United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20516

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Dr Kartik Chandra Ray v Revenue & Customs [2007] UKVAT V20516 (28 December 2007)

20516

INPUT TAX — Appellant provider of alternative therapies and registered as sole trader — various items of input tax claimed by the Appellant but disallowed by Commissioners as inappropriate to that registration — appeal dismissed in principle in relation to input tax claimed for preliminary construction costs and motoring expenses

MANCHESTER TRIBUNAL CENTRE

DR KARTIK CHANDRA RAY Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting

Mr M Farooq

Sitting in public in Birmingham on 15 November 2007

The Appellant appeared in person

Stephan Lewinsky, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Dr Ray is a registered medical practitioner and additionally is a specialist provider of alternative therapies, described on his letterheading as herbal remedies, acupuncture and biolaser treatments. Both elements of his profession are carried out from the Sai Medical Centre, 1 Forrester Street, Walsall. Dr Ray appeals against the decision of the Commissioners to assess him in the sum of £19,690 plus interest, the assessment being calculated on 13 August 2004. The assessment was raised to recover input tax claimed by Dr Ray in periods 03/02; 09/02; 12/02; 09/03; 12/03 and 03/04. The Commissioners took the view that the input tax reclaimed was not appropriate to Dr Ray's registration.

With the consent of both parties, the order of proceedings was reversed with the Commissioners presenting their case first. On behalf of the Commissioners, we heard oral evidence from the assessing officer, Mrs Ann Perry and from Mr Christopher Leng. Dr Ray gave oral evidence on his own behalf.

The Commissioners' evidence

Mrs Perry carried out a routine assurance visit to Dr Ray on 5 August 2004. She was aware that as a registered medical practitioner he would be exempt from VAT and would not have needed to be registered but that he had registered for VAT with effect from 25 March 1995 on the basis that he was making standard rated supplies of alternative therapies aside from his GP work. Mrs Perry had noted that Dr Ray had been reclaiming input tax in the periods mentioned above but that he had recorded no taxable supplies and had accounted for no output tax for the previous five years. During the course of this visit and one further visit made by Mrs Perry, she understood from Dr Ray that he was, by this time, working solely as a GP and she understood him to say that he was no longer carrying out any alternative therapies. She examined the records produced to her by Dr Ray and it appeared to her that the input tax reclaimed related to professional fees and preliminary costs associated with the construction of an intended new surgery and some motoring expenses. Mrs Perry formed the view that all the costs incurred by Dr Ray on which he had sought to recover input tax, related to his exempt supplies as a general practitioner and as such did not give him any entitlement to repayment. It was not possible from an examination of the records to establish what input tax had been reclaimed against which invoice as Dr Ray had carried out no cross-referenced analysis. In the absence of any clear audit trail, Mrs Perry decided to raise an assessment seeking to recover all input tax claimed.

By letter dated 13 August 2004, Mrs Perry wrote to Dr Ray advising him of her decision and also advising him that as he was no longer making taxable supplies, he should apply for cancellation of his registration. Dr Ray responded by letter dated 31 August 2004 that he did not wish to deregister as he would be increasing his trading activities once the new surgery was built and also intimating that he had understood from a previous officer that he would be able to recover his input tax on the construction project. Mrs Perry replied by letter dated 16 September 2004 that as the surgery being built was directly connected to his activities as a GP, any input tax incurred was not recoverable as it related solely to exempt supplies. Dr Ray replied on 4 October 2004 denying that he had ever told Mrs Perry that he acted only as a GP and maintaining that he had told her that he also traded in alternative therapies, in the course of which he was carrying out acupuncture, magnet therapy and biolaser therapy. In addition to carrying out these services, he had to buy in all the necessary materials and equipment. He denied the new surgery was to be built in connection with his GP activities and advised that in fact he was a sole developer because in that capacity he owned three companies namely the Sai Medical Centre Ltd, Sai Projects Limited and Sai Medical Company Ltd. He advised that "… these do not come under the activity of a GP, it is the activity of a developer of where I am the owner of the land and where I am building it and according to the VAT Regulations VAT is reclaimable, this advice came from my VAT advisor. … These are all allowable expenses for a developer for an individual. As Dr Ray, I am building the surgery as a developer so that I will get my VAT back". He concluded by saying that he understood Mrs Perry was going to return to see him during October. In fact, Mrs Perry at that stage referred the matter to her colleague, Mr Christopher Leng.

During cross examination, re-examination and in answer to questions from the tribunal, Mrs Perry said that her recollection was that the only invoices she had seen related to construction costs and motoring expenses but the records were not easy to follow and it was possible that there had been some invoices relating to alternative therapy purchases.

Mr Leng wrote to Dr Ray on the 21 October 2004 asking him to contact him to arrange a meeting. He received no response and wrote again on the 11 March 2005 advising him that he would be calling on the 23 March, which he duly did. Dr Ray told Mr Leng that there had been no supplies of alternative therapies for several years and that his principal activity was that of a GP. He was planning to construct a new medical centre at a projected cost of £4.5 million with construction due to commence the following year and the costs on which input tax had been reclaimed were those preliminary to the construction. He described his limited companies to Mr Leng, none of which had been registered for VAT and Mr Leng understood him to say that one of those companies, Sai Projects Ltd, had been set up as the development company for the purposes of building the new medical centre. Dr Ray told Mr Leng that he was reclaiming the input tax as a result of information provided in an earlier VAT assurance visit when he had been told that he could recover the input tax incurred by any of his limited companies through his sole proprietor registration. Dr Ray told Mr Leng that the new medical centre would serve a number of purposes, with parts of it being rented out to Dr Ray's own GP practice, to other GP practices, to his own alternative therapy practice and to other therapists. Mr Leng wrote to Dr Ray on the 9 May summarising what he had been told and asking Dr Ray to advise him if any of the facts had been misunderstood and also setting out the VAT implications which in essence were that the VAT on services purchased in respect of the development of the new health centre could not be recovered by the existing VAT registration because those costs were not a cost component of any actual or intended taxable supplies to be made by the registered business. Rather they were a cost component of intended rental supplies to be made by the limited company carrying out the development which was not itself registered. Mr Leng went on to say that Sai Projects Ltd was a separate legal personality and could not be included in the sole proprietor registration but could be registered separately in its own right. Dr Ray replied by letter dated 19 May in the following terms:

"The advice which I had from the previous inspector was totally opposite to what you are advising now. He said that as a single person, you could be the proprietor of different companies because you are the person. Any of them can run the company in their name so as such I did not apply for Sai Medical Company or Sai Projects Ltd to be registered under the VAT scheme."

Dr Ray had no cross examination for Mr Leng other than to thank him for his advice that he should see his own VAT consultant, which he had done.

Appellant's evidence

Dr Ray, in his evidence in chief, made a number of points which were peripheral to the main issue before us and which it is probably convenient for us to deal with one by one. First, he maintained that Mrs Perry had said that she would come to see him again in October 2004 which she had not done. We totally accept that Dr Ray was expecting Mrs Perry in October as this is in fact referred to in his letter of 4 October. However, Mrs Perry had, by this time, transferred the case to Mr Leng who wrote to Dr Ray without response on 21 October. Secondly, Dr Ray told us that on 6 June 2005 he had made a £10,000 part payment of the assessment this payment being made under protest to enable the matter to come before the tribunal. The payment was evidenced by bank statement, cheque stub and indeed receipts from the Commissioners but repeatedly thereafter, the Commissioners had still referred to the sum of £19,000 being in dispute. Dr Ray maintained that this showed that the Commissioners were themselves confused, their records were in disarray and they could not be relied upon. In fact, the part payment was made without prejudice to the issue in dispute and if Dr Ray were to be successful in his appeal, he would expect and indeed be entitled to repayment of the £10,000. It is therefore entirely correct to say that there remains in dispute the original sum of £19,690. The amount in dispute is unaffected by the part payment, which as we say was made entirely without prejudice. Third, he took great exception to the method in which payment was chased and to the visit of the bailiffs which he, understandably, said was most distressing to a professional person. Fourth, he pointed out that he had recently had a further visit from a VAT officer in which he had obtained a good report and no problems had been found. Finally, he emphasised the place which holistic therapy has within any GP practice and the two elements cannot be entirely divorced from each other. He was now doing rather more alternative medicine than he had been before.

