[2010] UKFTT 304 (TC)

TC00591

Appeal number: LON/2007/0454 

VAT – Whether HMRC were unreasonable in the exercise of their discretion not to allow claims for input tax in absence of valid tax invoices – Yes – Whether the decision to refuse claims for input tax have been the same had HMRC acted reasonably – Yes – Appeal dismissed – Regulation 29(2) VAT Regulations 1995

FIRST-TIER TRIBUNAL

TAX 

	BEST BUYS SUPPLIES LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN BROOKS (TRIBUNAL JUDGE)
				Dr CAROLINE SMALL (MEMBER)									

Sitting in public at 45 Bedford Square, London WC1 on 17 and 18 May 2010

Timothy Brown, counsel, instructed by the VAT Consultancy for the Appellant

Richard Smith, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by Best Buys Supplies Limited (the “Company”) against an assessment, dated 28 July 2006, in the sum of £110,324 disallowing a claim for input tax made in the Company’s VAT return for the period ended 31 May 2006 on the basis that it was made in reliance on invoices that were invalid by reason of showing no VAT registration number and/or being issued by a deregistered trader.
2.	Although in its amended grounds of appeal the Company contended that the invoices on which it relied were valid, at the commencement of the hearing Mr Brown, for the Company, conceded that this was not the case and that the sole ground of appeal was that, in the absence of valid tax invoices, the Commissioners (“HMRC”) were unreasonable in not exercising their discretion to allow the claims for input tax under Regulation 29(2) of the Value Added Tax Regulations 1995.
Facts
3.	We heard oral evidence from the Company’s managing director, Monoj Patel, and Mark Peneron, the managing director of Checkprice UK Limited (“Checkprice”) for the Company and Mohamed Aniz Abdul-Karim, Robert Lamb and Alan Crombleholme for HMRC. There was a joint bundle of documents. Although there was no agreed statement of facts, the underlying facts were not disputed. 
4.	Mr Patel, whose family been involved in the retail business for many years, became bored after several years running an off licence and saw greater potential in the wholesale alcohol business. In 2005 the Company was incorporated as a vehicle for this purpose and was registered for VAT. Within a year its turnover had grown to over £2 million. The Company did not have any warehouse facilities of its own and only purchased goods after a customer placed an order with it. The goods were then delivered directly to the customer by the Company’s supplier as its margins did not allow for the cost of haulage. Customers were found by Mr Patel who was, as he told us, a trader always looking for a deal in this high volume business.  Mr Patel found customers through the contacts he had made at wholesalers and during the time he ran the off licence in addition to contacting alcohol traders listed Yellow Pages and other directories. 
5.	On 13 December 2005 the Company received a visit from HMRC officers Mr Abdul-Karim and Mr Paul Simpson. The purpose of the visit, as stated in Mr Abdul-Karim’s report was “to verify [the] supply chain for a new supplier” to another company. During this visit Mr Patel was informed that because the Company was involved in the supply of alcoholic drinks, a trade sector with a high incidence of fraud on the Revenue, it should take great care when entering into transactions and should perform due diligence checks on any potential suppliers to ensure that they were bona fide traders and that goods for which it paid were actually being supplied. Mr Abdul-Karim also told Mr Patel that one of the Company’s suppliers, Speedex Freight UK Limited, had failed to submit VAT returns and that any subsequent claim for input tax for of supplies made by Speedex would be disallowed. This was confirmed in writing by Mr Abdul-Karim in his letter to the Company of 15 December 2005 and as a result the Company stopped dealing with Speedex.  
6.	The Company had previously been approached by a Mr Anthony Rajah Samson of Samson Traders UK Limited (“Samson”), which became its main suppliers from March 2006. However, before any transactions took place Mr Patel undertook due diligence checks on Samson obtaining details of its registration and a copy of its Certificate of incorporation from Companies House on 21 February 2006 and contacting the National Advice Service of HMRC on 1 March 2006 by telephone to verify its VAT registration number. Although Samson’s VAT registration number was confirmed by HMRC as valid, Mr Patel was told that this “confirmation cannot be regarded as authorisation by the Department for you to enter into commercial transactions with the trader. Any input tax claimed you make may be subject to further verification by us.”
