MASOOD AHMED Trading As NEW Touchappellant

20119

Value added tax – input tax – section 24 VATA – regulation 29(2) Value Added Tax Regulations 1995 – claim for deduction of input tax where supplier a taxable person but not registered – whether deduction for input tax can be claimed as of right – no – Ellen Garage (Oldham) Ltd v C & E Commissioners considered – whether Commissioners have discretion as to evidence required in respect of charge to VAT – yes – whether discretion exercised reasonably – yes – appeal allowed in part

LONDON TRIBUNAL CENTRE

MASOOD AHMED trading as NEW TOUCHAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

Tribunal:EDWARD SADLER (Chairman)

R G GRICE

Sitting in public in Birmingham on 1 and 2 March 2007

Raza Mithani of Counsel instructed by Speechly Bircham, for the Appellant

Matthew Barnes of Counsel instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

1

DECISION

Introduction

1. This is an appeal by Mr Masood Ahmed trading under the business name New Touch (“the Appellant”) against a VAT assessment made by the Commissioners of Her Majesty’s Revenue and Customs (“the Commissioners”) dated 28 June 2004. That assessment was made in consequence of a decision by the Commissioners to disallow as input tax claimed by the Appellant certain payments which the Appellant contends he made pursuant to invoices rendered to the Appellant by a trader carrying on business under the name Euro-tex (“Euro-tex”). The amount of input tax disallowed (and for which the assessment was made) is £72,951.00. In addition, the Appellant is assessed to interest, so that the total amount in dispute in this appeal is £76,692.85.
2. This case concerns the entitlement of a taxable person to claim as input tax amounts which he paid in good faith to a supplier who purported to charge him VAT when in fact the supplier was not registered for VAT. We are required to decide first in this case an important question of fact, namely whether or not the Appellant did in fact receive the supplies and make payment for them (including the purported VAT). If we decide against the Appellant on that question of fact then his appeal must be dismissed. If we find that the Appellant proves his case on the facts then we must determine how the law applies to those facts. The principal legal issues in this case are whether the Appellant has of right an entitlement to claim as input tax the purported VAT he paid, or whether he has no such entitlement; and if he has no such entitlement whether nevertheless the Commissioners have a discretion to allow him to claim those amounts as input tax, and if so, whether in this case the Commissioners acted unreasonably by failing to exercise that discretion in the Appellant’s favour, so that their decision should be set aside.
3. In summary it is the Appellant’s case that Euro-tex supplied the Appellant with goods (namely, items of clothing), and that the Appellant paid in cash the amounts invoiced by Euro-tex for those goods, including the VAT charged by Euro-tex in those invoices. The Appellant subsequently discovered from the Commissioners that although Euro-tex was registered for VAT purposes at the time the first two invoices were issued, the VAT registration of Euro-tex was then cancelled by the Commissioners. However, Euro-tex continued to issue invoices purporting to be VAT invoices, which the Appellant paid in good faith, having no knowledge of, or means of discovering, the changed VAT circumstances of Euro-tex until alerted to the situation by the Commissioners. This being so, the Appellant contends that since the value of the supplies made to him by Euro-tex exceeded the registration threshold, Euro-tex was required to be registered and therefore was a taxable person for VAT purposes, and in consequence the Appellant is entitled to claim as input tax all amounts charged to him as VAT by Euro-tex (whether Euro-tex charged him rightly so or not), relying on the principle established in the VAT tribunal case of Ellen Garage (Oldham) Ltd v Customs & Excise Commissioners [1994] VATTR 392 (“the Ellen Garage case”); alternatively, that he is entitled to claim as input tax the amounts charged to him as VAT by Euro-tex in respect of the initial two invoices (issued when Euro-tex remained VAT registered), and that in relation to the remaining invoiced amounts of purported VAT, the Commissioners have a discretion to allow those amounts as input tax and that in the circumstances of this case it would be unreasonable conduct on the part of the Commissioners if they failed to exercise that discretion in favour of the Appellant.
4. The Commissioners’ case in summary is that, first, the Appellant has failed to prove that the supplies were made by Euro-tex and that the invoiced payments (including the initial two invoiced payments) were made: accordingly, no question of a claim for input tax arises. (The Commissioners do not allege that the Appellant has been party to any fraud on the revenue.) Further, even if the Appellant can establish that the supplies and invoiced payments were made as the Appellant contends, in relation to all but the initial two invoices there was no taxable supply by Euro-tex (which had then been de-registered and could no longer make taxable supplies or issue valid VAT invoices) and in those circumstances the Appellant has no entitlement to claim the purported VAT as input tax, and the Commissioners have no discretion to allow such a claim. The Commissioners argue that the Ellen Garage case is distinguishable on its facts, and does not assist the Appellant. Finally, the Commissioners argue that if this is a case where they have a discretionary power to accept evidence other than valid VAT invoices so as to allow the Appellant’s claim for input tax, they have in the circumstances of this case exercised that power reasonably in reaching their decision not to accept such other evidence, and therefore the tribunal cannot set aside that decision.
5. It is our decision that the Appellant has established, to the required standard of proof, that Euro-tex made the supplies of goods in question and that the Appellant paid in cash the invoices (including purported VAT charged in those invoices) rendered by Euro-tex in respect of which the Appellant made his claim for input tax. In consequence the Appellant is entitled to a deduction as input tax for the VAT charged to him by the initial two invoices rendered by Euro-tex whilst it was registered for VAT, and we allow the Appellant’s appeal in relation to that VAT. In relation to the remaining invoices, we decide that Euro-tex was a taxable person making a taxable supply, notwithstanding that it was not then registered: the value of its supplies exceeded the registration threshold, so that it was required to be registered. In these circumstances the Appellant does not have an entitlement to claim the VAT as input tax, but must rely on the discretion of the Commissioners as to the evidence they require to substantiate the supplies and the charge to VAT. In this case the Commissioners exercised their discretion reasonably, and we have no basis for setting aside their decision. Accordingly the Appellant’s appeal fails in relation to these remaining invoices.

