United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20854

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Faith Clothing Ltd v Revenue & Customs [2008] UKVAT V20854 (04 November 2008)

20854

Value Added Tax - Denial of input tax claimed by clothing wholesaler - Contention that the suppliers identified on two sets of invoices had ceased trading such that the supplies cannot have been made by the alleged suppliers - Various different ways of sustaining an entitlement to input tax if the supplies cannot have been made by the apparent registered trader but may still have been made by a taxable person - Failure by Appellant to have undertaken sufficient checks on the identity of the supplier and the limited jurisdiction of the Tribunal to interfere with the exercise of discretion by the Commissioners - Penalty imposed under section 63 VAT Act - Irrelevance of good faith - Appeals in relation to the assessments and the penalty dismissed

LONDON TRIBUNAL CENTRE

FAITH CLOTHING LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

MRS R S JOHNSON

Sitting in public in London on 25 July and 23 October 2008

P P Savjani, of P P Savjani & Co, accountants, for the Appellant

Christiaan Zwart, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This was a case where the Appellant, a clothing wholesaler in the Commercial Road, London, had purchased, or claimed to have purchased, several consignments of goods from each of two different men, one called Mr. Graham and the other Costas, who allegedly drove their different unmarked vans down the Commercial Road, offering goods to various traders, including the Appellant. The purchases were all claimed to have been made in the period between June and November 2003. Whilst the Appellant's director, Mr. Ravinder Singh, only had mobile phone numbers for the two men in question, and had no prior knowledge of either man, he claimed that he bought several consignments of clothing from each man, paying in cash and taking the clothes in question out of the back of the relevant van. Each man supplied him with VAT invoices, Mr. Graham's ostensibly evidencing a supply from Blackgate Fashions Limited ("Blackgate"), and Costas's invoices ostensibly evidencing a supply from Alfacross Limited ("Alfacross").

Both Blackgate and Alfacross had become "missing traders" in HMRC terminology, meaning that whilst each was initially registered, they had ceased to make returns, and on making visits to their notified places of business in late 2002 and early 2003, HMRC officers had concluded that neither appeared to be trading. Indeed on 25 May 2003, Blackgate had been de-registered at the instigation of HMRC officers. As we will explain below, the fact of de-registration is significant but not decisive for a purchaser hoping to claim an input deduction. Alfacross, by contrast, remained registered indeed until some time in 2005.

An officer of HMRC first commenced enquiries into trading and purchases made by the Appellant on 16 December 2004. Provision of day books indicating the identities of the Appellant's suppliers in the six months of trading from June to the end of November 2003 (i.e. the VAT periods 08.03 and 11.03) revealed that a number of purchases had been made from the two missing traders after the dates when officers had concluded that they were not trading. Accordingly HMRC made assessments in the total sum of £10,628.00 to deny the input deductions for the input tax reflected in the Alfacross and Blackgate invoices, and imposed a 15% penalty of £945. There was a subsequent meeting between Mr. Davinder Singh, a director of the Appellant, Mr. Savjani, the Appellant's accountant and HMRC officers at which the officers explained why they had disallowed the invoices, and enquired into various of the Appellant's practices regarding stock control, book-keeping and levels of verification of the identity of suppliers. At that meeting, the HMRC officers indicated that nothing that had been said by Mr. Singh or Mr. Savjani that changed their view that the input deductions had rightly been denied, and the penalty properly imposed. Mr. Singh was offered the opportunity to provide further evidence to support his claim for input deductions but did not provide any, and instead appealed to this Tribunal against both the assessment and the penalty.

We dismiss the Appeal, both against the assessment and against the penalty. We should make it clear immediately however that this results simply from the failure of the Appellant to satisfy the burden of proof in relation to any of the various matters, demonstration of which would have enabled us to allow the appeal. It does not thus result from any conclusion on our part either that the Mr. Singh was dishonest, or that we have concluded that one of the more damaging possible explanations of events actually occurred. We would indeed like to say that, whilst his lack of stock control records and his book-keeping left much to be desired, we both found Mr. Singh to be a reliable and apparently honest witness. In relation to the fact that we also dismiss the appeal against the penalty, we emphasise that the penalty imposed was not one that penalised dishonesty or fraud; indeed it was one where even if we had been able to make a finding of "good faith" in relation to Mr. Singh's conduct, the statutory provisions would still have precluded us from reducing or discharging the penalty.