7.	Mr Patel described a typical transaction between the Company and Samson which, insofar as it involved Checkprice, was confirmed by Mr Peneron. After receiving an order, usually by telephone from Checkprice, Mr Patel would contact Samson by telephone and order supplies of wines and beers which Samson would then deliver to Checkprice. The Company would invoice Checkprice for these goods and receive payment either by an exchange of goods or in cash. Payment would then be made to Samson in cash by Mr Patel at Samson’s office in Edgware. Although the Company had agreed credit terms of 7 to 14 days with Samson Mr Patel explained that, in practice, credit was usually given for a longer period. Mr Patel informed the tribunal that Samson used a serviced office in Edgware without warehouse facilities which was different to its registered address and that he did not consider it necessary to ask about the location of the warehouse or how Samson obtained its stock. He accepted that it did not appear to make commercial sense for Samson to supply Checkprice via the Company, when it could have cut Company out of the deal and supplied directly to Checkprice, but said that this is what happened. 
8.	In addition to its trade in alcohol Samson had also been involved in transactions concerning computer chips, hardware and mobile phones. It had failed to submit VAT returns and there was no evidence of it trading from its registered address.  As a result Mr Robert Lamb, the HMRC officer who visited Samson’s premises on 21 April 2006, posted a VAT deregistration notice through the door. Similarly there was no-one available from Samson on 4 May 2006 when HMRC visited the serviced office in Edgware. In addition, its director and accountant failed to attend a pre-arranged meeting with HMRC on 16 May 2006 at the Edgware office. A missing trader assessment in excess of £36 million was issued to Samson on 9 May 2006. No appeal has been made against this assessment. 
9.	On 6 June 2006 Mr Abdul-Karim contacted Mr Patel by telephone to arrange an inspection of the Company’s books and records the following day. During the telephone conversation, when informed by Mr Patel that the Company was receiving supplies from Samson, Mr Abdul-Karim told Mr Patel that he had concerns with these supplies as Samson appeared to have been deregistered for VAT from April 2006. Mr Abdul-Karim said that he would make further enquiries in this regard and advise Mr Patel accordingly. However, rather than wait for Mr Abdul-Karim, Mr Patel made his own enquiries and contacted Samson himself receiving a letter, by fax, dated 6 June 2006 in reply which stated:
 Further to your query regarding the registration of Samson Traders Ltd we are in the process of providing Customs and Excise with all relevant information that they have requested following a recent meeting with them.
In the meantime it appears that we have been de-registered, but I can assure you that this is only a temporary measure imposed by Customs until we provide them with information they require, which is currently in hand.
I apologise for any inconvenience this may have caused you, but please do rest assured that the penalty imposed by customs and excise is a temporary measure.
10.	When Mr Abdul-Karim visited the Company on 7 June 2006 Mr Patel expressed his concern at the news that Samson had been deregistered and explained that he had only known of this when told by Mr Abdul-Karim on the telephone the previous day. Mr Abdul-Karim said that Mr Patel told him that when he (Mr Patel) last visited Samson there was no sign of it trading but Mr Patel did not agree saying that he had told Mr Abdul-Karim that Samson’s office had been closed and the director was unavailable that day.
11.	While inspecting invoices from Samson during his visit, Mr Abdul-Karim found that 19 of the 43 invoices were dated after 21 April 2006, the date of Samson’s deregistration, and that 15 (including five dated before 21 April 2006) of these did not carry Samson’s VAT number and, as such, were not valid VAT invoices. Mr Patel explained that the Company had paid these invoices and had received receipts acknowledging payment from Samson on which its VAT number had been included. However, as the Company had claimed the input tax in its 05/06 return, Mr Abdul-Karim issued an assessment for £110,324 on 28 July 2006 disallowing the deductions of input tax based on the invalid invoices i.e. those issued before 21 April 2006 that did not show Samson’s VAT number and those issued after that date following Samson’s deregistration. 
12.	The basis of the assessment was explained in Mr Abdul-Karim’s letter to the Company of 25 July 2006 which enclosed a schedule of its purchases from Samson. After referring to his visit on 7 June 2006 and transactions between the Company and Samson the letter states:
The Commissioners of HM Revenue and Customs have decided to disallow you claim to input tax 24 invoices out of the 43 …
In reaching this decision the following points have been taken into consideration:
•	Samson Traders UK Ltd ceased to be registered for VAT with effect from 21/04/06, therefore any VAT shown on invoices after 21/04/06 is not VAT and therefore does not fall to be deducted as Input Tax by your company under the provisions of s26 of the Value Added Tax Act 1994.
