First-Tier Tribunal Man/08/0641

[2010] UKFTT 166 (TC)

TC00471

FIRST-TIER TRIBUNAL MAN/08/0641

TAX

VAT-INPUT TAX –– Appellant purchased mobile telephones with the assistance of his family and others – telephones purchased retail from retail stores- evidence of purchase receipts for the telephones from the stores- doubtful connection between the receipts and the ultimate sales by the appellant – input tax claim disallowed save for those telephones purchased by the appellant himself - no agency – if an agency the agents were undisclosed – undisclosed principal cannot take benefit of agents contract- assessment to best judgment – misdeclaration penalty and default surcharge upheld - appeal dismissed

MIANFARUKH MAHMOOD

T/A MAHMOODMOBILE SERVICE Appellant

-and –

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondent

Tribunal:DAVID S PORTER (Judge)

PETER WHITEHEAD (Member)

Sitting in public in Manchester on 11 February 2010

No one appeared for the Appellant

JoshuaShields, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1. The Appellant,MianFarukh Mahmood (Mr Mahmood)appeals against amended assessments for the periods 10/05 and 10/06 in the sum of £471,685; for the period 04/06 in the sum of £67,923; for the period 1 May to 30 May 2006 in the sum of £12,692; amended assessments to misdeclaration penalties in respect of VAT for the periods 10/05, 01/06, and 1 May to 30 May 2006 in the sum £82,843; and an amended assessment to a default surcharge penalty in respect of the period 01/06 in the sum of £4,069.28 on the basis that no allowance has been made for input tax for the supplies, other than a small amount in relation to mobile phones, which he is deemed to have purchased himself. The Respondents (HMRC) say that Mr Mahmood is not entitled to any such allowances as he did not purchase the telephones. Mr Mahmood alleges that individuals purchased mobile telephones on his behalf if they did so they did so as undisclosed agents and their input tax is not allowable to Mr Mahmood

2. Joshua Shields, (Mr Shields)counsel, instructed by the Acting Solicitor for HM Revenue and Customs,acted for HMRC and called Mr John Patrick Foy (Mr Foy) the assessing officer.This appeal was called on for hearing at 10.30am on 11 February 2009. There was no one to represent Mr Mahmood. The Tribunal started the appeal at 10 50 am, the clerk having been asked to contact Mr Mahmood, who had not respond to the telephone call. No other information was provided indicating what Mr Mahmood’s intentions were.We decided to proceed and hear the appeal in the absence of Mr Mahmood,in accordance with Rule 26 of the VAT Tribunals Rules. It is important that Mr Mahmood should bear in mind that Rule 26(3) enables him, as the absent party, to apply in writing to the Tribunal to have the decision set aside on such terms as the Tribunal thinks fit. It is also important to note that, if Mr Mahmood wishes to pursue this course, he must attend the hearing of the application to have this decision set aside.

It would appear that Mr Mahmood has appealed against the assessment and the misdeclaration penalty which have been listed separately under numbers MAN/2008/0641 and MAN/0640. We have amalgamated the appeals so that they can be heard together

