amount in question was £1,554. There had also been an error in relation to the software in Atlas' computer system, relating to the insurance charge on hire of vehicles. The discrepancy was below £200 and had been put right.

Mistakes had also arisen because he had made sales on behalf of someone working in the same building. This had been done because Atlas had a PayPal account and had good standing as an eBay trader. Atlas had been paid commission, and Mr Eley had not been aware of the liability to output tax on that commission.

He had asked HMRC to accept that a genuine mistake had been made, in the light of the absence of any suggestion of incorrect accounting, and having been asked at the first visit whether all assessable sales were of new stock; he had indicated that all the sales in respect of which VAT was due were of new stock. He had then been made aware of the margin scheme by Miss Chaudhary at the visit. The question about new stock had been raised at a point when no discrepancies had been identified. Mr Eley emphasised that the administrative and accounting errors had been caused by the incomplete advice received from the former accountant.

Mr Eley had asked Miss Chaudhary whether Atlas could be assessed on the basis of the scheme set out in paragraph 19.4 of VAT Notice 718, even though the result would be a greater liability than that shown by the discrepancies. He considered this to be a reasonable compromise, but it had been rejected.

Mr Eley acknowledged that the invoices relating to second-hand scooters, motorcycles and cars did not carry the wording specified for the purposes of the margin scheme. As a result of the incomplete advice from the former accountants, Atlas had been unaware of the existence of this scheme. The claim to use the scheme was not a "manufactured" one; it had not been until the assessment had been raised and the size of the discrepancy pointed out that Mr Eley had looked at the question of using the scheme.

He acknowledged that he had made errors and misjudgments, and accepted that ignorance of the scheme was not an excuse for failure to comply with its requirements. He felt that HMRC's examination of Atlas' records should have caused it to reconsider Atlas' VAT position. At the time when the assessment was raised, if HMRC had looked, it could have been seen that there was a large volume of used items purchased for which no input VAT had been claimed; the items were either used or non-qualifying. If the assessment had been made at the time on the basis of the margin scheme or the further concession in Notice 718, there would have been a liability of approximately £10,000. This would not have been very different from his own calculation of the liability after correcting the discrepancies. Atlas would have been in a position to discharge the debt within four quarters, if it had been able to continue its activities. Instead, the issue of the assessment had caused Atlas to cease trading.

HMRC were correct to say that Atlas had not followed the scheme to the letter. However, documents were available to show the total figures. He accepted that it was not the job of HMRC to do the work of the taxpayer and go through untidy and non-compliant invoices. Once the assessment had been raised, he had attempted to do this, using information available before the raising of the assessment, to try to correlate the information from Atlas' accounts. He accepted that the scheme was optional. His main defence was that, quite wrongly, as a result of incomplete advice, he had been unaware of the requirements.

He asked for the appeal to be decided on the basis of recognising that HMRC was asking for VAT to be paid which had not been collected. He argued that it ought not to be charged.

Arguments for HMRC

Having cross-examined Mr Eley in detail on the records and sample invoices shown in the bundle, Mrs Crinnion argued that Atlas had failed to operate the second-hand scheme correctly. It was essential to have a stock book; Atlas had not kept such a record. It was necessary to be able to cross-reference between purchase and sales invoices; despite attempts in the course of her cross-examination of Mr Eley, it had not been possible to demonstrate this in the sample cases considered. It was necessary to keep new items and commercial items separate from the second-hand items; Atlas had not done so. In order to be liable only for output tax on the margin, Atlas should have complied with the specific requirements set out in the scheme as described in Notice 718.

Mrs Crinnion argued that the assessment had been made to best judgment, following a reference by another HMRC office. There had been no reason for Miss Chaudhary to assume that there had been any second-hand sales. She had been informed that all the motorcycle and scooter sales were new. There had been no mention of second-hand sales of such items. The assessment had been correctly arrived at, being based on 17.5 per cent of the sale price.

For Atlas, Mr Eley had requested the use of the margin scheme. There were strict conditions for the use of this scheme; if a trader was not able to meet all of them, the trader was not able to use it.