The relevant statutory provisions

1. The statutory provisions relevant to this appeal are as follows.
2. Section 4(1) of the Value Added Tax Act 1994 (“VATA”) provides:

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

It should be noted at this point that section 3(1) VATA defines a taxable person as follows:

A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.

1. Section 24(1) VATA provides the definition of input tax:

Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say –

(a)VAT on the supply to him of any goods or services;

(b)…

(c)…,

being (in each case) goods or services used or to be used for the purposes of any business carried on or to be carried on by him.

1. There is provision in section 24(6)(a) VATA for regulations to determine how input tax is to be evidenced:

Regulations may provide –

(a)for VAT on the supply of goods or services to a taxable person…to be treated as his input tax 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 the Commissioners may direct either generally or in particular cases or classes of cases;

1. Regulations have been made under this provision concerning the documents which will evidence and quantify input tax. They are found in the Value Added Tax Regulations 1995, 1995/2518. Regulation 29 is headed “Claims for input tax”, and the provisions relevant for the purposes of this appeal are as follows:

(2)At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –

(a)a supply from another taxable person, hold the document which is required to be provided under regulation 13…

provided 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.

1. Regulation 13 is concerned with the obligations of the person making the supply to provide to his customer a VAT invoice. Regulation 13(1) is the only provision relevant to this appeal, and is in the following terms:

Save as otherwise provided in these Regulations, where a registered person –

(a)makes a taxable supply in the United Kingdom to a taxable person…

he shall provide such persons as are mentioned above with a VAT invoice….

1. Finally, Regulation 14 stipulates what must be the content of a VAT invoice:

(1)Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars –

There then follows a list of matters, such as the time of the supply; the name, address and registration number of the supplier; the name and address of the customer; a description of the goods; the amount payable for the goods (exclusive of VAT); and the total amount of VAT chargeable.

1. Thus in overview, the scheme of the legislation is that a taxable person can treat as input tax only that which is VAT charged on a supply of goods or services made to him (that is, VAT on a taxable supply made by a taxable person in the course of his business), where the VAT is evidenced and quantified by a valid VAT invoice which he holds (i.e. an invoice issued by a registered person, and stating the particulars specified by Regulation 14). However, the Commissioners treat the proviso to Regulation 29 as giving them a discretion to accept, in place of the VAT invoice, other evidence that the taxable person has paid VAT in order for him to claim that VAT as input tax.
2. This scheme of things presents few, if any, difficulties where the taxpayer receives a supply of goods or services made by a VAT-registered person in the course of his business – such a supply will be a taxable supply made by a taxable person, and he will issue a VAT invoice which is the evidence the taxpayer requires to claim the VAT as input tax. If for any reason the taxpayer cannot produce a VAT invoice (for example, because the supplier fails to provide it, or the taxpayer loses it), the taxpayer has to produce other evidence that the supply was made and the relevant VAT paid, and then rely on the Commissioners acting reasonably in the exercise of their discretion to accept such other evidence.
3. The difficulties arise, as in this case, where, although the taxpayer holds what purports to be a VAT invoice which relates to a payment made by him for supplies received, the supplies in question were made by a person who at that time was not VAT-registered. The question then is whether, nevertheless, those supplies are to be regarded as taxable supplies made by a taxable person (taking into account that the definition of taxable person extends to someone who, although not registered for VAT, is required to be so), and if they are, whether the taxpayer can rely on the purported VAT invoice to claim the amount stated as VAT as input tax, or whether he must produce other evidence and rely on the Commissioners’ discretion.

The findings of fact

1. The first hurdle which the Appellant must surmount if his appeal is to succeed is to establish that Euro-tex made to him the supplies in question and that he paid Euro-tex the amounts (including the purported VAT charged) invoiced for those supplies. The burden of proof rests on the Appellant as he is seeking to claim relief for the input tax; and he must prove, to the standard of the balance of probability, that the facts are as he asserts them to be. At the hearing this issue occupied the greater part of the tribunal’s time. (The Appellant argued that, in relation to the first two invoices, issued at the time Euro-tex remained registered for VAT purposes, the production of those invoices, being valid VAT invoices, was sufficient in itself to entitle him to claim the VAT in question as input tax. We deal with this point below. For immediate purposes in making the necessary findings of the facts we will proceed on the basis that the Appellant is required to prove that all supplies and all payments were in fact made.)

The evidence

1. The evidence before us comprised a bundle of documents prepared jointly by the parties, and the evidence of witnesses, their evidence in chief being in the form of witness statements. In place of a witness statement, one of the witnesses for the Appellant had produced in support of his evidence an extensive set of papers relating to his analysis of the financial workings and performance of the Appellant’s business for the relevant period.
2. The documentary evidence was not in contention between the parties. It principally comprised the correspondence between the parties in the period leading up to the assessment under appeal; extracts from the notebook of the relevant officer of the Commissioners relating to meetings with the manager of the Appellant’s business (and the file notes produced by the officer as his record of those meetings); a copy of the certificate of registration for value added tax issued in respect of Mohammad Yousaf trading as Euro-tex; and 45 sales invoices, each bearing the name of Euro-tex and a VAT registration number, and each addressed to New Touch, and dating from 10 March 2002 to 29 May 2003.
3. The Appellant provided evidence from eight witnesses: the Appellant himself, Mr Masood Ahmed, the owner of the New Touch business; Mr Javid Akhtar, who is Mr Massod Ahmed’s brother and the manager of the business; Mr Andrew Pope, who, as a casual employee of the New Touch business, on occasion drove the business’s van to collect goods from suppliers; Miss Paula Lovelady, an employee of the New Touch business who at the relevant time was responsible for labelling and coding goods delivered to the business; Mr Maqood Akhtar, the manager of a shop in Plymouth located in the vicinity of the New Touch shop in Plymouth; Mr Barry Joyce, a friend of Mr Javid Akhtar, who from time to time assisted in unloading goods at the New Touch shop in Plymouth; Mr Shahzad Ahmed, the nephew of Mr Masood Ahmed and Mr Javid Akhtar, who introduced Euro-tex to New Touch, and acted as a point of contact between the two businesses; and Mr Alan Roderick Thompson, a chartered accountant engaged by the Appellant for the purposes of the appeal to analyse the accounts of the business with a view to offering his opinion as to whether or not those accounts substantiated the Appellant’s claims that the business had purchased and paid for the goods invoiced by Euro-tex.
4. For the Commissioners, Mr Barnes cross-examined all the Appellant’s witnesses save for Mr Masood Ahmed, Mr Maqood Akhtar and Mr Barry Joyce. Mr Massod Ahmed has little by way of English language skills, and since his evidence was, in all material respects, replicated in the evidence of Mr Javid Akhtar (who in practice runs the business), Mr Barnes helpfully proposed that he would not cross-examine Mr Masood Ahmed, but that his evidence should be treated as challenged by the Commissioners to the extent that they challenged the like evidence of Mr Javid Akhtar.
5. The Commissioners had one witness, Mr Richard John Phillips, a long-standing and experienced officer of the Commissioners, who, as a VAT Assurance Officer was the officer responsible for the enquiries leading up to the disputed assessment and for the decision (which resulted in that assessment) to disallow as input tax the claim made by the Appellant in relation to the Euro-tex invoices. Mr Phillips was cross-examined by Mr Mithani, who appeared for the Appellant.

Facts not in dispute

1. The following outline facts were not in dispute between the parties:

(1)The Appellant has owned the New Touch business since June 2001. The business comprises retail trading in men’s and women’s fashion clothing and accessories such as shoes, aimed at the lower end of the market. The business operates from shops in the West Country (St Austell, Plymouth, Tavistock and Bridgewater) and from two market stalls in Plymouth. The business has an annual turnover of approximately £1,000,000. There are four permanent staff employed by the business and a number of part-time staff.