20438

VAT – ASSESSMENT – Appellant claimed input tax on supplies of killing services – the supplies were fictitious – the Appellant or his employees slaughtered the animals – the Appellant failed to declare output tax on sales of animal skins – assessment raised to recover input tax wrongly claimed and the output tax on the sales of the animal skins – assessment reasonably arrived at – Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

IBRAHIM MOOSA YUSUF Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMSRespondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

PETER WHITEHEAD (Member)

Sitting in public in Manchester on 4 September 2007

The Appellant did not appear and was not represented

Lisa Linklater, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

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DECISION

The Appeal

  1. The Appellant was appealing against the following decisions of the Respondents:

(1)An assessment dated 17 January 2006 in the sum of £71,762 plus interest for unpaid VAT in respect of periods 01/03 to 10/04 inclusive.

(2)Misdeclaration penalties in the sum of £10,430 imposed on 20 January 2006.

(3)Amendment to the Appellant’s VAT return for period 01/05 dated 13 December 2005 reducing input tax by £1,912.82 and increasing output tax by £493.52

(4)Amendment to the Appellant’s VAT return for period 04/05 dated 13 December 2005 reducing input tax by £19,037.86 and increasing output tax by £2,583.79.

The Grounds of Appeal

  1. The Appellant contended that the basis of the assessment was wrong and incorrect assumptions made. Further the misdeclaration penalties were incorrect because they were based on a flawed assessment.

The Hearing on 4 September 2007

  1. The Appellant did not attend the hearing. We decided to proceed in the absence of the Appellant under rule 26 of Tribunal Rules 1986 because:

(1)The Tribunal notified the Appellant of the place date and time of the hearing.

(2)The Appellant gave no reasons for his non attendance.

(3)The Appellant had not been in contact with the Tribunal.

(4)The Appellant supplied no documents to the Respondents to substantiate his assertion that the assessment was flawed.

(5)The Appeal had been previously adjourned in March 2007 at the Appellant’s request.

(6)Over 20 months had elapsed since the issue of the first assessment.

(7)The Respondents’ witness was present to give his evidence.

  1. We heard evidence from Mr McClelland, the Officer who issued the assessment and amended the Appellant’s VAT returns. The Respondents also supplied a bundle of documents in evidence.

The Facts

  1. The Appellant traded under the name of Halal Meat Supplies as a wholesale butcher from premises at 17 South Street, Dewsbury, West Yorkshire. The Appellant slaughtered animals purchased from various markets and sold the carcases less guts to wholesalers and butchers. The Appellant made very occasional retail sales.
  2. After carrying out a VAT audit of the Appellant’s business on various dates in February and August 2005 Mr McClelland concluded that the Appellant’s VAT returns for periods 01/03 to 04/05 were incorrect. He decided that

(1)The Appellant had wrongly claimed input tax on supplies of killing services which either did not take place, or were in fact zero-rated, or were made by suppliers not registered for VAT.

(2)The Appellant’s reclaim of £1,225 input tax on a Scania lorry purchased in period 04/05 from a Mr Darwan should be disallowed. The registration number given for the lorry on the invoice related to a Mercedes van owned by the Appellant since 10 August 2003. The Appellant was unable to produce a registration document for the lorry.

(3)The Appellant should account for output tax on sales of animal pelts.

  1. Mr McClelland’s conclusion about incorrect claims for input tax on supplies of killing services was based on the following facts:

(1)Three of the suppliers of killing services, Phoenix Livestock, Al Halal Meats, and Shelf Livestock, were not registered for VAT.

(2) A further three suppliers of killing services, Prime Livestock Limited, Ossett Livestock and Derbyshire Livestock, which traded successively from the same address at 176 Wakefield Road, Ossett, West Yorkshire were registered for VAT. However, they each ceased trading within six to nine months and never submitted VAT returns.