The different tests for demonstrating that a trader is entitled to a deduction for input tax

Prior to summarising the evidence and the facts and the detailed provisions, we believe that it may be helpful if we first list the theoretical possible factual scenarios that may have prevailed in this case. The particular significance of this is that the matters that the Appellant must establish differ for each of the possibilities that we list below.

Those possibilities appear to be as follows:-

Alfacross remained registered at all times material to the purchases made by the Appellant, so that the first possibility is that if the Appellant can demonstrate (i) that Costas was in fact an employee or agent of Alfacross such that the purchases from him were purchases from Alfacross itself, and (ii) that he had indeed genuinely bought the goods identified in the invoices, then the case would be a straight-forward one where the purchaser would have purchased from "the registered trader", and the invoices supplied would appear to have satisfied all the requirements for VAT invoices from a registered trader, and the appeal would be allowed. Since the purchases, on this scenario, would have been from a registered trader Regulations 13 and 14 of the VAT Regulations 1995 would have been in point as regards the requirement on the "registered trader" to furnish a VAT invoice, and Regulation 14 would have been relevant in specifying the information that the VAT invoice should contain.

Blackgate, by contrast, had been compulsorily de-registered shortly before the period during which the Appellant made his purchases from Mr. Graham, and thus the alleged purchases from Blackgate. By telephoning any VAT office or the VAT Helpline the Appellant could have ascertained whether Blackgate was still registered or not, though he did not make this call. The consequence of the fact that Blackgate had been de-registered is that Regulations 13 and 14 cease to be material, since they plainly apply only to supplies by, and the provision of VAT invoices by, registered traders. Notwithstanding this, in the event that the Appellant could demonstrate that (i) Mr. Graham was an employee or agent of Blackgate; (ii) that he had genuinely bought the goods identified in the invoices, and (iii) that Blackgate, whilst not registered, was nevertheless a "taxable person" by virtue of still having a turnover that rendered it compulsorily registerable, then the Appellant might be able to satisfy the Commissioners under Regulation 29 that it should still be granted an input deduction. Regulation 29 gives a discretion to the Commissioners to grant the input deduction in this situation, in contrast to the entitlement to the deduction where goods are purchased from a registered trader, where Regulations 13 and 14 are the governing provisions. We will refer later to the tests that the Commissioners apply in considering whether to exercise their discretion or not, though we should say immediately that the collection of the tax from the supplier is not a pre-condition to the allowance of the input deduction. It is for the Commissioners to collect the tax from the supplier where the supplier ranks as a taxable person by virtue of being compulsorily registerable so that failure to collect that tax does not of itself preclude the purchaser, with the right information and standard of proof, from sustaining an input deduction. It is however incumbent on the claimant to show that he has exercised the appropriate care in verifying the identity and genuineness of the supplier.

The next possibility is that either or both of Costas and Mr. Graham may in fact have had nothing to do with Alfacross and Blackgate, both of which were believed to have ceased trading, and they may simply have acquired invoice books from the two companies in question. They may nevertheless have supplied the goods identified on the invoices. If this was so and could be established by the Appellant, then since neither Costas nor Mr. Graham were themselves actually registered, the Appellant might be able to satisfy the Commissioners that it should have an input deduction if it could first establish that the level of supplies by either of the individuals rendered them compulsorily registerable, and thus "taxable persons" in their own right. An input deduction might then be available under Regulation 29, this depending again on the information produced by the Appellant to sustain its claim, and the exercise of discretion by the Commissioners, rather as in the previous case.

The next possibility is that the Appellant may not have actually purchased goods at all, but may have been party to a fraud where Costas and Mr. Graham might have somehow secured apparently genuine looking invoice books and simply sold VAT invoices for some fraction of the assumed value of the input deductions. An input deduction is only sustained by purchasing goods from a taxable person, and having the appropriate VAT invoice or other satisfactory proof of entitlement, so that there is not the slightest chance in this scenario of sustaining an input deduction. In addition, the Appellant would be implicated in the fraud, and its volume of sales would be unlikely to match its volume of purchases since the fraudulent invoices would have to be recorded amongst its purchases in its VAT returns to sustain the bogus claim for invoice deductions, whilst there would naturally be no matching sales since there would be no actual goods to sell. It would follow in this scenario that the Appellant would have to be understating its profits for Corporation Tax purposes, because its accounts would have to include the bogus purchases, again with no sales to match them.

