[2009] UKFTT 327 (TC)

TC00270

Appeal Number: MAN/2008/0843 

FIRST TIER TRIBUNAL TAX

VAT – INPUT TAX – Invalid VAT invoice – input tax claim denied  whether HMRC exercised its discretion reasonably as to alternative  evidence for input tax claim – Yes – Appeal dismissed  

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	MR ARASH RAZAIE	Appellant
trading as FOODLINE DELIVERY SERVICES

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      RAYNA DEAN FCA

Sitting in public at Manchester on 27 October  2009

Nigel Gibbon of Omnis VAT Consultancy Limited for the Appellant  
James Puzey counsel instructed by the Solicitor’s office  of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing against an assessment for VAT in the sum of £488,592 plus interest dated 13 May 2008.
2.	The Appellant was a sole trader operating as food wholesaler. On 1 April 2006 he took over the business as a going concern from his father. The assessment related to the recovery of VAT claimed by the Appellant on supplies purportedly made to him by Shahab Limited in the quarter ending 10/06.
3.	 The Appellant accepted that the invoices issued by Shahab Limited evidencing the disputed supplies were invalid in a material particular, in that the VAT registration number recorded on the invoices did not belong to Shahab Limited but to another trader.  Further Shahab Limited has never been registered for VAT.
4.	 In order for the Appellant to deduct input tax he must hold a valid VAT invoice. The Appellant did not hold valid VAT invoices for the supplies made by Shahab Limited, and, therefore, was not entitled as of right to claim VAT on those supplies. HMRC, however, has a discretion under regulation 29(2) of the VAT Regulations 1995 to permit input tax deduction on evidence other than a valid VAT invoice. Mr Jones, the assessing officer, refused to exercise his discretion in favour of the Appellant and decided that the input tax claim for the quarter 10/06 should be denied.
5.	The Appeal was brought on the basis that HMRC acted unreasonably in refusing to accept other evidence to support the Appellant’s claim for input tax.  This Tribunal has to decide whether the refusal was a decision which no reasonable body of Commissioners could have arrived at. In order for the decision to have been reasonable HMRC must have considered all relevant matters and must not have taken into consideration irrelevant matters. In short, has HMRC exercised its discretion in a defensible manner? If the Tribunal decides that the refusal was unreasonable, the Appellant is entitled to recover the VAT on the disputed supplies subject to any Appeal made by HMRC (see Kohanzad v C & E Commissioners [1994] STC 967). 
The Evidence
6.	Hamid Razaie gave evidence for the Appellant. Mr Razaie was the Appellant’s father and ran the business until it was transferred to his son as a going concern in April 2006. Stephen Jones, the assessing Officer, gave evidence for HMRC. A bundle of documents was presented in evidence.
The Facts Found
7.	During the three month quarter ending 10/06, the Appellant recorded 61 transactions with Shahab Limited which supplied the Appellant with various goods principally, Red Bull, Capri-sonne and Gillette Mach 3 razor blades..  The value of the transactions was in the region of £3.2 million, upon which the Appellant claimed input tax in the sum of £495,291.00.
8.	The Appellant purportedly sourced buyers for the goods before concluding the purchases from Shahab Limited . The Appellant operated on very low margins. For example, the unit cost for Red Bull was £11.88 which was sold on at a unit price of £11.98.
9.	The purchase price for the goods included the delivery to the Appellant’s customers. The goods from Shahab Limited were delivered direct to the Appellant’s customers because of the low margins. The Appellant never took delivery of the goods into his warehouse. The Appellant’s father suggested that some of Shahab’s deliveries went via the Appellant’s warehouse. The father, however, provided no documentary evidence in the form of delivery notes to support his assertion. He also admitted in cross examination that he did not see goods from Shahab Limited in the Appellant’s warehouses.
10.	The Appellant did not make payment for the supplies to a bank account held by Shahab Limited. Instead the payments were made by CHAPS to Integral Resources, which were evidenced by copies of the Appellant’s bank statements. According to the Appellant’s father, Shahab Limited instructed the Appellant to pay the invoices direct to Integral Resources. The father saw nothing unusual with the arrangement. He suggested that Integral Resources were the suppliers for Shahab Limited but provided no documentary evidence to support his suggestion. Further there was nothing in writing corroborating the payment instructions of Shahab Limited. The invoices in the name of Shahab Limited contained no details of its bank or specific payment instructions. In contrast the Appellant’s invoices included details of its bank account.
11.	 The invoice issued by Shahab Limited recited a VAT registration number which did not belong to the company. The registration number cited related to a partnership of which a director of Shahab Limited was a partner. Shahab Limited was not registered for VAT.
12.	The invoices of Shahab Limited gave details of its address, registered office, phone and fax numbers, and the Appellant’s details. The invoices were dated and numbered. They detailed the goods to be sold together with their unit price, total price, and the VAT payable at the rate of 17.5 per cent.