There was no stock book. Some invoices were the same as the one in respect of which the original reference had been made. The original referring officer had mentioned two scooters. The requirement for the appropriate wording on invoices had not been met. Atlas had not reconstructed the records or a stock book, as the former accountant had the records. Mrs Crinnion queried why there were sales in the cash book without VAT. She contended that it was not fair to other traders to allow the use of the margin scheme where the trader in question was not able to satisfy the requirements; she referred to Mr Eley's request to use the concession in paragraph 19.4 of Notice 718, under which, if the mark-up on the sale of a vehicle was considered not to exceed 100 per cent, HMRC could allow the trader to calculate VAT on half the selling price where the trader did not hold the purchase invoice but did hold the sales invoice.

Mrs Crinnion emphasised that the use of the scheme was optional, not compulsory. However, it was essential to comply with the requirements. The test was an "all or nothing" one. If a trader was not operating the scheme, all the trader's sales were subject to output VAT, whether or not the trader had paid VAT on the purchase. The absence of the stock book was a substantial failure for the purposes of the scheme, even if the records had been enough to enable accounts to be prepared. It was not for HMRC to do the work of the trader to sort out the records for VAT purposes in order to establish whether the trader was eligible for the scheme. The VAT had been calculated at 7/47ths of the sale values, because HMRC accepted that Atlas could not go back to its customers and ask for the VAT.

Mrs Crinnion pointed out that it had only come to light at a later stage that Atlas' business had become dormant and Atlas itself insolvent. She emphasised that Atlas was not eligible to use the margin scheme, so that the assessment had been made to best judgment. The appeal should be dismissed.

Discussion and conclusions

VAT Notice 718 was not among the documents put before me for the purposes of the hearing. Reference to some of the relevant paragraphs may assist:

"2.1 What is the Margin Scheme?

VAT is normally due on the full value of the goods you sell. The Margin Scheme allows you to calculate VAT on the difference (or margin) between your buying price and your selling price. If no profit is made (because the purchase price exceeds the selling price) then no VAT is payable.

The scheme is not compulsory. If you decide to use it you must meet the conditions of the scheme or VAT will be due on the full selling price of your sales.

2.2 Why is there a Margin Scheme?

Businesses buying and selling goods can usually recover the VAT they are charged on their stock as input tax. But if you obtain most of your stock from members of the public who are not VAT registered or from other dealers using the Margin Scheme, you will have no VAT to recover. The Margin Scheme means that you still charge VAT but only on the value you add to the goods. By calculating VAT on the margin, the scheme therefore avoids double taxation as second-hand goods re-enter the economic cycle.

2.3 What are the conditions of the Scheme?

The detailed conditions are explained throughout this notice. The essentials of the scheme are—

— The goods must be eligible. The definition of second-hand goods, works of art, antiques and collectors' items is in paragraph 2.7.

— That goods sold under the scheme must be acquired by you in eligible circumstances. In most cases this means that you have obtained eligible goods for resale in circumstances where you cannot recover any input tax (see paragraph 2.9).

— You must calculate the margin in accordance with the rules of the scheme. There are special rules about how to calculate your buying price, your selling price and your margin under the scheme. Your margin may not be the same as your profit margin (see paragraph 2.11).

— You must meet the record keeping requirements of the scheme. There are special rules about invoicing and stock records (see section 3) and unless you meet those conditions, VAT will be due on the full selling price of your sales.

2.4 What if I can't meet all the conditions?

If you sell an eligible item but cannot meet all the record-keeping, invoicing and accounting requirements in section 3, you cannot use the Margin Scheme. You must deal with the sale in the normal way, accounting for VAT on the full selling price."

At section 3 of Notice 718, the required records are a stock book or similar record, purchase invoices, and copies of sales invoices. The detailed requirements for these records are described.

Paragraph 19 of Notice 718 deals with second-hand vehicles. Paragraph 19.1 specifies which vehicles are, and which are not, eligible for the scheme. Among those not eligible are:

"new vehicles—registration and delivery mileage do not make a vehicle used;" and

"any vehicle where the invoicing and record keeping requirements have not been met (a concession may apply in these instances—see paragraph 19.4)."

Paragraph 19.4, which Mr Eley asked should be applied to Atlas, states:

"19.4 What if I can't meet the conditions of the Margin Scheme?

You must comply fully with all the invoice and record-keeping requirements which are detailed in section 3. However, if for some reason you do not hold a purchase invoice or a sales invoice there is a concession available whereby you do not have to pay VAT on the full selling price of the vehicle.

If you do not hold a purchase invoice or sales invoice for particular transactions you should contact your local VAT Business Advice Centre. If they decide that the mark-up on the vehicle does not exceed 100 per cent they may allow you to calculate VAT on either—