The Facts

1. In the absence of Mr Mahmood we have had to rely on his witness statement and the evidence deduced by Mr Sheilds. In his witness statement Mr Mahmood states that his english language is poor and that his statement was prepared by McGrigors LLP with his wife in attendance to act as translator. HMRC confirmed that his grasp of the english is poor.Mr Mahmood owns his home at 19 Carter Street, Bolton, and subsequently,with the help of a mortgage, he purchased house numbers17 and 21 Carter Street, Bolton. 17 and 21 Carter Street are let to tenants, who pay him rent.Mr Mahmood started trading in mobile telephones, as a result of an introduction by his brother, in 2004. He had rendered returns for VAT purposes up to and including the period to the end of July 2005. His brother was one of the shareholders in Noon 2000 Limited (Noon),the registered office is at 23 The Broadway, Greenford, Middlesex, UB6 9PN. Mr Mahmood has annexed to his witness statement copies of those accounts for Noon to 31 December 2007. They indicate that the turnover for 2006 was £26,450,342 and for 2007 £10,267,489. Mohama Baccai, known to Mr Mahmood as Noor, explained to Mr Mahmood that some shops sold mobile telephones at a higher price than other stores. As a result, if Mr Mahmood purchased such telephones cheaply from shops such as Argos, Woolworths, and Asda, Noor would buy the telephones from Mr Mahmood, in lots of 100, presumably to sell on to the more expensive shops. Mr Mahmoodsaid he made a gross profit of £2 to £3 on each telephone. Mr Mahmood was given a list of the telephones, which Noor wished him to purchase, initially, he went to the shops and purchased the telephones on a retail basis himself, which he then sold on to Noon. Mr Mahmood would attend at the shops and ask how many telephones of the particular make he might purchase. If this was only a few he appears to have paid for the telephones himself. If there were up to a 100 then Noon appears to have provided the purchase money.
2. The telephones he purchased were always sold on a ‘pay as you go’ basis. Those telephones came in a box with a SIM card inside and the packaging would be branded by one of the network providers such as Vodafone or 3G. It appears that in many cases Noon did not want the SIM cards, as they required the owner to sign up to a company to provide the ‘pay as you go’ contract. As a result many SIM cards were thrown away. As the business grew Mr Mahmood acquired a property at 55 Derby Street, Bolton by way of a lease for two and one half years. He had intended to use the shop to store the telephones before he sent them on to Noon. Unfortunately the shop was broken into on one or two occasions and Mr Mahmood lost some of his stock. The burglaries were reported to the police. No evidence as to that issue was produced to the tribunal. Apparently Mr Mahmoodalso fell into arrears with the rent and the Landlord repossessed the shop and threw away the remaining contents, which included some telephones, the SIM cards andMr Mahmood’s paperwork. He also purchased a van at about this time to deliver the telephones to Noon and other customers. When the business had grown larger he purchased 3 cars to help in collecting the telephones.
3. As the business grew, Mr Mahmood was unable to supply the quantity of telephones that Noon required and he asked his wife’s relatives to purchase the telephones from the retailers. His wife has five sisters and three brothers. One of the brothers and two of the sisters live in the Londonarea and three of the sisters live in Bolton. The brothers and sisters would sometime allow their children to buy the telephones. When Mr Mahmood started in business, the stores had no restrictions on the number of telephones he could purchase at any one time. By the time the family were involved, the retailers were limiting individuals to the purchase of one or two telephones at most. Apparently Mr Mahmooddid not pay his wife’s relatives for purchasing the telephones, as they bought them as a favour for him, although it seems that he might have paid 50p to £1 to others than the immediate family. As the business expanded he sourced other retailers who would allow him to purchase more than one or two telephones at any one time. Annexed to Mr Mahmood’s witness statement are the details of Cashco Ltd (Cashco) whose registered office is at 221 New Hall Lane, 2nd Floor, Preston, PR1 5XB and which had a warehouse in Preston. Mr Foy, in his witness statement, states that Noon and Cashco were known to be involved in MTIC type deals in quantities of about 100 telephones at a time, the number of telephones that Noon had asked Mr Mahmood to sell to him. Mr Mahmood also had a contact, a Mr Zulfakar in Birmingham, to whom he sold the telephones. It appears that he also sold telephones to Mobilezone Ltd. Mr Mahmood had been told by HMRC, in an interview on 9 July 2004, about the problems that HMRC were having with companies involved in the MTIC trade sector. They supplied Mr Mahmood with VAT Notice 726- Joint and Several liability; 700/52- Notice of Requirement to give security;, and the input Tax Statement of Practice – input deduction without a valid invoice. Mr Foy also explained that Mr Mahmood should make enquires of his customers and Redhill, to verify that they were VAT registered, and gave him the details.Mr Mahmood has also annexed to his witness statement, in addition to the family, the names of 6 further people, who he says worked for him buying the telephones. (Hereinafter together referred to as his assistants).No evidence has been deduced as to whether these people were employees, although it has been suggested that they acted as Mr Manmoods agents. If they did act as his agents, which is not agreed, it is clear that they could only have purchased the telephones personally, and not as businessmen, as they allegedly purchased the telephones from retail stores. There is no evidence that they were registered for VAT, on the contrary, Mr Mahmood alleges that any VAT incurred should be allowed as input tax to him. Mr Mahmood states that sometimes these people would drive the van for him. On other occasions he would collect the telephones, which they had purchased. He would give his assistants cash to buy the telephones sometimes he would reimburse them because they purchased the telephones with their own money. He provided the individuals between £50 and £100 presumably toassist in buying the telephones, but did not pay them any commission.He used cash because the retail shops could not easily trace who had bought the telephones and the quantities. He had banked with Lloyds TSB but the accounthad been closed and no further accounts were available. We were told by Mr Sheilds that Lloyds TSB had closed the account because they thought Mr Mahmood was involved in ‘carousel’ fraud.
4. Mr Mahmood has annexed to his witness statement details of the input tax that he believes should be allowed as a deduction from his output tax.From these figures, for the period of six months from October 2005 to March 2006,his business appears to have turned over £3,767,181. It is difficult to know,from the evidence, what his average price for each telephone was, but with a generous estimate and assuming that they all cost the top price of £79, this represents the sale of 47,686 telephones for the six months or 7948 telephones each month. He has indicated that he had 14assistants involved in purchasing the telephones and himself, making 15 people in total purchasing telephones from the retailers. On that basis he would expect each of his assistants to purchase at least 529 telephones each month or 26 telephones each day, assuming the assistants all worked for five days of the week, which we suspect is unlikely as far as the family is concerned, as they were apparently not being paid. Mr Mahmood has indicated that in many cases the retailers would only sell one or two telephones at any one time. In fact, the bulk of the receipts, which he has exhibited to his statement, identify the purchase of only one telephone on each occasion. On that basiseach of the assistants, family included, would have to visit at least 20 shops every day. If the average price of the telephones is reduced to £59 then, on the same basis,the assistants would have to visit approximately 30 shops each day.Using the above figure of £79 for each telephone Mr Mahmood would have to make available to each of his assistances £41,857 each month in cash, a total of £627,855 for all 15 each month. None of this is credible. Mr Mahmood has confirmed that when the bank account closed he had to use cash. There is no indication as to where the cash came from. On any showing £627,855 in cash is a substantial amount of money and we do not believe, on the balance of probabilities, that Mr Mahmood personally had that amount of money available to him.Further Mr Mahmood has not produced enough receipts for the six months trading. There must be in excess of 25,000 receipts overthe period, if there were two telephones to each receipt. If there were receipts with only one telephone purchase detail, as there appear to have been in many circumstances, then the number of receipts would increase significantly. Mr Mahmood annexed 338 invoices to his statement although he had provided boxes of mixed up receipts to Mr Foy during the course of the investigations.Mr Mahmood has made no attempt to collate the receipts to the appropriate periods to at least show that they might relate to his subsequent sales.
5. Mr Mahmood, states in his witness statement, that whenever a telephone was purchased he kept the receipt or obtained one from the person who had purchased the telephone. He has annexed to his witness statement copies of numerous receipts for every retailer, who sold the business telephones between August 2005 and May 2006. The receipts show the telephones were purchased from Argos, Argos Extra, Asda Price, Boots, Choice UK, Curreys, Dixons, Jessops, Phones4U, Rainbow Foodstore, Saver Stores, Selfridges, Superdrug, Tesco, The Link, TJ Hughes, Toys R Us, Virgin Megastore, Woolworths, and shops branded with the name of the network provider – ‘3’ Orange, O2, T-Mobile, Virgin Mobile, and Vodafone. The receipts show the purchase of one or two phones at prices ranging from £20 to £79. They have no names on them, other than the store from which the telephones were purchased, so that it is impossible to know that these telephones were purchased by or on behalf of Mr Mahmood. Although the retailers had been told that they must only sell one or two telephones at a time to customers. Mr Mahmood persuaded some of themanagers to give him several receipts for a small number of telephones, so that the owners would not know that he had purchased a larger quantity. Mr Mahmood has attached samples of receipts issued on the same day by The Link at Cheetham Hill, Manchester. Again there is no way of knowing who bought the telephones and whether they were purchased for Mr Mahmood. These receipts could belong to anyone.
6. He also arranged with some of the managers that he would collect the receipts over a period of days so that it would appear that the telephones had been purchased separately. Sometimes the name of the purchaser would appear on the receipts, but frequently names such as My Three Pay or Swift House would appear. Mr Mahmood annexed to his witness statement examples of those receipts. There are large numbers of such receipts and they seem to relate to the purchase of a single telephone. The prices all appear to be £64.04.