13.	The Appellant’s father stated that a Mr Ghulam Yahya Khan was the principal for Shahab Limited. The father referred to Mr Khan as Mr Yahya, and had known him for about 16 to 17 years. The father’s first contact with Mr Yahya was through his cash and carry business in Blackburn when he would come across Mr Yahya supplying the father’s customers with goods. At that time Mr Yahya ran a butchers supplying fresh Halal meat. The father developed an informal business arrangement with Mr Yahya calling on him to supply fresh produce to his customers. In 2004 Mr Yahya informed the father that he had opened a cash and carry and enquired whether he could supply goods to the father. The father did not take any supplies from him, although he visited Mr Yahya’s premises on Waterloo Street, Bolton. According to the father, the warehouse was big containing a range of goods. In the father’s view it looked very professional.  In June 2006, the Appellant, however, decided to take supplies from Mr Yahya.  The father stated that he still came across Mr Yahya supplying fresh produce to Asian restaurants in Rusholme. Recently the father met Mr Yahya who informed him that things did not go right with his cash and carry business, and it had ceased trading. Mr Yahya said he would be trading under a different name, but the father did not know the name of his new business.
14.	Mr Yahya asked for the Appellant’s VAT number when he commenced business with the Appellant. The father stated that he had never been asked before for his VAT number.  Mr Yahya in return apparently gave a copy of the VAT registration certificate for Shahab Limited. 
15.	 The VAT registration certificate was in fact a print from the EUROPA website comprising a VAT validation response with typed details for Shahab Limited below the response.  The validation response simply confirmed that the VAT number given was valid. The response did name the holder of the VAT number. The Appellant’s father confirmed that Shahab Limited typed its details on the form.  The EUROPA response was dated 24 October 2006, some four months after the commencement of  trading with Shahab Limited. The Appellant stated in a letter to Mr Jones dated 15 January 2007 that Mr Yahya printed the validation response from the EUROPA website.
16.	The Appellant carried out no commercial checks on Shahab Limited in respect of its creditworthiness and corporate status.
17.	On 11 August 2006 HMRC supplied the Appellant with a copy of the Statement of Practice: VAT Strategy: Input Tax Deduction without a Valid VAT Invoice (SP 7/2003). This Statement explained and clarified HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices.
18.	On 14 August 2006 HMRC sent the Appellant a letter explaining the problems with Missing Trader VAT Fraud. HMRC advised the Appellant to verify the VAT status of new or potential customers with the Redhill VAT Office. The father believed that the contents of this letter did not apply to the Appellant’s business because the Appellant was not trading in computer equipment and mobile phones.
19.	The Appellant’s documentary evidence regarding the supplies from Shahab Limited comprised solely the invalid invoice, and the corresponding Appellant’s sales invoice to his customers. There were no written terms and conditions for the supplies with Shahab Limited. There were no delivery notes evidencing the receipt of the goods from the Appellant’s customers. The father, however, pointed out that the customers would not have paid for the goods, if they had not been received. The father explained that the arrangements with Shahab Limited were typical of those in the market that the Appellant operated. The father illustrated his explanation by describing the arrangements with the Appellant’s customers for the products from Shahab Limited. The father stated that the market in which the Appellant traded was relatively small with well-known traders.
20.	The father accepted in cross examination that he played a minor role in the business after he transferred it to his son in April 2006.  The father had no involvement in the trades with Shahab Limited. The Appellant dealt with his customers.   
21.	On 29 November 2006 Mr Jones with a colleague visited the addresses quoted on the invoices issued by Shahab Limited. The unit on Waterloo Road was found to be a lock up with no apparent activity.  The registered office address was that of an accountant, Saleem & Co.  Mr Jones also visited the butcher’s shop ran by Mr Yahya  on 21 December 2006. He discovered that the shop was owned by a Mr Mia and a Mr Khan who had purchased the shop for £15,000 in March 2006. They had no contact with the vendor of the business since its purchase. 
22.	Mr Jones acknowledged that the Appellant had paid the VAT declared on its returns.
The Legal Requirements
23.	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. Section 24(6) (a) of the 1994 Act enables regulations to be made which provide for VAT to be treated as 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 HMRC may direct either generally or in particular cases or classes of cases. 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. Regulations 13 and 14(1) of the 1995 Regulations specify the contents of a VAT invoice. 
24.	Under regulation 29(2) of the 1995 Regulations HMRC is given the power to require a taxable person to hold or provide such other evidence in support of a claim for input tax. HMRC issued a Statement of Practice (SP 7/2003) effective from 16 April 2003, regarding the circumstances in which input tax recovery will be allowed in the absence of a valid VAT invoice. HMRC will consider a claim without a valid VAT invoice favourably if  a taxpayer is able to answer satisfactorily most  of the following questions:
(1)	Is there alternative documentary evidence other than an invoice (eg supplier statement)?
(2)	Is there evidence of receipt of a taxable supply on which VAT has been charged?
(3)	Is there evidence of payment?
(4)	Is there evidence of how the goods/services have been consumed within the claimant’s business or their onward supply?
(5)	How did the claimant know that the supplier existed?
(6)	How was the claimant’s relationship with the supplier established?
 
25.	The following conditions must, therefore, be met for input tax credit to be available:
(1)	a supply must have taken place;
(2)	the input tax credit must be claimed by the taxable person to whom the supply is made,
(3)	the supply must be chargeable to tax at the rate claimed;
(4)	the claimant must hold satisfactory evidence of his entitlement to input tax credit.
26.	The Appellant did not take the point that the evidential requirements of regulation 29(2) were not applicable to the circumstances where the supplier was not registered for VAT. The VAT & Duties Tribunal in Masood Ahmed Trading as New Touch (VAT decision number 20119) decided that this point had no merit (see paragraphs 75-79). For completeness the Tribunal adopts the reasoning in Masood Ahmed Trading and decides that the evidential requirements applied to the Appellant’s claim for input tax in respect of the supplies from Shahab Limited, even though Shahab was not registered for VAT. 
Reasons
27.	The starting point in this Appeal is that the Appellant conceded that he did not hold valid VAT invoices in respect of the supplies made to him by Shahab Limited. Thus the issue for the Tribunal is whether HMRC acted unreasonably in the exercise of its discretion not to accept the Appellant’s alternative evidence of his claim for input tax on the disputed supplies.
28.	Mr Jones’ reasons for refusing the Appellant’s claim were articulated in his decision letter dated 18 March 2008 which were:
(1)	The VAT registration number quoted on the invoices from Shahab Limited did not belong to Shahab Limited.
(2)	Shahab Limited has never been registered for VAT.
(3)	The Appellant did not make payments for the supplies to Shahab Limited. The Appellant was, therefore, complicit in the inability of Shahab Limited to discharge its VAT liability to HMRC.
(4)	 The Appellant commenced purchasing from Shahab Limited in late July 2006 and claimed VAT on those purchases within the 10/06 period. During that period HMRC alerted the Appellant to its requirements regarding input tax recovery on 11 August and 14 August 2006 (Statement of Practice and Redhill). The Appellant had ample opportunity to ask HMRC about Shahab Limited but failed to do so.
(5)	The check of the VAT number with the EUROPA website was inadequate in that it did not confirm ownership of the VAT number.
29.	The Appellant asserted that he acted in good faith throughout his dealings with Shahab Limited. He conducted his business with Shahab Limited in exactly the same manner as with his other customers. He accounted for VAT on his returns. The Appellant ceased doing business with Shahab Limited as soon as he became aware of HMRC’s concerns. The Appellant relied on the following evidence to demonstrate that HMRC had been unreasonable in not exercising its discretion to admit his input tax claims:
(1)	The Appellant held invoices from Shahab Limited evidencing the purchase of the supplies. Although the invoices were false in a material particular, the remaining details on the invoices were still good evidence of the supply, in particular the nature and the price of goods purchased, which could be connected with the sales invoices to the Appellant’s customers.
(2)	The sales invoices which showed that the Appellant had used the goods purchased from Shahab Limited for the purposes of his business.
(3)	The Appellant’s bank statements evidenced payment for the goods from Shahab Limited, albeit to a different legal person (Integral Resources).
(4)	The Appellant knew Mr Yahya of Shahab Limited for a considerable period of time. They had met in person and conducted business without any problems. The Appellant’s father had visited the warehouse for Shahab Limited, and formed the view that it was a professionally run business. 
(5)	The Appellant held a print out from the EUROPA website which indicated that the VAT number recited on the invoices was valid.  The Appellant had accepted in good faith that the print out was in fact the VAT registration certificate for Shahab Limited.
30.	The Tribunal did not share the Appellant’s confidence with the reliability of his evidence. The Tribunal considers the evidence seriously flawed with many shortcomings.
31.	The Appellant did not give evidence. He relied almost exclusively on the oral testimony of his father, who on his own admission held a significant reduced role with the business after it was transferred to his son in April 2006. The Tribunal was concerned with what the Appellant knew and did in relation to the dealings with Shahab Limited. In the Tribunal’s view the father’s evidence did not carry weight, particularly as he was keen to distance himself from the Appellant’s business with Shahab Limited when challenged in cross examination. The father accepted that he had minimal involvement with the business after his son took it over, which predated the disputed supplies.  
32.	The Appellant’s documentary evidence of the disputed supplies comprised invoices from Shahab Limited, sales invoices to his customers and bank statements. The invoices recited false VAT registration numbers, which in the Tribunal’s view casted considerable doubt on the authenticity of the whole document. The sales invoices were not accompanied by delivery notes acknowledging receipt of the goods by his customers. The Appellant accepted that he never saw the goods. They were purportedly delivered direct to the customers from Shahab Limited. The customers were not called by the Appellant to give evidence that they received the goods. The Appellant’s bank statements perhaps constituted his strongest evidence in that they revealed transfers of significant sums of money to and from his bank account which appeared to be connected with the supplies. The evidence of money transfers, however, was just that. The money transfers on their own were not compelling evidence that the documented supplies of goods actually took place. The fact that the Appellant paid a third party for the goods purportedly supplied by Shahab Limited undermined the evidential value of the money transfers for the Appellant’s case.  The Tribunal finds that there was no persuasive evidence that Shahab Limited supplied goods to the Appellant.
33.	 The value of the Appellant’s business with Shahab Limited was £3.2 million in a period of three months trading. The Appellant relied on his father’s knowledge and business dealings with Mr Yahya to give assurance of the bona fides of Shahab Limited.  The Tribunal’s considers the Appellant’s reliance on his father’s experience misplaced. His father had conducted no high value business deals with Mr Yahya. Moreover the Appellant was not transacting with Mr Yahya but with Shahab Limited. 
34.	The Appellant carried out no commercial checks on Shahab Limited. He did not know about its creditworthiness or corporate status. Further he made no enquiries with HMRC about the VAT status of Shahab Limited, despite receiving HMRC’s advice in the letters of 11 and 14 August 2009. The Tribunal’s rejects the Appellant’s evidence that the letters had no relevance to his business. The Statement of Practice clearly applied to all businesses making claims for input tax. The letter of 14 August was not directed solely at businesses dealing in mobile phones and computers. The Tribunal attached no weight to the EUROPA website extract as evidence of the bona fides of Shahab Limited. The Appellant did not himself search  the website. Shahab Limited provided the extract, the contents of which were not understood by the Appellant. Finally the extract was supplied on 24 October 2006, at the end of their trading relationship. In short the Appellant conducted no due diligence on Shahab Limited.  His failure to do significantly increased the risks of fraudulent VAT trading.
35.	Thus the Tribunal finds the following facts in respect of the Appellant’s trading with Shahab Limited:
(1)	The invoices of Shahab Limited contained false information regarding the VAT number of Shahab Limited, which cast considerable doubt on the authenticity of the whole documents.
(2)	There was no satisfactory alternative documentary evidence of the supplies made by Shahab Limited.
(3)	The Appellant paid a third party for the purported supplies from Shahab Limited.
(4)	The Appellant did not see the goods involved in the disputed supplies.
(5)	There was no evidence from the Appellant’s customers that they received the goods.
(6)	There was no persuasive evidence that the disputed supplies actually took place. 
(7)	The Appellant conducted no due diligence on Shahab Limited.
Decision
36.	Having regard to its findings of facts the Tribunal holds that HMRC exercised its discretion reasonably and in a defensible manner in denying the Appellant’s claim for input tax in quarter 10/06. The Tribunal dismisses the Appeal, and makes no order for costs.

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 27 November 2009

MAN/

Notes
1.	The Tribunal directed that the costs regime which operated prior to 1 April 2009 applied to this Appeal. 
2.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.