(3)The final supplier was a Mr Imran Darwan trading as Wakefield Halal Meats. Mr McClelland decided that Mr Darwan was not supplying killing services to the Appellant because:

  1. Originally the Appellant told Mr McClelland that he was paying rent of £1,000 per week for the Ossett abattoir to the owner Mr Ali Akbar Shan. The Appellant subsequently changed his story stating that Mr Darwan was his landlord, who in turn rented the premises from Mr Shan. According to the Appellant, he paid Mr Darwan a VAT standard rated fee for killing the animals instead of paying rent. Also Mr Darwan retained the animal skins.
  2. Mr McClelland analysed the number of killing fees paid by the Appellant to Mr Darwan against the number of animals purchased for periods 10/04, 01/05 and 04/05. His analysis showed that Mr Darwan was apparently charging killing fees far in excess of the number of animals passing through his hands.
  3. A Food Standards Officer informed Mr McClelland that Mr Darwan had told the police that he was an employee of the Appellant.
  1. Mr McClelland decided in the light of the above facts that the supplies of killing services to the Appellant were fictitious. The most probable explanation was that the Appellant or one of his employees was killing the animals, in which case the Appellant was not entitled to claim input tax on the supplies of killing services.
  2. Mr McClelland formed the view that the Appellant not Mr Darwan was supplying animal skins, in which case the Appellant was liable to pay output tax on those supplies. Mr McClelland’s view was based on the facts that two local skin processing companies which purportedly received skins from Mr Darwan made payments to the Appellant. Further some of the invoices selling the skins were in the Appellant’s name rather than in the name of Mr Darwan or his firm. Mr McClelland noted that the Appellant and Mr Darwan shared the same bookkeeper who kept the Appellant’s and Mr Darwan’s records on the same computer from which their invoices were produced. Mr McClelland considered the shared bookkeeping arrangements between Mr Darwan and the Appellant supported the information from the Food Standards Officer that Mr Darwan was the Appellant’s employee.
  3. Mr McClelland arrived at his assessment of unpaid VAT for periods 01/03 to 10/04 inclusive and the amendments to the VAT returns for periods 01/05 and 04/05 by disallowing the input tax claimed for killing fees and adding output tax for the sales of animal skins. The amendments to the VAT returns included additional adjustments of input tax in the sum of £5.60 for a BT invoice for the period 01/05 and for period 04/05 in the sum of £2,380.80 for which there were no supporting invoices for the input tax claims including the purported purchase of a Scania lorry.
  4. The quantum of the disallowed input tax in respect of the killing fees was derived from the VAT charged on the fee invoices raised in each VAT period. Some of the quarterly periods covered by the assessment did not have supporting invoices in which case Mr McClelland applied a percentage to the input tax claim for that period to determine the input tax attributable to killing fees. The percentage was computed from averaging the proportion of input tax allocated to killing fees in the Appellant’s quarterly returns where he had supporting invoices.
  5. Mr McClelland calculated the output tax on the sales of animal skins by multiplying the number of animals killed in period 04/05 with £1.50 to arrive at the value of skin sales during that quarter. Mr McClelland then determined the amount of VAT due on the sales for 04/05, from which he derived a percentage which represented the proportion of VAT on skin sales to total sales declared in period 04/05. This percentage, which was 0.48025344, was then applied to the total sales declared for each period to arrive at the amount of output tax due for each quarter for the sale of animal skins.
  6. On 20 January 2006 the Respondents assessed the Appellant for misdeclaration penalties under section 63 VAT Act 1994 for periods 04/03 to 07/04 inclusive. The Respondents were satisfied that the Appellant made returns for the said periods which understated his liability for VAT and overstated his entitlement to VAT credits. The under-declaration of VAT was such that it met the objective conditions for imposing a misdeclaration penalty. Thus the Appellant was liable to pay misdeclaration penalties in the sum of £10,430 representing 15 per cent of the VAT which would have been lost if the inaccuracy had not been discovered.

