20982

Gayle :Lon/08/1012 and 1678

VAT – deduction of input tax – whether input tax creditable in respect of supplies for which no invoices held – whether input tax claimed related to supplies to be used in the Appellant’s business

VAT – cancellation of registration – jurisdiction of tribunal – conclusion: deregistration was warranted

LONDON TRIBUNAL CENTRE

NICHOLAS NEHEMIAH GAYLE

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS

Tribunal:CHARLES HELLIER (Chairman)

HELEN FOLORUNSON

Sitting in public in London on 16 December 2008

Mr Gayle in person

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

© CROWN COPYRIGHT 2009

1

DECISION

  1. This appeal (or rather the two appeals made by Mr Gayle which have been consolidated and are heard together) concerns events in the period from April 2007 to October 2008. That much is fairly clear.
  2. On 26 April 2007 Mr Gayle applied to be VAT registered. He made a second application on 8 June 2007. HMRC accepted both applications and gave him two VAT numbers. Mr Gayle submitted his first VAT return – that specified as being for the period ending on 30 September 2007 (the “09/07” period – we shall similarly describe other periods) on 9 September 2007, three weeks before the end of the period. That return bore the VAT registration number from (we think) the first application for registration. On 11 October 2007 Mr Gayle submitted a VAT return for the period to 31 October 2007 – again before the end of the period. That return bore the second registration number. Then further returns were submitted, under the first registration number, for the periods 12/07, 03/08, and 06/08. At some stage the second registration number was cancelled.
  3. Thus far the picture is relatively uncomplicated.
  4. Before us Mr Gayle explained his approach to the completion of VAT returns. He explained that he completed them on a cumulative basis. Thus if the VAT on his purchases and sales had been:

Sales Purchases

July – Sept 0710045

Oct – Dec 07nil70

Jan – Mar 081080,

he would have made the following entries on his VAT returns:

09/0710045

12/07100115

03/08110195.

5. Mr Gayle explained that his first sale had been of a number of printed tee shirts. He had been given cheques for £9,000 and £45,000 in payment. The VAT on their sale, £9450, was declared as output tax on the 09/07 return, together with input tax of £4,497.50 (which Mr Gayle told us was an error: it should have been £6902). But the cheques he had been given bounced and Mr Gayle did not receive the money. He has made no further sales. Thus for each period after 09/07 he considered that his cumulative output VAT was – since the inception of his registration – nil.

Leaving aside Mr Gayle’s return for 10/07 we now turn to the 12/07 return. This showed as indicated above, cumulative sales of nil. It also showed (after the correction of a manuscript error which we shall return to shortly) input VAT of £6902. On Mr Gayle’s evidence that is the cumulative VAT since the inception of his business, and the same figure as that which should have been shown as input tax in his first return, since he made no further purchases in this period.

7. Mr Gayle’s return for 03/08 reflects Mr Gayle’s evidence that he made no further sales and made no further purchases. Thus it records output tax of nil, and input tax claimed of £6902.

8. Mr Gayle’s 06/08 return again reflected no further sales in that period – so that his cumulative output tax was nil, but also reflected additional input VAT on purchases made by him (it appears mainly in March and April 2008). We assume that the early delivery of the 06/08 return precluded their inclusion on that return. These purchases we understood Mr Gayle to say included some £548 of VAT, and as a result his declared input VAT for that period was shown as £7450 (= 6902 + 548).

9. Mr Gayle’s approach to the entries in his VAT returns was not that which HMRC were expecting, or that which they recommended. HMRC’s expectation, where a trader has three-monthly returns, is that the entries for input and output VAT will reflect the VAT on sales and purchases for the three months ending with the return date rather than the cumulative figures. And that is indeed what the VAT Regulations contemplate since the prescribed form of return speaks of “VAT due in this period on sales and other outputs” and of “VAT claimed in this period on purchases and other inputs”, and the natural interpretation of those words is that they refer only to what has been sold or purchased in that period rather than cumulatively since registration.

