20565

Input Tax – Assessment issued to reclaim VAT paid to trader:  Invoice including VAT unpaid for 6 months; transaction invoiced outwith the scope – supplier correcting its VAT with HMRC:  no proof of receipt of Credit Note by trader – group registration – whether assessment valid – yes – VATA 1994 s.26A.

EDINBURGH TRIBUNAL CENTRE

	POWER TV LTD	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Members):   Mrs Charlotte Barbour, CA, ATII
							  Mr K Pritchard, OBE., BL., WS

Sitting in Edinburgh on Monday 21 and Tuesday 22 January 2008

for the Appellant		Mr David Henry

for the Respondents	Mr Andrew Scott, Shepherd & Wedderburn, WS

© CROWN COPYRIGHT 2008.

DECISION

Introductory
This appeal is against an assessment in the sum of £680,115 plus interest thereon issued on 15 June 2006.  That was an amended assessment there having been two previous assessments varying, but little in the totals brought out, as due by the Appellant.

The Tribunal were favoured with two bundles of documents, one from each side, and heard evidence on oath from the Appellant’s representative and Director Mr David Henry, his two cited witnesses Mrs K Ross and Mrs F Bell, both officers of HMRC, who had had some involvement with the Appellant and Mr Henry about which details are given below.  Mr Scott for the Respondent led Mr Rhys Smithson, an employee of BT, William Paul and Norman Mutch both officers of the Respondent.  Mr Henry complained that he had not been notified that the latter two gentlemen were to give evidence.  The Tribunal took the view that that had no significance since the documentary evidence contained in substance the whole of those witnesses’ contribution to proceedings and the Appellant had produced several letters from both of them.

Grounds of Appeal
These read:  “The Limited Company that was contracted to BT was liquidated on 15 April 2005.  BT did not issue a credit note to the company and an assessment was issued several months after liquidation.  No amount is due by Power TV Limited.  The original assessment was removed”.

Issue to be determined
The issue before the Tribunal was whether the disputed assessment had been correctly made.

Factual Background
Matters raised by Mr Henry strayed beyond the contentions in the grounds of appeal but the Tribunal did not think it appropriate to confine Mr Henry to those since he was, in effect, a party litigant.  That however meant that he adopted a wide ranging scattergun approach with little regard to relevance.

The Appellant had applied for VAT Registration which was granted with effect from 2 May 2002 under number 801499041.  A company called Rapture TV (Scotland) Ltd (Rapture) was incorporated on 27 May 2002.  It did not register for VAT.  Mr Henry was the controlling Director of both companies.

On an inspection visit by Mrs Ross on 12 February 2003 it was noted that there had been included in the Appellant’s return invoices made out to Rapture TV (Scotland) Ltd.  These were correctly disallowed.  Some discussion took place on that matter and Mrs Ross advised that some other arrangement had to be made in order to reclaim that VAT.  There were two options, either Rapture should seek to register under a new VAT number or there could be a group registration.  Mrs Ross informed Mr Henry of the mechanics of applying for a group registration, gave him the appropriate information and pointed him to the website from which an application form could be downloaded or copies could be obtained from the local Customs Office.  She did not have application forms with her.  Mr Henry obtained and completed the application form in his own handwriting and signed it and sent it off.  Thereafter group registration took place under number 808748594.  The certificate was issued 27 February 2003 but effective from 1 January 2003 in which the Appellant was the representative member.  The implications of group registration were set out by the National Registration Unit in a letter dated 27 February 2003 and in particular the matter of joint and several liability.

Over a year after the group registration was in operation a further visit took place this time by Mrs Bell, (then Mrs Halcrow) who by letter dated 12/5/04 noted problems with the Appellant’s accounting, viz over-inflation of input tax claims and an under-declaration of £5,378.31.

Significantly she noted “you intimated at the time of my visit your inability to pay this debt”.

A further visit by Mrs Bell took place on 20 August 2004.  There she was made aware of the receipt by Rapture of an invoice relating to cancellation charges from BT detailing VAT of £680,283.48.  There was discussion about the Appellant claiming this amount and she wrote “I concur that you will be able to claim this amount on the next company VAT return.  However, I understand that there may be difficulty in paying this amount.  I must advise you that should your supplier need to treat this amount, or any part thereof as a bad debt in the future and seek to write an amount off, you will need to adjust your VAT returns by the amount written off and repay any input tax claimed by you to Customs and Excise”.

The sum of £680,283.48 was paid by the Respondent to the Appellant as group representative, which Mr Henry agreed had been received by the Appellant.

According to Mr Smithson, whose evidence we accept, BT had terminated the contract with Rapture on the ground of non-payment of debts amounting to about £380,000.

The termination carried with it the said invoice which claimed VAT on the termination charge.

At the time this invoice was received by the Appellant there was not any realistic prospect of the termination charges and VAT thereon being paid.  Rapture, however, continued to trade despite its apparent insolvency.

Mrs Bell, we infer, was aware of potential difficulty with payment hence the terms of her letter.

BT after internal consideration not specifically related to Rapture’s invoice, came to the view, in the Tribunal’s judgment correctly, that the termination charge they levied on such contracts was outwith the scope of VAT.  They took steps therefore to create a credit note which was for the VAT they had erroneously billed.  BT having discussed the matter with their dedicated customs officer took steps to correct the attribution of output tax they had made.  BT were refunded the output tax they had paid HMRC relating to termination charges.
Mr Smithson’s evidence, which we accept, was that such a procedure required to be undertaken in relation to several customers and that the credit notes were created mechanically and forwarded in normal course of post.  He accepted that there could possibly be a situation in which he could not establish beyond doubt that the note had been transmitted but it was progressed in normal course.  No other of their many customers complained that they had not received a credit note appropriate to them.

Mr Henry’s evidence was to the effect that he never received a credit note at the time in question.  Subsequently however he became aware of the existence of a credit note and ultimately received a copy of it.  When he was made aware of the existence of a credit note he took no steps to ascertain whether that was correct or not.

At no time did BT receive any money whether by way of payment of the principal debt or VAT from either the Appellant or Rapture.

Communication takes place between various VAT offices and particularly so when substantial sums are involved.  Accordingly the BT’s Customs Officer and those dealing with the Appellant in Edinburgh were made aware internally that no payment had been made of the input tax in question.

As a result Mr Paul visited the Appellant in May 2005.  He intimated that as 6 months had passed since the date of the BT invoice, 19 July 2004, and as payment had not been made by the Appellant it should have adjusted its VAT return to reflect the fact that it had not made the payment as it had claimed.  An assessment was accordingly raised for that amount.

That assessment was subjected to minor adjustments as further facts and details came to light but the final assessment issued was, basically, to reflect the fact that the Appellant had not made any payment whatsoever and had received from the Respondent £680,283 which the Respondent sought to recover.

No attempt has been made even to this date by the Appellant to rectify the situation whereby they are and have been holding that sum of money to which they have now no entitlement whatsoever.

Contentions for Appellant
We deal firstly with the Appellant’s contentions which depended upon the assessment of credibility.

The first of these was that there had been a mis-direction by Officer Ross in that it was asserted that she had directed the Appellant to apply for group registration on the basis that it would be the only way to reclaim VAT.  That, it was said, had given rise to difficulties which would not have arisen had the VAT accounting of Rapture been separately attended to.  The result of that mis-direction, which it was asserted was supported by the witness stating “I gave no directions” at an early stage in her evidence.  It was argued somewhat surprisingly to be the result that the Respondents became shadow Directors of Rapture and were therefore jointly and severally liable for the sum at issue.

The second contention was that no credit note had been issued by BT and accordingly the matter was still at large because, the Appellant suggested it could not act after Rapture was put into liquidation on 15 April 2005.  Since BT could not establish that they had despatched a credit note and more particularly that the Appellant had received it, it was argued that the assessment could not stand.

Thirdly, since the credit note did not comply with HMRC guidelines, it was asserted, the assessment could not be correctly raised and therefore could not stand.

Contentions for Respondent
The Tribunal in the first place has no jurisdiction to consider the issue if it is asserted that there had been a mis-direction given to the Appellant (see Vetplus Limited (No 19850)) but in any event any advice given was irrelevant to the appeal.  Mrs Ross’ evidence was that she had given no instructions but had explained the options.

It was incorrect to say that the liquidation of Rapture by voluntary resolution of the company leading to its liquidation on 15 April 2005 and dissolution in July 2006 meant that the matter of the incorrect claim by BT for input tax could not be corrected by Section 43 VATA.  Liquidation would be irrelevant.

On the evidence, relying upon Mr Smithson, an invoice was issued and that was followed by a credit note dispatched in the normal course.  Further by the stage that the matter of the credit note was raised as an issue, the Appellant was made aware of it and could have obtained it.  The fact that the invoice was approved for payment by two officers, Bell and Paul has nothing to do with the entitlement of the Respondent to reclaim money if the principal debt and VAT charged is not paid.  BT was correct in their conclusion that the charge was outwith the scope of VAT and that their error in issuing a VAT invoice required to be corrected.  It was.  In any event if VAT was in fact due on the invoice and whether BT were right or wrong about that, the amount assessed stands on the basis of the evidence of Mr Paul i.e. that the invoice was not paid.  After 1 January 2003 by section 26A of VATA 1994 as amended, the persons in the position of the Appellant ceased to be entitled to input tax credit at the end of a period of 6 months beginning with the date of the supply or the date the sum became payable.  Since the sum was not paid the assessment was correctly issued.

Decision of the Tribunal
The Tribunal in first place made an assessment of the credibility and reliability of witnesses.  They saw no reason to doubt the evidence of Mrs Ross who gave her evidence clearly and compellingly.  She stated, and we accepted, that she did not give a “direction or instruction”.  That her evidence is likely to be correct is reinforced by the general practice that if a direction is made by HMRC on matters relating to VAT it is given in writing.  It would be inappropriate to purport to give a direction to a trader as to whether he should have a single registration or multiple registrations.  It is for the trader to satisfy himself as to the most convenient course for him and adopt that.  There could be practical arguments on both sides and the trader must weigh it up.  We did not believe Mr Henry’s account of the meeting with Mrs Ross which was, we considered an afterthought seeking to find some support for the position adopted by the Appellant in not paying or accounting for the sum at issue when he knew full well he had not paid it.  In any event the events with which the Tribunal are concerned took place over a year after the fact of group registration.

Mrs Bell was seen as a credible and reliable witness.  The Tribunal noted her careful approach in her letter of August 2004.  As matters then stood there was a validly issued invoice on which VAT could be reclaimed.  There was no sufficient reason to refuse payment at that stage.  That formal approval for payment, however does not mean that HMRC accepted that the legal or factual situation underlying the invoice was finally determined and could not be revisited. 

The Tribunal had no hesitation in accepting Mr Smithson’s evidence which was given carefully and in which he was careful not to overstate matters.  For example he accepted that he could not prove in the sense of absolute proof that a credit note had been sent out.  He did prove that a credit note had been raised and that a copy of it was kept within the files of BT.  We take the view that the more likely series of events is that a credit note was created and dealt with in the normal fashion and sent out by BT.  That did not establish that the Appellant must have received it although that would be the more likely course of events.  We do not find that there is evidence that the Appellant did receive the credit note at the time it was issued by BT.  That said however the fact of the creation of a credit note became known, its existence was plain, the Appellant has seen it now and seen a copy of it before the raising of the appeal and we do not accept that the Appellant could not have been aware of the fact of that credit note.

On the fundamental and primary matter the Tribunal has no hesitation in upholding the assessment deriving from that made by Mr Paul for the reasons given by him.  The Appellant’s Mr Henry knew that payment was not made.  We find that in all circumstances he also knew that there never would or could be payment of the sum demanded by BT whether it contained VAT or not.  Accordingly when it came to the knowledge of Mr Paul that the sum had not been paid he correctly demanded its payment by way of an assessment as he was bound to do.  Retention of the said VAT money might well be said to involve dishonesty.

Result
In the result we dismiss the appeal.

The Respondent, unusually, moved for expenses in the event of success.  Expenses are not usually granted save in cases in which there has been a waste of time and or have demonstrably no merit.  In the light of our findings above there has been demonstrated to be neither logic, substance, merit or equity in the position adopted by the Appellant, further the calling of Mrs Bell and Mrs Ross as witnesses was irrelevant since they had nothing to say regarding the basic issues.  We have no hesitation in making an award of expenses which failing agreement will require to be taxed by the Auditor of the Court of Session in terms of the rules.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  1 FEBRUARY 2008

EDN/07/17