•	In addition to the above, I had brought to your attention that Samson Traders UK Ltd had failed to quote their VAT registration number on a number if invoices and again, these have been identified on the attached schedule. These invoices are deemed as invalid VAT invoices in accordance with the Value Added Tax Regulations 1995 reg.14(1).
•	Our enquires have revealed that on 21/04/06 Samson Traders UK Ltd were classed as a ‘Missing Trader’. In reply to this you have produced a letter from Samson Traders UK Ltd dated 06/06/06 confirming that they were aware of their VAT de-registration but assuring you that this is a temporary measure. In the light of this you may wish to pursue this matter with Mr Samson,
In respect of the above I am aware that you have based the recovery of this Input Tax on the following facts – 
a)	You had not been aware of Samson Traders UK Ltd being deregistered for VAT at the time of making these supplies, and
b)	On 01/03/06 you verified the VAT registration number for Samson Traders UK Ltd as valid through our National Advice Service (NAS).
However, during our meeting in December 2005 you were made aware of your ‘Duty of Care’ regarding your part in the alcohol supply chain. Through the evidence you have provided for the purchases from Samson Traders UK Ltd, other than verifying the companies VAT registration number through the NAS you have not been able to demonstrate that reasonable steps were taken by you to ensure that these supplies were ‘bona fide’.  
Your claim to Input Tax of £110,324 (rounded) on 24 of the invoices from Samson Traders UK Ltd will be disallowed …
13.	On 13 September 2006 the VAT Consultancy, acting on behalf of the Company, wrote to HMRC “to appeal against a decision made regarding the [Company] and recovery in respect of his supplier [Samson].” Enclosed with the letter were amended invoices from Samson which included its VAT number and also a copy of a letter, dated 2 August 2006, from Samson to the Company stating:
Further to your letter regarding invoices without VAT numbers attached, please note that this was an administrative error on our behalf: as we appeared to have sent to you the pro forma invoices ere copies of the amended invoices.
Please find attached the following [amended ] sales invoices ….
14.	The letter from the VAT Consultancy was treated by HMRC as a request for a review of the decision to disallow input tax as is clear from the letter of HMRC to the Company, dated 21 September 2006, which refers to the “your accountants letter of 13 September 2006 regarding reconsideration of [an] Assessment” and states:
As you have requested, we will be carrying out a reconsideration.
…
When we have completed the reconsideration, we will advise you of the result in writing.
15.	Mr Alan Crombleholme was the officer of HMRC responsible for the reconsideration. In his initial letter, dated 29 September 2006, to the VAT Consultancy he explained that he had “enclosed copies of this letter to both the parties in dispute” by which, as he explained, he meant the Company and Mr Abdul-Karim asking that further information be provided to him. He wrote:
There is certainly further documentation that I will need to see in order to make a decision in this matter and I should be glad if the parties holding these documents will make them available to me. There will be corresponding sales invoices to Checkprice (UK) Ltd in respect of the invoices – I will need to see copies of these as also the commercial documentation (orders from Checkprice, delivery notes, etc.) Also a copy of the Department’s letter of 18 August 2006 which I have not seen. A copy of the schedule of 24 disallowed purchase invoices would also be appreciated. On a commercial level would I be correct in assuming that a stock valuation would be nil on account of the style of trading. I should be glad if the parties would agree between themselves as to who forwards me what.
16.	On 27 October 2006 Mr Crombleholme again wrote to the VAT Consultancy sating:
My letter of 29 September refers. I have not heard from either party in respect of the disputed input tax reclaim. This being the case I propose to close my case in 14 days from the date of this letter unless good cause can be shown why it should remain open. 
17.	In a further letter to the VAT Consultancy, dated 15 November 2006, Mr Crombleholme wrote:
There is simply insufficient information for me to make a decision in the matter.
18.	In response to the letters of 29 September and 27 October the VAT consultancy enclosed with its letter of 17 November copies of invoices the Company had issued to Checkprice (although these do not correspond to the invoices it received from Samson, for example, the Samson invoices refer to the supply of wines and beers whereas the Company’s invoices to Checkprice are only in respect of beers). It also confirmed that the Samson invoices had been paid and that the goods concerned had been despatched by Samson to Checkprice. These were acknowledged by Mr Crombleholme in his letter of 22 November 2006 who wrote “I haven’t ruled on the original documents yet!” and sought further information regarding payment for the goods by the Company.  