9.Mr Mahmood stated that, if he found the make of telephone that Noon required at a particular store, he would ring round all the stores in the same group, so that he could purchase a larger quantity of the telephones by driving round to the individual store. He has annexed to his witness statement a list of those purchases all of which appear to have been from O2. Again it is impossible to know whether these were telephones purchased by or for Mr Mahmood. The prices appear to be £59.99and £77.99 respectively and represent individual telephones. The receipts are variously from Oldham, Manchester, Peterbough, Derby, Hemel Hempstead, Rochdale, St Albans, Leicester, Macclesfield, London, and other areas. We find it difficult to believe that Mr Mahmood was able to collect these receipts from so many different areas and collate them for this appeal, but that he was unable to collate them for the purposes of his accounts. It is impossible to know if these receipts represented business that Mr Mahmoodor his assistantshad carried out. He also states that he purchased old telephones at car boot sales, Sunday markets, and at a discount from The Link and Vodafone. This enabled him to use them to obtain a discount of £10 on the new telephones that he purchased. There is annexed to the witness statement examples of those purchases. Interestingly,one of the receipts for O2 in Accrington dated 6 October 2005 is made out to Rafiq Patel and is for £99 less the discount of £10. Rafiq Patel does not appear on the list of the 6 people Mr Mahmood stated worked for him. The receipt clearly demonstrates that the telephone was not purchased by or for Mr Mahmood.