The final possibility is that the Appellant may itself have somehow obtained the books of invoices, and may itself have filled in the invoices with a view to reducing its VAT liability, and automatically and consequentially, its Corporation Tax liability. In other words, there may have been no Costas and no Mr. Graham at all. In this case, the VAT and Corporation Tax implications would be precisely as in the previous situation.

The evidence and the facts

Evidence was given by Mr. Ravinder Singh and by two HMRC officers, Mr. Zussman and Mr. McCain.

According to Mr. Singh's evidence, it was quite common for the clothes wholesalers in the Commercial Road to find that a van would pull up, whereupon the driver would invite the shop-keepers to inspect samples of clothes in their vans. Obviously in many cases the driver would be known in advance to the shop-keeper and in many cases the van would display the name and details of the company offering goods. If the shop-keeper was interested in buying, the goods would either be delivered straight from the van if the requisite stock was being carried, or an order would be placed and the goods delivered on a return visit.

In the case of the vans driven by Costas and Mr. Graham, Mr. Singh said that he had seen these vans and the two individuals trading with others in the Commercial Road before they approached him, and offered him goods. When they visited him, he apparently liked the samples or the goods and decided to buy from them. He said that both vans were un-marked; he had only mobile phone numbers for the two individuals, and he had done no previous business with either of the two companies that the two men purported to represent. He then either purchased clothes there and then, or waited for them to deliver when they were next in the vicinity. He always paid for the goods purchased in cash because he always had significant cash in hand because he often received cash from his own customers. The VAT invoices given to him by the two individuals included land-line phone numbers for the two companies, Alfacross and Blackgate, but he never had occasion to ring either. If he wanted additional garments in the same style as those that he had already purchased he would simply use the mobile numbers that he had for the two men in question, and then collect and pay for goods when they next delivered.

Mr. Singh's practice was to keep a hand-written day book which listed all purchases made, and on separate sheets, all sales. This day book indicated on a month by month basis the sales and purchases made by the Appellant. In the case of purchases, the day book indicated the identity of the supplier, the VAT inclusive price paid for goods, the VAT and the VAT exclusive price. It generally, but not always indicated a number, up to 31, indicating the date in the particular month when the goods had been purchased. It also included a number running down the list of purchases in sequence, which number appeared also to have been written on the related suppliers' invoices, thus cross-referencing the VAT invoices to the purchases in the day book.

Mr. Singh said that the day books were made up by his book-keeper, who did not give evidence. Mr. Singh said that the book-keeper collected the invoices weekly and then compiled them monthly into the monthly record of purchases for each month.

The day book for purchases identified two purchases in June 2003 from Blackgate Fashion, or Blackgate, numbered 22 and 23 respectively, being dated June 8 and June 19. All three of the VAT inclusive and VAT exclusive, and VAT, figures were then given, the VAT inclusive figures being £4968.78 and £4720.56. The day book appears to have been compiled on a slightly chaotic basis because we note that in the June page, there are three entries with purchase dates of 12 May and two being at the end of May, rather than June at all.

The day book for July included no purchases from either of Blackgate or Alfacross. The day book for August included four undated purchases from Blackgate, those being the last purchases from Blackgate recorded in the day books. The day books for September, October and November included three purchases in each month from Alfacross. The prices paid in each of these asserted purchases were in the region of £4,000 on a VAT inclusive basis, and to put that in context the total VAT inclusive purchases in the June day book were £25,318, in the July day book £27,934, and in the August, September and October books the respective figures of £44,712, £44,493 and £47, 468.

We have already mentioned that the day books appeared slightly chaotic in that just as that for June included a few May purchases, that for July included one for a June purchase, and that for October a purchase dated 4 September. Both of these appeared to be uncontested invoices, meaning that HMRC officers either matched them with recorded payments of VAT by the identified suppliers or assumed that the suppliers were reliable and did not even require verification.

There is nothing particularly surprising of course in the odd invoices being included in the day books for a later month. This would inevitably occur if the invoice was supplied at some point after the actual delivery, and also if the invoice had been temporarily mislaid.

Something rather odder occurred however in relation to the Blackgate purchases referred to above in relation to August purchases because although these were included in the August list, notably and slightly unusually without dates against them, and then included in the Appellant's VAT return for the period 08/03, signed by Mr. Singh on 12 September and received (with payment) by HMRC on 23 September, one of the supporting invoices was dated in August, one in September and two in October. Mr. Singh was unable to account for how the VAT return that he had signed on 12 September included purchases in the month of August for which he appeared actually to have VAT invoices dated 12 and 24 October. He simply put this down to some error from his book-keeper.