10. But before we turn to the details (about which there is some greater confusion), we should note one other aspect of Mr Gayle’s evidence. He told us that his understanding was that he was entitled to repayment from HMRC in each quarter of the figure shown as the difference between cumulative output and cumulative input VAT. Thus, taking into account relief for the bounced cheques, he was entitled to payments of £6902 in each of the quarters 09/07, 12/07,and 03/08, and of £7450 in respect of 06/08. Mr Gayle explained that these payments would enable him to run his business and to employ someone, and that his employee would assist in the business of claiming further VAT repayments.

11. Now, Mr Gayle’s return for 09/07 showed £9450 of output tax (being the tax on the failed sale of £54,000), input tax of only £ 4,497.50 and EU acquisition VAT of £1,417.50. It thus indicated VAT due by Mr Gayle of £6370. On 10 December 2007 Mr Gayle submitted a form “Error on VAT Returns” on which he showed by reference to the 07/07 period (rather than 09/07) an amount repayable to him of £6902. On the form he explains:

“I had previously sent in a VAT for, but it was the first time I had ever sent a VAT form. I have now excepted my error and I am now positioning my purchases for my company which deals with printing and photography and music and cosmetics and telephone services using a server system – thank you.”

And on 21 January 2008 Mr Gayle sent a second Error on VAT Returns form showing by reference to the period 12/07 VAT repayable to him of £6902. At about the same time he resubmitted his 12/07 VAT return with a correction. The original VAT return had shown input VAT of:

“6,0902”

which was a manuscript error for

“6902”

which was, as Mr Gayle had explained to us, the cumulative input VAT to December 2007. Thus HMRC had, by the end of January 2008, received two Error claim forms for £6902 each, a 12/07 VAT return with a claim for £6902, and the 09/07 return with an amount originally shown due from Mr Gayle of £6370.

12. We mentioned the 10/07 VAT return. This return did not follow the pattern of the other VAT returns in so far as disclosure was concerned although like them it was received in good time- some three weeks before the period end. In this return Mr Gayle showed:

“1. VAT due on Sales8042

2. VAT due on acquisitions8042

3. Total VAT due (the sum of 1 and 2)8042

4. VAT reclaimed on purchases 8042

5. VAT to be paid or reclaimed8042”

13. From HMRC’s perspective all this was no doubt very confusing. They arranged a meeting with Mr Gayle on 18 February 2008. They learned from Mr Gayle of the bounced cheques and asked for documentary evidence of the inputs on which he claimed the £6902 input tax. Mr Gayle produced a number of petty cash slips but no invoices. HMRC were not satisfied with this evidence. They decided that the best course of action was to reduce both the input and output VAT in the 09/07 (and it appears the 12/07) returns to nil. In pursuit of this practical attempt at a solution various notices of assessment or of over declaration were issued to Mr Gayle.

14. On 22 February 2008 Mr Dowling from HMRC wrote to Mr Gayle explaining that this solution was not the correct one, and withdrawing the earlier notifications. He allowed and disallowed similar items with the same overall effect. On 8 April Mr Gayle was assessed with a misdeclaration penalty in respect of 12/07. On 14 April HMRC wrote effectively disallowing the £6902 input tax claim for 03/08. There was further correspondence.

15. On 23 July 2008 Alpa Adatia, one of HMRC’s officers, met Mr Gayle by prior arrangement. He had been asked to bring documentation supporting the £7,450 input tax claim in his 06/08 return (the reader will remember that this comprised the brought forward £6902 and the extra £548). Mrs Adatia was not convinced by the evidence offered by Mr Gayle and wrote to Mr Gayle indicating that the £7450 would not be paid. During the meeting she also formed the impression that Mr Gayle was not trading nor had he any real intention to trade in the near future: he had indicated that he had lost focus in June 2007, that he was on Jobseekers’ Allowance, and gave, she says in her witness statement, ambiguous replies to her questions about his business. She therefore notified HMRC’s National Registrations Section on 23 July 2008 and procured his deregistration with effect from the earlier date of 30 June 2008.

15. Mr Gayle appealed. It appears that he submitted two tranches of appeal forms. The first were dated 5 April, 22 April, and 20 February 2008. The second was dated 30 July 2008. The second dealt among other things with the cancellation of his VAT registration.

16. After the first set of appeals, Mr Gayle’s case was reviewed by Mr Priest of HMRC’s compliance unit. He wrote a long and careful letter to Mr Gayle, and started by explaining that he was unsure as to exactly what he wished to appeal against and what his grounds of appeal were. At the end of his letter he asked Mr Gayle whether he intended contesting four matters. Mr Gayle replied to that letter by circling two of those matters;

“2. Do you wish to dispute the fact that Ms Mort has disallowed the input tax you have claimed on VAT returns?

3. Do you wish to dispute the fact that Ms Mort has rejected your voluntary disclosures?”

17. Following his review Mr Priest also made some amendments to the way in which the various disallowances had been processed. In particular he made adjustments so that bad debt relief was given in the 03/08 return for the bounced cheques rather than in the 09/07 return.

18. In our judgement, this appeal is to be taken as an appeal by Mr Gayle in relation to the following issues:

(i) against his deregistration; and

(ii)against the disallowance of input tax (by whatever administrative instrument it was in the end effectively disallowed) in respect of (a) the £6902 and (b) the extra £548.

The relevant law

(a) input tax recovery

(i) the intended use of a supply

  1. Input tax forming part of the purchase price of a supply received by a taxable person may be credited or deducted only if that person intends at the time of receipt of the supply to use the supply for the purposes of his business, see Lennartz v Finanzamt Munchen III [1995] STC 524 and for example Independent Thinking Ltd [2008] UK VAT 20084.
  2. The test of the determination of the intention of the taxpayer is a subjective one: we are required to determine what was in the taxpayer’s mind at the time of the supply to him, see Ian Flockton Developments Ltd v C&E Comms [1987] STC 394.

(ii) the possession of a VAT invoice

Regulation 29 of the VAT Regulations deals with claims for input tax: —

“(1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

(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[that is to say a VAT invoice complying with that regulation];

(b)a supply under section 8(1) of the Act, hold the relative invoice from the supplier;…

provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a), (b), (c), (d), (e) or (f) above, such other documentary evidence of the charge to VAT as the Commissioners may direct.”

  1. It seems to us that the proper interpretation of para (2) is to treat it as a condition for the making of a claim rather than as a freestanding obligation imposed upon a taxpayer. Article 16 of the Sixth Directive (the Directive applicable at the relevant time) provides authority for that approach. We note that the tribunal in MS Vaughan [1996] VATDR 95 (VATD 14050 held that the requirement was that invoices be held at the time of making the claim rather than subsequently, although a Member State has the power to legislate so as to require production of an invoice -see Reisdorf 1997 STC 180
  2. We note the words in the tailpiece of para (2) – that the Commissioners might direct “generally” or in relation to particular cases. We therefore considered whether the Statement of Practice issued by the Commissioners in July 2003 and updated in 2007 contained anything which might be a general direction for these purposes. Para 1 of that statement provides:“This Statement of Practice explains and clarifies the Commissioners’ policy in respect of claims for input tax supported by invalid VAT invoices”
  3. The notice explains what “valid “ and invalid VAT invoices are, and indicates that the Commissioners have a discretion to allow input tax recovery in the absence of a valid invoice. Para 11 provides that:“As long as the claimant provides satisfactory answers to the questions in Appendix 2 and to any additional questions that may be asked, input tax deduction will we permitted” [our italics].
  4. Appendix 2 sets out questions as to other evidence of supply, payment, use, the agreement for the supply, and the existence of any assets supplied.
  5. HMRC submitted that this statement was “created in order to clarify what steps HMRC would expect taxpayers to take to establish the bona fides of suppliers in the area of goods subject to widespread fraud, before entering into deals” and that it was not a direction but an indication of standard checks the Commissioners would expect.
  6. It seems to us that the first paragraph of the statement and its later provisions make it clear that it was addressing the conditions which would be applied when a trader held something which might be an invoice but which did not meet all the criteria for a VAT invoice. It did not address the case where no invoice of any description was held. The italicised words noted above indicated to us that this statement was an indication of the way in which HMRC would exercise its discretion rather than a direction which would take effect under regulation 29 so that a taxpayer who fell within its terms would have by virtue of that direction a right, rather than an expectation, to input tax credit.
  7. Mr Manknell told us that there was, and we could find, no other publication which took effect as a general direction under regulation 29(2).
  8. We conclude that if a taxpayer does not hold a valid VAT invoice satisfying the relevant requirements of the Act, he may be entitled to input tax deduction only if HMRC exercise the discretion vested in them by para 29(2). There are other conditions for credit which also need to be fulfilled.
  9. That is not an end of the matter: as Scheimann J held in R(Kuhanzad) v C&E Comms [1994] STC 967, an appeal may be made against an exercise of that discretion, but on such an appeal the tribunal’s function is to consider whether HMRC exercised its discretion unreasonably rather than to exercise its own discretion afresh.

(b) Deregistration.

  1. A person is liable to be registered for VAT if, broadly, he makes taxable supplies over a threshold amount. (see para 1 Sch 1 VAT Act 1994). That amount was £60,000 per annum for 2006/7. Mr Gayle was not liable to be registered at any relevant time.
  2. A person who is not liable to be registered, is entitled to be registered if he satisfies HMRC that he makes taxable supplies or “he is carrying on a business and intends to make taxable supplies in the course or furtherance of that business”( see para 9 Sch 1 VATA).
  3. Para 13 Sch 1 VATA 1994 provides that the Commissioners may, if they “are satisfied that registered person has ceased to be registrable [ie liable or entitled to be registered]…cancel his registration from the date when he so ceased” to be registrable but may not do so unless they are satisfied that at that time he would be required or entitled to be registered (see para 13(2)(5) and (18) Sch 1 VATA).
  4. Mr Gayle was registered for VAT. He may in his circumstances be deregisteerd only if he ceased to be entitled to be registered. That is to say that he ceased to be someone who was carrying on a business and who intended to make taxable supplies in the course or furtherance of that business.
  5. Section 83 (a) VATA 1994 provides that an appeal lies against “the registration or cancellation of the registration of any person under this Act”.
  6. The question arises as to whether that tribunal’s jurisdiction in relation to an appeal against deregistration is supervisory only – that is to say that we may allow the appeal only if we are satisfied that the Commissioners’ decision was one which they could not reasonably have reached, or fully appellate – that is to say that we may allow the appeal if we are satisfied that the conditions about which HMRC are in para (2) required to be satisfied are not satisfied. In Anne Brookes [1994] V&DR 35 the tribunal held that the jurisdiction was supervisory only. That decision has been followed by other tribunals – see for example Gillamoor Ltd and Airdre Ltd VATD 20591. As Mr Manknell noted this was also common ground in Innova Inc (UK) 188989. We note that in Gray (t/a William Cory & Son ) v C&E Comms [2000] STC 880, Ferris J held that the language in para 1(3) of schedule 1 concerning registration, which used the words “if the Commissioners are satisfied “ meant that a tribunal could only interfere with the decision of the Commissioners if it is shown that the decision is one which no reasonable body of Commissioners could reach (see para[19]). The same phraseology appears in para 13(2) which strongly suggests that the same approach should be followed; we note however that in Banbury Visionplus v R&C Comms 1997 STC Etherton J, considering the tribunal’s jurisdiction in relation to special methods took an approach whose logic might suggest a different approach to the tribunal’s jurisdiction in the case of para 13. We therefore consider the issue on both bases.

Discussion