19.	Although the VAT Consultancy did respond the matter did not progress further and on 13 February 2007 Mr Crombleholme wrote to the VAT Consultancy in the following terms:
As notified in my letter of 15 November 2006 there is no active reconsideration in respect of [the Company] following your failure to supply the information required nor is it for you to determine what information is or is not relevant to the outcome of the case. As you still appear to be withholding co-operation I see no point in continuing this correspondence.
…
In view of your continuing failure to attend to these matters I have no alternative but to ask that the debt be desuspended …
I would also remind you that any tribunal application should now be made as an out of time appeal. …
20.	Mr Crombleholme accepted that, in the absence of further information, no decision was made on reconsideration and therefore the original decision (i.e. the assessment made by Mr Abdul-Karim) stood. He also confirmed that HMRC would have exercised their discretion as to whether to allow claims for input tax in the absence of a valid Vat invoice in accordance with the then current Statement of Practice issued in July 2003 – ‘Input Tax deduction without a valid VAT invoice’ although he agreed that this does not have the force of law. 
21.	Paragraphs 18 to 20 of the Statement of Practice provide:
How will Customs apply their discretion?
17. …
18. For supplies of goods listed at Appendix 3, claimants will be expected to be able to answer satisfactorily all or nearly all of the questions at Appendix 2. In addition, they are likely to be asked further questions by Customs in order to test whether they took reasonable care in respect of transactions to ensure that their supplier and the supply were ‘bona fide’.
19. As long as the claimant can provide satisfactory answers to the questions at Appendix 2 and to any additional questions that may be asked, input tax deduction will be permitted.
20. Decisions on when to allow disallow VAT claims will only be made after an independent central review of the case has been carried out.  
22.	Appendix 3 lists “supplies of goods subject to widespread fraud and abuse” and includes alcohol while Appendix 2 consists of the following list of questions which as is made clear in the Appendix, is not exhaustive as additional questions may be asked in individual circumstances:
1. Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?
2. Do you have evidence of receipt of taxable supply on which the VAT has been charged?
3. Do you have evidence of payment?
4. Do you have evidence of how the goods/services have been consumed within your business or their onward supply?
5. How do you know that the supplier existed? 
6. How was your relationship with the supplier established? For example:
•	How was contact made?
•	Do you know where the supplier operates from (have you been there)?
•	How do you contact them?
•	How do you know they can supply the goods or services?
•	If goods, how do you now the goods are not stolen?
•	How do you return faulty supplies?
Law
23.	Section 3(1) of the Value Added Tax Act 1994 (“VATA”) provides that “a person is a taxable person for the purposes of this Act while he is, or is required to be registered under this Act.” 
24.	Input tax, in relation to a taxable person means “VAT on the supply to him of any goods or services …being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.” (s. 24(1) VATA). It is therefore necessary to establish that a supply has taken place before any claim to deduct input tax can be made. 
25.	In its judgment in Reisdorf v Finanzamt Koln-West [1997] STC 180 the European Court of Justice confirmed at [31] that:
“… art 18(1)(a) and art 22(3) of the Sixth Directive permit the member states to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the member states themselves, and confer on them the power to require production of the original invoice in order to establish the right to deduct input tax, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place.”
26.	The power of HMRC to admit other evidence to establish that the transaction in respect of which a claim to deduct input tax is took place is contained in Regulation 29(2) of the Value Added Tax Regulations 1995 which, insofar as is material to the present appeal provides:
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 other generally or in relation to a particular case or classes of cases, a claimant shall hold or provide such other evidence of the charge as the Commissioners may direct.  
27.	This gives HMRC a discretion to accept other evidence, as an alternative to an invoice, that a supply has taken place and allow a deduction of input tax. The jurisdiction of the Tribunal in such a case, where there is an appeal against the refusal by HMRC to exercise their discretion, is supervisory.  