The evidence from the two HMRC officers concentrated naturally on a different aspect of the case, namely the alleged feature that from the stand-point of their records and their visits to the known premises of the two traders, Alfacross and Blackgate, it appeared that both had ceased trading or at least they had ceased to file VAT returns and appeared not to be trading from their registered principal places of business.

We consider it unnecessary to record the individual and all minor items of evidence which were given to us in relation to the affairs of Alfacross and Blackgate. Instead we consider that it is sufficient to summarise that:-

• having ourselves inspected the registration documents and visit reports in relation to both companies, there are references to directors and one or two others who were allegedly employed in some way by the two companies but we have found no reference to either a Mr. Graham or to Costas;

• generally speaking, neither company appears to have had the requisite machinery to undertake what was at least asserted to be their respective principal activities, namely that of "cut, make and trim of ladies garments" in the case of Blackgate and "upper shoe closures and dressmaking" in the case of Alfacross; and

• declining use of electricity by Alfacross in the months March to July 2003 at its registered premises in amounts of £149, £27.60, £4.65, £3.91 and £4.55 strongly suggest declining or nil activity and these figures are certainly inconsistent with any conduct of manufacturing or finishing activity;

• visits to the registered principal place of business of Blackgate indicated that the premises had been locked and unoccupied for several months by May 2003, resulting in the compulsory de-registration of Blackgate on 25 May 2003. We should add that we were told that in November 2002 Blackgate had been recorded as being primarily liable for business rates at two Units in Fontayne Road, London N15, described by the council as a "notorious address", but we were given no other information as to whether there was any activity from this address. We were told that Blackgate's tenancy of these two units in any event terminated on 28 April 2003`.

• Blackgate appeared to have issued various invoices to a company called Platinum Clothing Limited. Platinum Clothing was a company that had appealed to this Tribunal when an input deduction had been denied for invoices issued to it in the name of Module Limited, a company that had been struck off the Register of Companies at the time of its alleged supplies to Platinum Clothing Limited. Platinum Clothing's appeal had been dismissed since it failed to appear or be represented or to give any evidence at all at the hearing, and since the asserted supplies could certainly not have been made by a company that did not exist at the time of the claimed supplies.

The law and the relevant provisions of the VAT Regulations 1995, and the terms of the Statement of Practice issued by HM Customs & Excise in July 2003

Section 26(2) and section 24(6) (a) VAT Act 1994 make it clear that input tax is the VAT on the supply of goods or services to a taxable person in supplies from a taxable person. The definition of "taxable person" in section 3 clearly includes both persons who are, and persons who are required to be, registered under the VAT Act. Finally section 24 (6) (a) consistently provides that the Regulations dealing with input tax can provide that a deduction for input tax is to be available "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 as the Commissioners may direct either generally or in particular cases or classes of cases"

Points to observe in relation to the above provisions are as follows. Firstly the mere holding of a VAT invoice that contains all the required information is not of itself sufficient to establish a valid claim for input tax since it must additionally be shown that the invoice actually records a genuine supply from the purported supplier. This is both clear on the language of the provisions, and was confirmed in the case of Genius Holdings BV v. Staatsseecretaris van Financien [1991] STC 239 and Joytot Limited v. Commissioners of C&E Tribunal case no LON/97/0514. Secondly, input claims can be substantiated when supplies have been made by taxable persons, so including people who are in fact registerable under the Act, and they do not inevitably require a supply from a registered person, and indeed a supply accompanied by a conventional VAT invoice.

Turning to the VAT Regulations 1995, Regulations 13 and 14, read together make it clear that the requirement to provide a VAT invoice, and the obligation to include on that invoice the information required by Regulation 14 all apply to "registered persons". Inclusion of the supplier's VAT Registration number would plainly not be possible for a person who should be registered but is in fact not registered, so that consistently, Regulations 13 and 14 apply only to registered persons. As already indicated however, since input tax can be claimed in certain other circumstances when taxable supplies have been made by taxable persons, the Regulations then deal, very briefly, with the circumstances where input tax can be claimed either where there is not a valid invoice (where perhaps the supplier was nevertheless a registered person) or where the supplier was required to be registered (so being a "taxable person") although not registered. Regulation 29 accordingly closes with the words 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".