Reasons for Decision

  1. Section 73 of VAT Act 1994 empowers the Respondents to raise assessments for unpaid VAT or to recover VAT which has been wrongly repaid or credited as input tax to the taxpayer.
  2. Under section 25 of the VAT Act 1994 a taxable person is entitled at the end of each accounting period to credit for input tax paid on taxable supplies of goods or services made by a taxable person. The taxable person can only claim the VAT credit on a taxable supply if it takes place and is made to him.
  3. We are satisfied on the facts that the Appellant did not receive the supplies for killing services. Mr Darwan was the Appellant’s employee and did not kill the animals in the capacity of an independent supplier. The other suppliers named on the invoices were either not registered for VAT of if they were did not submit VAT returns. The suppliers ceased trading after six to nine months. The level of killing fees invoiced by Mr Darwan significantly exceeded the number of animals in the Appellant’s possession. We find that the supplies of killing services described in the invoices were fictitious. The Appellant manufactured the invoices to enable him to make inflated claims for input tax. The Appellant or one of his employees killed the animals. We, therefore, hold that the Appellant was not entitled to claim VAT on the purported supplies of killing services.
  4. We find that the Appellant sold the animal skins to the processing companies. The arrangements set up by the Appellant to give the impression that Mr Darwan sold the skins were flawed. Some of the processing companies paid the Appellant direct rather than Mr Darwan. The Appellant invoiced some companies in his firm’s name for the skins. Further Mr Darwan was employed by the Appellant, which underlined that Mr Darwan’s skin sales as an independent operator were a sham. We hold that the Appellant was liable to account for output tax on the sales of animal skins.
  5. Under section 73 of VAT Act 1994 Mr McClelland was required to consider fairly all material placed before him by the Appellant, and come to a decision which was reasonable and not arbitrary as to the amount of tax due. Mr McClelland’s assessment dated 17 January 2006 in the sum of £71,762 for periods 01/03 to 10/04 inclusive was derived from his conclusions on the killing fees and sales of animal skins. Our findings of fact support Mr McClelland’s conclusions. The Appellant has produced no evidence to substantiate his assertion that the assessment was wrong and incorrect assumptions were made. We consider Mr McClelland’s methods for computing the input tax wrongly claimed on the killing fees and the output tax on the skin sales were reasonable, particularly as they were based on information taken from the Appellant’s business records. We, therefore, uphold Mr McClelland’s assessment dated 17 January 2006 for £71,762.
  6. In view of our finding that Mr McClelland’s assessment dated 17 January 2006 was correct, we are satisfied that the Appellant was liable to pay misdeclaration penalties in the sum of £10,430. We found no circumstances which justified mitigating the penalty.
  7. Mr McClelland’s conclusions on the killing fees and skin sales formed the principal grounds for amending the Appellant’s VAT returns for 01/05 and 04/05. Mr McClelland made further adjustments by disallowing input tax claims where there were no supporting invoices. We are satisfied from our findings on the killing fees and skin sales that the amendments were soundly based. Regulation 29(2)(a) of the VAT Regulations 1995 requires a taxable person to hold a VAT invoice for the supply from another taxable person, in respect of which a claim for input tax is made. Mr McClelland was, therefore, correct to make the further adjustments where the Appellant did not hold invoices for the input tax claims.

Decision

  1. For the reasons set out above we dismiss the Appellant’s appeals against the assessment dated 17 January 2006, the misdeclaration penalties imposed 20 January 2006 and the amendments to the Appellant’s VAT returns for periods 01/05 and 04/05.
  2. The Appellant gave no reasons for not attending the Tribunal hearing. The Appellant failed to provide the Tribunal and the Respondents with documents supporting its Appeal. We are satisfied that the Appellant misused the Tribunal procedure within the meaning of the Hansard Statement on Costs in Tribunal Appeals dated 24 July 1986. In those circumstances we order the Appellant to pay the reasonable costs of the Respondents. The Tribunal gives leave to either party to apply for determination of the costs if they cannot be agreed between the parties.

MICHAEL TILDESLEY OBE

CHAIRMAN
Release Date: 7 November 2007

MAN/06/0112

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