In cross-examination, Mr Lewinsky took Dr Ray through the period by period assessment and pointed out that in each period assessed, there was no record of taxable supplies having been made and each period recorded zero output tax. Dr Ray agreed that that was what was recorded. He confirmed that he had not charged any private patients during the period assessed and further went on to say that it would be in his returns if he had done. Also in cross-examination, Dr Ray gave slightly more information about his limited companies adding that he and his wife were the main shareholders. Dr Ray also said that the original construction project had not developed as planned as it had in fact been carried out by an independent company called A&H Construction Ltd as developers and constructors. He repeated that an earlier officer, Mr Crombleholme, had advised him, back in 2001 that his limited companies did not need to be registered and that he could still claim back the input tax in his own name.

In answer to questions from the tribunal, and then developed in further cross-examination by Mr Lewinsky, Dr Ray told us that in fact he had carried out some private alternative therapy work during the period assessed. He had received payments from these patients, which had been paid into his personal account. He had disclosed all payments to his accountant who had told him that he should pay income tax on them, which he had, but that there was no need to pay VAT on them because his total income was less than £64,000 per annum. He also confirmed that the materials and supplies purchased during the assessed period upon which he had sought to reclaim input tax had been used in the course of treating his private patients. Further, he told us, before the construction project was taken over by A&H Construction Ltd, the development was being carried out by Sai Medical Centre Ltd of which he and his wife were the only shareholders and only cheque signatories. Funding was raised by way of a bank loan taken out on the security of the old surgery, owned by Sai Medical Centre Ltd. Invoices would come in addressed to Dr Ray personally but payments of the invoices were made by Sai Medical Centre Ltd. He stressed that as he and his wife were the sole shareholders of Sai Medical Centre, they were also the only signatories on the cheques.

Submissions

Dealing with the construction costs, Mr Lewinsky contended that input tax was irrecoverable as it was not appropriate to the alternative therapy business. The project had been undertaken by Sai Medical Centre Ltd which was not registered for VAT.

Dr Ray's main contention was that he had been misdirected by Mr Crombleholme. We were referred to a letter dated 22 January 2001 written by Mr Crombleholme following a recent inspection. Mr Crombleholme had recognised that the exempt GP practice and the standard rated alternative therapy practice ran side by side and that there were a number of common outgoings. Mr Crombleholme took the total expenditure and allowed a constant one percent recovery of input tax except in relation to acupuncture and biolaser machines which exceptionally he agreed a 10% recovery rate. In fact, Dr Ray contended to us that this was an incorrect approach because all materials for his alternative therapy practice were purchased by him personally and all materials for use in his NHS practice were provided by the NHS. Finally, he had had a recent investigation from officer Sally Fletcher, who had found everything to be satisfactory.

Conclusions

The assessment seeks to recover the entirety of the input tax reclaimed by Dr Ray in the periods assessed. The absence of any audit trail in Dr Ray's records prevented Mrs Perry from matching invoices to claims and she therefore disallowed all of it. Mrs Perry's recollection is that the only invoices she saw related to motoring expenses and the development project. However, Dr Ray is insistent that a part of the input tax claimed covered purchases of materials and equipment for his alternative therapy practice. The invoices were not before the tribunal and nor was there any evidence as to how the original input tax claim had been made up. We can, and do, deal within this decision with the claim in relation to the motoring expenses and the development costs. Because there was no evidence as to how the original input tax was calculated, we cannot put our decision into monetary terms but leave it as a decision in principle. We will then return to the matter of the alternative therapy purchases.

With regard to the motoring expenses, there was no evidence whatsoever before the tribunal that these related to Dr Ray's registration as an alternative therapist and we dismiss his appeal in relation to whatever part of the assessment was represented by motoring expenses.

When the construction costs were incurred, it was anticipated that the development was to be carried out by Sai Medical Centre Ltd. The company was funding the project by way of a bank loan. Payments in respect of the project were met by Sai Medical Centre Ltd and cheques were drawn on the company account, the cheques being signed by Dr and Mrs Ray as sole signatories. Sai Medical Centre Ltd was not registered for VAT. The costs have not been incurred by Dr Ray in his capacity as a provider of alternative therapies and as such the claim to input tax is not appropriate to Dr Ray's VAT registration. As submitted by Mr Lewinsky, the costs incurred are not components of any supplies or intended supplies by that registration.

Dr Ray claims that he was misdirected by Mr Crombleholme and was misled into believing that he personally could reclaim the input tax on his company's development. We accept that Dr Ray was under a misapprehension. Dr Ray believed that as he was the sole operator of the limited companies, albeit wearing a different hat, he was entitled to reclaim the input tax on costs incurred by the companies against his sole registration. This is not the case and the tribunal has to administer the law as it stands, not as a trader believes it to be. Misdirection is not therefore an issue upon which the tribunal can adjudicate or over which it has any jurisdiction. We would, however, just make one point in this regard. We did not hear from Mr Crombleholme and there was no evidence before us as to the nature of the misdirection he is alleged to have given. We do however note that at the conclusion of his letter of 22 January 2001, he suggested that Dr Ray should contact him to discuss the "prospective new company registrations". It would appear from this, therefore, that Mr Crombleholme was anticipating that the companies would become VAT registered. It may be that Dr Ray misunderstood the advice which Mr Crombleholme was giving him. However, as we say, whether or not there was a misdirection is not a concern of the tribunal.

In relation, therefore, to the claim for input tax insofar as it relates to the construction costs, the appeal is also dismissed.

There therefore remains such input tax as might relate to the purchase of alternative therapy materials. As Mr Lewinsky quite correctly pointed out, Dr Ray has failed to produce any evidence that there were any such items within his claim and the tribunal would be clearly entitled to dismiss the appeal in its entirety in the absence of any such evidence. We, however, believe that we should give Dr Ray one more chance to establish his entitlement to recovery of input tax in relation to any purchases of alternative therapy materials during the assessed periods. Mr Lewinsky very helpfully made his position clear, namely that subject to the provision of conclusive evidence, then he would accept Dr Ray's entitlement to recovery. To assist the parties, we set out below, in the form of a direction, the minimum evidence which we expect Dr Ray to produce to the Commissioners in support of his claim. On receipt of such evidence, it is of course open to the Commissioners to raise further enquiries with Dr Ray or to seek such further evidence as they consider they need.

We direct:

(i) That by 15 February 2008 the Appellant should produce to the Commissioners:

(a) All alternative therapy invoices for the periods assessed in respect of which he wishes to reclaim the input tax

(b) Evidence, in the form of bank statements / cheque stubs that payment of these invoices was made by Dr Ray personally out of his own personal funds

(ii) In default of so doing, the Appellant's appeal in relation to the alternative therapy invoices shall stand dismissed without further direction

(iii) Liberty to apply

In summary, therefore, Dr Ray's appeal in so far as it relates to the input tax incurred in relation to the motoring expenses and the construction costs is dismissed. In relation to any alternative therapy invoices, he is given until 15 February 2008 to provide the evidence which we have stipulated in support of his claim.

The Commissioners made no application for costs and no order is made.

LADY MITTING

CHAIRMAN
Release Date: 28 December 2007

MAN/06/0003