In July 2003, HM Customs & Excise issued a Statement of Practice which outlined their practice for conceding or denying input deduction where a claim for input tax was not accompanied by a valid VAT invoice. The Statement stresses that whilst other evidence, including non-documentary evidence will be considered when HM Customs & Excise are exercising their discretion as to whether to give a deduction for input tax in the absence of a valid VAT invoice, it is nevertheless incumbent on the trader to "undertake normal commercial checks to ensure that their supplier and the supplies they receive are bona fide prior to doing any trade.

The Statement of Practice includes a flowchart designed to clarify for traders the circumstances in which they will be likely to obtain an input deduction in the absence of a valid VAT invoice. One box indicates that a distinction is drawn between the purchase of goods (such as computers, mobile phones and software etc) where fraud and abuse has been widespread, and the supply of other goods. In the former case, the flowchart indicates that the trader needs to satisfy nearly all of the questions listed in Appendix 2. In the case of other goods (including clothing), the flowchart indicates that the trader needs to satisfy most of the questions in Appendix 2. We will refer shortly to a respect in which these words and this distinction seem to us to be somewhat confusing, but it is necessary first to quote the list of questions appearing in Appendix 2 in full.

Appendix 2 reads as follows:

"Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice

Do you have alternative documentary evidence other than an invoice (e.g. a supplier statement)?

Do you have evidence of receipt of a taxable supply on which VAT has been charged?

Do you have evidence of payment?

Do you have evidence of how the goods/services have been consumed within your business or their onward supply?

How did you know that the supplier existed?

How was your relationship with the supplier established? For example:

How was the contact made?

Do you know where the supplier operates from (have you been there)?

How do you contact them?

How do you know they can supply the goods or services?

If goods, how do you know the goods are not stolen?

How do you return faulty supplies?

* This list is not exhaustive and additional questions may be asked in individual circumstances"

The respect in which the list quoted in the previous paragraph, and the notion of just "satisfying most of the questions posed, seems to us to be slightly confusing is this. The list is obviously concerned with the two fundamental underlying points of whether first there really has been a supply and moreover a supply by the purported supplier, and secondly whether that supply (if there was one) was by a taxable person and was a taxable supply such that VAT was chargeable upon it. Since there is no question whatever of an input deduction being conceded if the supply itself cannot be proved, and no question of securing an input deduction where it cannot be demonstrated that the supplier was a taxable person and the supply a taxable supply, it seems that clear failure to demonstrate either of these points is likely to result in a denial of input tax. The notion thus of managing to answer most of the questions satisfactorily, but still being unable to establish these fundamental points seems a little confusing since it would seem improbable that an input deduction would or should be conceded in that sort of situation. Whether that is a fair comment or not is not of much significance. We will in due course have to consider whether the Appellant satisfied most of these questions satisfactorily, and we will also have to consider what jurisdiction we have to address this matter.

The contentions on behalf of the Appellant

The Appellant contended that it held valid VAT invoices in respect of the supplies to it, including those invoices that it had claimed and included in its day books on a date before the ostensible date of issue of the invoices.

The contentions on behalf of the Respondents

It was contended on behalf of the Respondents that:

• In order to sustain a claim for input tax where a valid VAT invoice was held, it was necessary to establish that supplies had actually been made (which was not conceded by the Respondents) and it was also necessary to establish that the supplies were made by the person ostensibly issuing the VAT invoice. In this case, it was suggested that even if goods had been supplied, there was no evidence that the individuals Mr. Graham and Costas were actually employees or agents of Blackgate and Alfacross respectively. Since there was substantial evidence that neither of those companies was trading at all there was every reason to suppose that someone had obtained invoice books from the two companies, and was using those books to evidence supplies (assuming that there were supplies) that had nothing to do with either company.

• Since the Appellant claimed to have paid for all goods purchased in cash; had no records of the stock held at particular times, and no way of identifying that clothing ostensibly purchased from either Blackgate or Alfacross was clothing shown later to have been supplied to customers, and since in particular the evidence of Mr. Singh was to be doubted because he had recorded purchases in his day book and VAT returns two months before the related VAT invoices were themselves dated, there was every reason to doubt whether goods had been supplied at all. In any event it was for the Appellant to demonstrate this and he had failed to do so.

• Even in the event that the Appellant had purchased clothing from Mr. Graham and Costas as asserted, his failure to check whether there was any connection between the respective van drivers and the companies that they ostensibly represented and his failure to answer satisfactorily many of the due diligence type questions listed in Appendix 2 to the Statement of Practice meant that the HMRC officers were amply justified in refusing to exercise their discretion in favour of the Appellant in refusing an input deduction.

• Our jurisdiction in a case where there was no valid invoice such that availability of an input deduction required an exercise of discretion by HMRC officers, was only to overturn the decision of the officers if we considered that they had exercised their discretion in an unreasonable manner.

• No grounds of reasonable excuse, or for mitigation had been advanced as to why the penalty was wrongly imposed, and so we should not disturb the imposition of the penalty.

Our decision

This was a slightly involved case because it was never clear to us what had actually happened. To a considerable extent therefore, the case hinged on the fact that it was for the Appellant to prove its entitlement to the input deduction, and we dismiss the appeal on the grounds that on various grounds (most of them involving one or another element of doubt), the Appellant has not shown that its case is supported by evidence, or that the HMRC officers have acted unreasonably.

We start from the proposition that if the Appellant could demonstrate that the two individuals, Mr. Graham and Costas or either of them had been employed by or been the agent of either of the companies that they purported to represent, and if goods had actually been supplied and purchased, then it would be appropriate to allow the appeal at least in the case of Alfacross, the company that was registered at all material times, and it would be likely that the appeal should be allowed in the case of Blackgate as well.

Assuming initially the two key doubtful points (of actual supplies and supplies by the companies whose invoices were provided) to be decided in favour of the Appellant, the result would be that in the case of Alfacross goods would have been supplied by a registered trader, and VAT invoices would have been issued on behalf of the correct supplier to evidence those supplies. Thus the Appellant's case would succeed. We can actually see no relevance to the fact that Alfacross may have been labelled as a "missing trader" by HMRC officials. This is a designation that would not have been revealed to any purchaser who sought to ascertain whether Alfacross was registered or not. On the assumption thus that the registered trader Alfacross was the actual supplier of goods that were genuinely supplied, the Appellant would succeed, and in this context we fail to understand why paragraph 10 of the Statement of Practice says that a VAT invoice, issued by a registered trader would be an "invalid invoice … if the details shown on it are those of a company which … is missing at the time the supply is made". We can certainly see why the invoice would be invalid if it gave information that "relates to a business which is not the one that actually made the supply", and equally if the ostensible supplier was a company that had been struck off the Register of Companies, such that it did not exist. But if the company existed, was still registered, and the information given related to the supplier itself and the supplies were genuinely made, we fail to understand why the designation of the company as a missing trader would have any affect of the entitlement of the buyer to the input deduction.

Assuming again that the two key points of agency and actual supplies were decided in favour of the Appellant in the case of Blackgate, the position seems then to be different, simply because Blackgate had in fact been de-registered. The Appellant did not know this, thought he could easily have established that this was indeed so. The significance of the fact of de-registration however is that it would then be incumbent on the Appellant also to show that the suppliers' supplies were in fact taxable, and that the supplier was still a taxable person, by virtue of being required to be registered, and furthermore to sustain the claim for the deduction under Regulation 29 the purchaser would have to demonstrate that it had satisfied sufficient of the verification tests set out in Schedule 2 to the Statement of Practice.

Some of the issues posed in paragraphs 30 and 31 above may be academic because we decide that it has not been established that either Mr. Graham or Costas in fact represented Blackgate or Alfacross in any way. The evidence of the HMRC officers was that there was every indication that neither of those companies was trading. In the records that we saw for those companies there was no reference to either Mr. Graham or Costas. Mr. Singh never made any enquiries of either company, as to whether either man represented their claimed companies. He never visited their premises and he never sought to ring the land-line phone numbers that appeared on the invoices of the two different companies. He simply dealt with the two men when they arrived in their unmarked van, or he rang them on their mobile phones. By not following any of the verifications steps implicit in the questions in Appendix 2 to the Statement of Practice, he took a considerable risk in buying goods without any reliable knowledge of the identity of the supplier. We should record that he had obtained the VAT 4 certificate for Alracross and the certificate of incorporation for that company, but it was not clear whether these documents were obtained before the purchases were made, or only after the first HMRC enquiries. In the light of the strong indications on the evidence of HMRC that the two companies themselves were not trading, and of the absence of any actual evidence advanced by Mr. Singh to establish an employment or agency link between the individuals and the asserted suppliers, we decide that that link has not been established.

The other key question is of course whether goods were supplied at all. Not surprisingly, the Respondents' case was not in the first place advanced on the basis that no goods were supplied, because that would have involved asserting that Mr. Singh had been party to a fraud, and a high level of proof would have been required to establish that. Nevertheless the Respondents made it perfectly clear that they did not concede that goods had in fact been supplied.

On the afternoon of the second day of the hearing the Respondents were somewhat forced to re-visit this issue however. This is because they had confirmed that they had obtained (in connection with another case) further invoices in the name of Blackgate, made out clearly in the same hand-writing as those in the present case, with the result that the total invoices (assuming they evidenced supplies from Mr. Graham and not Blackgate) would have rendered Mr. Graham to be compulsorily registerable, and thus a taxable person. If thus we concluded that supplies had in fact been made, it became possible that the supplies would still have been made by a taxable person, Mr. Graham, even if he in no way represented Blackgate. It was impossible to say of course whether the invoices in the other case reflected genuine supplies, but whether they did or not, the Respondents re-raised the suggestion that no goods had been supplied at all in the present case.

We have found it very difficult to reach a decision on this particular question and in the event we consider that a decision on this key point is not strictly necessary. Canvassing the points in each direction, we confirm that we found Mr. Singh to be a fairly impressive witness. He plainly failed to answer many questions in relation to the poor records maintained by his business and the key issue of how he claimed an input deduction for certain purchases one and two months before the invoices were even issued. But it would be wrong to say that we fundamentally doubted his word. He had a very clear recollection of everything that he had said on the first day of the hearing, a considerable time before the hearing resumed, and in some respects he was an impressive witness.

Having said that, something very curious had clearly occurred in this case. Everything to do with Blackgate and Alfacross was dubious, and all Mr. Singh's dealings with Mr. Graham and Costas were informal to put the best description on them. Of the various scenarios that we canvassed in paragraph 6 above, we rather doubt that Mr. Singh had simply acquired invoice books, which he himself completed to provide false input deductions. We confirm that at a meeting with HMRC officers, Mr. Singh obtained from his brother the mobile phone numbers of Mr. Graham and Costas and sought, in the presence of the officers, to ring both to obtain verification of his account. One number was dead, and when Mr. Singh phoned Costas and told him that the VAT officers were questioning him, Costas put the phone down. We think it decidedly improbable that Mr. Singh would have rung Costas, had he simply obtained invoice books and effectively perpetrated a fraud on his own.

Assuming that Costas and Mr. Graham were themselves perpetrating a fraud, this could of course have either involved the sale of goods accompanied by fake invoices, or it could have involved rather more simply just the sale of the invoices, without the goods at all. We were given no information whatever about the profitability of the Appellant's business in order to have any chance of judging whether profits were artificially diminished by deductions for fake purchases, and no indication was given to us as to whether the level of sales in periods after the contentious possible purchases indicated that the purchases were more or less credible. Neither possibility can be ruled out. From the standpoint of the person in the position of Costas and Mr. Graham, the sale of invoices is obviously a great deal simpler, but it does have various disadvantages. It obviously requires a fraudulent counter-party, and the price for the invoices would involve sharing the value of the input (and Corporation Tax!) deductions. By contrast if goods were sold, conceivably stolen goods, there would be the various advantages that the seller might make a profit on the sale of the goods themselves, the seller might collect cash equal to the whole of the assumed input tax deduction, and the seller would only need to find gullible or merely casual counter-parties, rather than fraudulent ones. We are unable to say which scenario is more likely to have occurred in this case, though we repeat that we saw nothing that indicated that Mr. Singh himself was fraudulent.

In giving that conclusion we should address the issue advanced strongly by the Respondents to the effect that Mr. Singh included input claims in his September VAT return for the period 08/03 two months before the date of the related invoices, and he was in no way able to explain this. It was particularly surprising in the light of his statement that his book-keeper made up the day book weekly by reference to invoices received, as mentioned in paragraph 11 above. We agree that this is damaging, and hard to explain away, though we would say that there were other oddities in the day books, and we would have thought that a person fraudulently buying just VAT invoices would actually be slightly more careful to see that the details of the very simple fraud were not defectively recorded. In other words, whilst the mis-match between invoices, the day book and the VAT returns is odd, it would almost be odder and more difficult to understand if Mr. Singh was just concentrating on utterly fake invoices that did not accompany purchases.

Our conclusion thus is that it is not proved, and indeed it was barely asserted, that Mr. Singh himself was involved in a fraud. It is possible that he was but it has not been proved, and on balance we think that he probably was not.

This does not however mean that the Appellant succeeds in this appeal.

To succeed the Appellant needs to establish, it having the burden of proof, that:

• supplies were in fact made;

• that those supplies were taxable, and so were made by taxable persons; and

• save where it had been demonstrated that supplies were made by registered persons who had provided valid VAT invoices, it would finally be necessary to show that the Appellant had exercised appropriate due diligence to verify the identity and bona fides of the supplier, to satisfy the questions and tests set out in the Practice Statement.

Whilst we have indicated that we have not decided that Mr. Singh was in fact fraudulent, and indeed we should re-confirm that this was not specifically alleged by the Respondents, we nevertheless say that he also failed, on his evidence, to persuade us that supplies were in fact made. They may well have been, but in the absence of evidence in relation to documentation, bank accounts illustrating cheque payments, stock control records, relative levels of purchases and sales, and profitability, and any confirmation by anyone else that Costas and Mr Graham existed, it is difficult to say that the Appellant has satisfied the burden of proof. We have weighed against all these doubts the fact that we did not judge Mr. Singh to be dishonest, but in the absence of anything to corroborate his oral evidence, we still cannot say that he has satisfied the burden of proof. We indeed asked Mr. Singh whether he though it possible to obtain evidence from any other shop-keepers that they had also been approached by the two men, and whilst we could understand that they might be reluctant to admit that they had also purchased from the men in question, that reticence would appear much less likely if genuine supplies had been made. Mr. Singh said however that it would be impossible to obtain any confirmation from others that they had also dealt or had even seen either Costas or Mr. Graham, on account of competition between the various traders.

We have already said that we considered that Mr. Singh had not established that the two individuals, Costas and Mr. Graham, were in fact employees or agents of the companies that they purported to represent (one of them anyway being de-registered). It thus follows automatically that in order to satisfy the last two requirements mentioned in paragraph 41 above, the Appellant has to demonstrate to the satisfaction of the HMRC officers responsible for exercising the discretion to concede input tax in the absence of valid VAT invoices that it had undertaken the verification required by Regulation 29 and the Practice Statement (or that the officers acted unreasonably in rejecting its claim) in order to succeed in this appeal. When Mr. Singh took the risk of buying clothing from two men, neither of whom he knew, who appeared in un-marked vans, producing VAT invoices from companies neither of which he had heard of, and gave only mobile phone numbers, and when he then paid in cash and had no other documentation to prove either the fact of the purchases, or any verification in relation to the suppliers, he utterly failed to conduct the verification required to establish an entitlement to input tax, where valid VAT invoices are not available. We thus decide that, in the event that we can disturb the decisions of the HMRC officers only if we consider that they acted unreasonably, they did not act unreasonably. Were we to have jurisdiction to substitute our own judgment for that of the officers in deciding whether the Appellant and Mr. Singh can prove the points mentioned in paragraph 41 above, and show that he satisfied the various verification tests contained in the Statement of Practice, that judgment would be no different from the decision of the officers.

The penalty

A 15% penalty was imposed on the Appellant for having submitted a Return that understated the company's liability to VAT or that overstated its entitlement to a VAT credit. On the basis that we dismiss the appeal, it follows that the condition for the imposition of the penalty is established.

Were the penalty one based on fraudulent conduct on the part of the Appellant or Mr. Singh, we would allow the appeal against the penalty because we repeat that fraud has not been established, and it was barely even contended. But this penalty is not based on there having been fraud. It can only be reduced if it can be shown that the Appellant had a reasonable excuse for its Return being wrong, or if there are mitigating circumstances. Once we conclude that the Return was wrong because the Appellant failed to pursue the proper verification process that he should have undertaken when being offered goods in the circumstances that prevailed here, it seems self-evident that there cannot have been a reasonable excuse for the wrong Return. Furthermore we are very mindful that section 70 VAT Act 1994 specifically says that the fact that (or in this case, the possibility that) Mr. Singh acted in good faith is a matter that we must altogether disregard in considering any appeal against the imposition of the penalty.

In the light of these facts, and the further fact that no arguments were advanced at all as to why we should reduce or eliminate the penalty, we consider that we must leave the penalty unchanged.

HIOWARD M NOWLAN

CHAIRMAN

RELEASED: 4 November 2008

LON 2007/0554