10.Noon had told Mr Mahmood to register for VAT, which he did, through his accountant Mr Mohammed Ishaq on the 2 February 2004. The application for registration appears to have been signed by someone other than the accountant. We assume the signature is Mr Mahmood’s, as it is similar to the signatures on the letters addressed to Mr Foy. Mr Mahmood ceased business on 31 May 2006. Mr Ishaq appears to have been able to complete the quarterly returns for the business from information provided by Mr Mahmood. Mr Mahmoodhad provided HMRC with handwritten invoices with regard to the telephones he stated he had sold to Noon, Cashco, and Mr Zulofakar. Mr Foy, in his witness statement, indicates that Mr Mahmood’s VAT registration was cancelled on 6 October 2004 because he had failed to renderappropriate VAT returns. An appropriate return was subsequentlyrendered on 26 October 2004 and Mr Mahmood’s registration was re-instated. Mr Mahmood had been unhelpful in responding to correspondence from HMRC and he had been threatened again with the cancellation of his registration if he failed to make appropriate returns. Mr Foy visited Mr Mahmood on 16 June 2006 and Mr Mahmood’s wife acted as interpreter. At that meeting, Mr Mahmood told him that he had no employees. His accountant was Mr Ishaq of Wilmslow RoadManchester. Mr Mahmood gave Mr Foy Mr Ishaq’s mobile number.Mr Foy had attempted to contact the accountant but without success. Mr Ishaq was untraceable. Mr Foy had received information from an HMRC Officer, Mr Scanlon, who had been monitoring Mr Mahmood’s sales, that there had been sales to Noon totalling £256.111.49 between 13 March 2006 to 27 April 2006 in the name of Mr Mahmood trading as MFM Traders, and three further supplies in May 2006 totalling £21,155.88 including VAT of £3,150.87. Mr Mahmood had also made wholesale supplies to Subhan Universal Ltd in February 2007. As a result Mr Foy made several attempts to contact Mr Mahmood from May 2007. On 5 July 2007 Mr Foy raised an assessment of £498,970, which was based on known sales between 1 October 2005 and 31 May 2006. He allowed a nominal amount of £150 input tax for expenses during the period. It was not until 9November 2007 that Mr Mahmood attended at Mr Foy’s office and left with him several sheets of paper with figures on them.These are annexed to Mr Mahmood’s witness statement and appear to be based on the schedule of the invoices prepared by Mr Foy running from 4 January 2006 to 28 April 2006. Mr Foy raised assessments of £145,914 for the period 01/06; £62,525 for the period 10/05; and £237,848 for the period 04/06. Mr Ishaq, as a result, prepared a further schedule of the input VAT on the purchases of the telephones for the periods 10/5, 01/06 and 04/06 showing input tax of £561,069 on purchase of £3,767,181. In preparing the schedule Mr Ishaq appears to have accepted the turnover figures, as he has used those figures to arrive at the input tax figures, which he believes should be allowed against the assessments.