28.	Schiemann J (as he then was) said in Kohanzad v Commissioners of Customs and Excise [1994] STC 697 at 969: 
“It is established that the tribunal, when it is considering a case where the commissioners have a discretion, exercises a supervisory jurisdiction over the exercise by the commissioners of that discretion. It is not an original discretion of the tribunal; it is one where it sees whether the commissioners have exercised their discretion in a defensible manner. That is the accepted law in this branch of the court's jurisdiction, and indeed it has recently been decided that the supervisory jurisdiction is to be exercised in relation to materials which were before the commissioners, rather than in relation to later material. The cases which establish these propositions are Montalbano v Customs and Excise Comrs (LON/85/591, unreported), a tribunal decision released on 19 June 1986; another tribunal decision, this time released on 18 August 1986, Morgan v Customs and Excise Comrs (LON/86/165, unreported); and a very recent decision of Dyson J only decided on 13 July 1994 called Customs and Excise Comrs v Peachtree Enterprises Ltd [1994] STC 747.
It is, of course, well established that in this type of case, the burden of proof lies on an appellant to satisfy the tribunal that the decision of the commissioners was incorrect.”
29.	In John Dee Limited v Commissioners of Customs and Excise [1995] STC 941 Neill LJ, giving the judgment of the Court of Appeal said, at 950:
“The task of the tribunal, though appellate rather than supervisory, is therefore very similar, if not identical, to the task of a court on judicial review of an administrative decision. But it is more satisfactory to avoid references to Wednesbury itself and instead to follow the guidance given by Lord Lane in the Corbitt case where he said ([1980] STC 231 at 239, [1981] AC 22 at 60) that the tribunal could only properly review the commissioners' discretion—
'... if it were shown the commissioners had acted in a way in which no reasonable panel of commissioners could have acted; if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight.'
In the Corbitt case Lord Salmon dissented but the other law lords agreed with Lord Lane's speech.”
30.	He continued, at 952:
“In examining whether that statutory condition is satisfied the tribunal will, to adopt the language of Lord Lane, consider whether the commissioners had acted in a way in which no reasonable panel of commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The tribunal may also have to consider whether the commissioners have erred on a point of law. I am quite satisfied, however, that the tribunal cannot exercise a fresh discretion on the lines indicated by Lord Diplock in Hadmor. The protection of the revenue is not a responsibility of the tribunal or of a court.”
31.	As the task of the Tribunal, is similar to that of a court on a judicial review, it would seem that even if the exercise of the discretion had been unreasonable the decision will stand if it would have been the same had the matter had been dealt with properly. Although not a tax case, in Merton London Borough Council v Williams [2002] EWCA Civ 980, [2003] HLR 20, Manse LJ said. [at 43]:
“Mr Latham [counsel for the defendant] accepts that a court may confirm a decision otherwise vitiated by procedural irregularity if it can properly be said that the decision would inevitably have been the same even if the matter had been dealt with properly: see Barty-King v. Ministry of Defence [1979] 2 AER 80; Hussain Ali v. Somirun Ness v London Borough of Newham [2001] EWCA Civ 73; and he referred us to R. v. City of Westminster, ex p. Ermakov (1995) 28 HLR 819, where, at pp. 833-4 Hutchison LJ endorsed a previous statement by Schiemann LJ “that judicial review is a discretionary remedy and that relief may be refused in cases where, even though the ground of challenge is made good, it is clear that on reconsideration the decision would be the same”. Mr Latham also started his oral submissions by expressly recognising a need to establish that there was a real prospect of successful judicial review proceedings.”
Discussion and Conclusion
32.	The first question for us to consider is whether the supplies to the Company from Samson, on which its claim for input tax is based, actually took place. This is a perquisite to any claim to deduct input tax and in the absence of any supply the Company’s appeal cannot succeed.
33.	Mr Smith, for HMRC, contends that there is insufficient evidence for the Company to establish that these supplies took place; who the supplier was; whether the supplier was a taxable person; what was supplied; and the amount paid for the supply including VAT. He reminded us that Samson is the primary source of what little available evidence there is and that it is a “missing trader” which dealt in computer chips, hardware and mobile phones, all of which are commonly used for fraud, and has defrauded the Revenue of over £36 million. He suggested that had Samson been a legitimate trader we would have expected to hear evidence from its director Mr Samson, but that we have not done so.
34.	He also referred to the fact that Mr Patel did not know the source of the goods before they were obtained by Samson and that he had not seen them himself as they were delivered by Samson directly to Checkprice. He commented on the lack of commercial logic in the supply arrangements and suggested that the Company was an unnecessary part in the chain.
35.	For the Company, Mr Brown submits that there is evidence to establish, on a balance of probabilities, that the supplies took place. He points to the fact that there were 43 transactions between the Company and Samson which took place in identical circumstances and that Mr Abdul-Karim accepted that in 19 of these the Company was entitled to deduct input tax and only disallowed the input tax in respect of the other transactions because of the lack of VAT numbers on 15 of the invoices. He contends that even if the invoices and receipts from Samson are not valid VAT invoices they are still evidence of a supply to the Company by Samson which at the time of the supply was a “taxable person” in that before 21 April 2006, the date of its deregistration, it was registered for VAT and after 21 April 2006, given the extent of its turnover, it was required to be registered for VAT. 
36.	Mr Brown contended that the evidence of Mr Patel and Mr Peneron of Checkprice was that goods were supplied directly to Checkprice by Samson although not seen by Mr Patel. As for payment for the goods Mr Patel said that he did go to Samson’s office and make payment in cash. We were reminded, by Mr Brown, that Mr Patel was asked in cross examination about the lack of commerciality in revealing the Company’s suppliers to its customers. However, if it was poor commercial practice to reveal suppliers how could Mr Patel be expected to know who supplied Samson? As there was no evidence that the goods came from smaller suppliers they must have come from somewhere and Mr Brown submitted that, on a balance of probabilities, they were supplied by Samson.
37.	Given that there were 43 transactions between the Company and Samson all of which took place in similar circumstances and that it was accepted by HMRC that the Company was entitled to deduct input tax, and therefore that there was a supply, in 19 of these we conclude that there were also supplies made by Samson to the Company in the other 24 transactions as evidenced by the invoices on which input tax has been disallowed. 
38.	We find support for this conclusion in the letter that Mr Abdul-Karim sent to the Company on 25 July 2006 (which we have quoted in paragraph 12, above) explaining the basis of the assessment disallowing the claim for input tax. This letter refers to the Company not being aware of Samson’s deregistration “at the time of making these supplies” and it is apparent that the concern of Mr Abdul-Karim at the time of writing was not whether there had been any supplies to the Company by Samson but the lack of a VAT number on, and the dates of, the invoices in 24 of the 43 transactions.
39.	Having found that the supplies to the Company by Samson on which its claim for input tax is based did take place, it is necessary for us to consider whether HMRC were unreasonable in the exercise of their discretion not to allow the deduction of input tax claimed by the Company. 
40.	As is clear from the authorities HMRC would have exercised their discretion unreasonably if they had acted in a way in which no reasonable panel of commissioners could have acted; if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight (Commissioners of Customs and Excise v J H Corbitt (Numismatists) Ltd [1980] STC 231 at 239, [1981] AC 22 at 60). 
41.	Mr Smith submits that the July 2003 Statement of Practice, which is HMRC’s interpretation of how their discretion should be applied in common circumstances but which does not fetter their discretion, provides an entirely reasonable approach to the question of whether a person should be afforded the right to deduct input tax in the absence of valid VAT invoices and that where a claim falls outwith that approach it is perfectly reasonable for HMRC to reject it. He referred to the reconsideration exercise undertaken by Mr Crombleholme submitting that as there was insufficient evidence for him to make a decision it was entirely reasonable to uphold the assessment made by Mr Abdul-Karim. He further submitted that even if that decision was procedurally flawed, as it would have inevitably been the same had the matter been dealt with properly, the assessment should be upheld and the appeal dismissed in accordance with the decision of the Court of Appeal in Merton v Williams.
42.	Mr Brown submitted that, despite their letter of 21 September 2006 (to which we have referred at paragraph 14, above) stating that they will do so, HMRC have failed to carry out a reconsideration in this case which, he submits, is in itself unreasonable. Also, as a consequence of the lack of any reconsideration, HMRC have failed to take account of relevant evidence provided by the Company after the date of assessment. Although he accepted that the task of the Tribunal in such cases was similar to that of a court in a judicial review case Mr Brown reminded us that this was not a judicial review case and so far as he was aware Merton v Williams had not been applied previously by the Tribunal
43.	In addition to HMRC’s letter of 21 September 2006, to which we were referred by Mr Brown, stating that a “reconsideration” would be undertaken, we note that paragraph 20 of the Statement of Practice provides that decisions on when to disallow VAT claims “will only be made after an independent central review of the case has been carried out.” However, from the evidence of Mr Crombleholme, who was responsible for carrying out the review, and his correspondence with the VAT Consultancy it would seem that there was no reconsideration or review in this case at all. For example Mr Crombleholme’s initial letter to the VAT Consultancy, of 29 September 2006, seeks information to enable him to make a decision. In his letter of 27 October 2006 he threatens to close the case in 14 days as he has not heard from either party. On 15 November 2006 he says there is “simply insufficient information” available to make a decision and after receiving copies of invoices the Company had issued to Checkprice wrote on 22 November 2006 “I haven’t ruled on the original documents yet!” His final letter of 13 February 2007 to the VAT Consultancy states that because of the failure to provide him with information there “is no active reconsideration”. 
44.	In the absence of a review or reconsideration, relevant information provided by or on behalf of the Company subsequent to the issue of the assessment in July 2006, such as the due diligence information Mr Patel obtained on Samson, the amended invoices which included Samson’s VAT number, the letter from Samson regarding the “pro-forma” invoices and the Company’s invoices to Checkprice showing the onward supply of the goods, has been disregarded and has not been taken into account by HMRC in the exercise of their discretion. 
45.	By disregarding matters to which they should have given weight and failing to take account of all relevant matters we find that HMRC have acted unreasonably in the exercise of their discretion to disallow the Company’s claim for input tax. However, the decision of HMRC to disallow the claim for input tax will stand if we find that it would have been the same had HMRC acted reasonably in the exercise of their discretion which would have been the case had Mr Crombleholme carried out the review or reconsideration and taken account of all relevant matters (Merton v Williams).
46.	We accept Mr Smith’s submission that the 2003 Statement of Practice although it is not binding on the Tribunal (Pexum Limited v HMRC (2006) VTD 20083) does provide a reasonable approach to the question of how HMRC should apply their discretion to allow a deduction of input tax in the absence of a valid VAT invoice. Appendix 3 of the Statement includes alcohol as a type of supply which is subject to “widespread fraud and abuse”. Under paragraph 18 any person seeking to deduct input tax in respect of supplies listed in appendix 3 would be expected to be able to answer all or nearly all of the questions listed in appendix 2 (which we have set out in paragraph 22, above) and be asked further questions in order to test whether they took reasonable care in respect of transactions to ensure that their supplier and the supply were ‘bona fide’. 
47.	As Mr Smith points out in his skeleton argument the Company is unable to answer all or nearly all of the questions in appendix 2. It cannot provide documentary evidence of payments made to Samson (question 3) as these were made in cash; the evidence of onward supplies (question 4) does not match the evidence of the supplies it received from Samson as is apparent from invoices issued by the Company to Checkprice. As for the separate parts of question 6, although Mr Patel told us that Samson operated from a serviced office in Edgware he did not know the location of its warehouse, or even if it had one. Also, he did not know how it could supply the goods or the provenance of the goods supplied. Even where there is documentary evidence of receipt of a taxable supply (question 2) other than an invoice (question 1) this emanates from Samson, a missing trader with a debt to Revenue of over £36 million and HMRC would have been right to treat it with caution.
48.	Given that the Company is not able to answer all, or nearly all, of the questions in appendix 2, we find that had HMRC carried out the independent central review, as stated in paragraph 20 of the Statement of Practice or the reconsideration as stated in the letter of 21 September 2006, they would have come to the same conclusion and not exercised their discretion to allow the Company’s claim for input tax in the absence of valid VAT invoices.
49.	In the circumstances we dismiss the appeal.
50.	Both parties sought costs if successful, HMRC on the basis that it was unreasonable for the Company to bring the appeal, asking us to disapply rule 10 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 under the provisions of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 as the appeal commenced under the previous regime before the Tribunal was established. 
51.	We left the question of costs open at the conclusion of the hearing and although we do not consider that it was unreasonable for the Company to have brought the appeal we direct that, if advised to do so, HMRC should either file and serve written submissions in support of its application for costs on the Tribunal and Appellant (to which the Appellant may respond within 14 days of receipt) within 28 days of release of this decision or alternatively make an application for an oral hearing within that time. 
52.	In the absence of any written submissions or application we make no order for costs.
53.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN BROOKS
TRIBUNAL JUDGE
RELEASE DATE: