[2010] UKFTT 166 (TC)

TC00471

FIRST-TIER TRIBUNAL                                                                   MAN/08/0641	
TAX
VAT-INPUT TAX –– Appellant purchased mobile telephones with the assistance of his family and others – telephones purchased retail from retail stores- evidence of purchase receipts for the telephones from the stores-  doubtful connection between the receipts  and the ultimate sales by the appellant – input tax claim disallowed save for those telephones purchased by the appellant himself -  no agency – if an agency the agents were undisclosed – undisclosed principal cannot take benefit of agents contract-  assessment to best judgment – misdeclaration penalty and default surcharge upheld - appeal dismissed

MIAN FARUKH MAHMOOD
				T/A MAHMOOD MOBILE SERVICE                   Appellant	                                                                 
					                                                                          
-	and –

THE COMMISSIONERS FOR HER MAJESTY’S 
				         REVENUE AND CUSTOMS           	           Respondent             
								             	
Tribunal:		DAVID S PORTER (Judge)
                             PETER WHITEHEAD (Member)

Sitting in public in Manchester on 11 February 2010

No one appeared for the Appellant
Joshua Shields, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2010
DECISION

1.   The Appellant, Mian Farukh Mahmood (Mr Mahmood) appeals against amended assessments for the periods 10/05 and 10/06 in the sum of £471,685; for the period 04/06 in the sum of £67,923; for the period 1 May to 30 May 2006 in the sum of £12,692; amended assessments to misdeclaration penalties in respect of VAT for the periods 10/05, 01/06, and 1 May  to 30 May 2006 in the sum £82,843; and an amended assessment to a default surcharge penalty in respect of the period 01/06 in the sum of £4,069.28 on the basis that no allowance has been made for input tax for the supplies, other than a small amount in relation to mobile phones, which he is deemed to have purchased himself. The Respondents (HMRC) say that Mr Mahmood is not entitled to any such allowances as he did not purchase the telephones. Mr Mahmood alleges that individuals purchased mobile telephones on his behalf if they did so they did so as undisclosed agents and their input tax is not allowable to Mr Mahmood
2.     Joshua Shields, (Mr Shields) counsel, instructed by the Acting Solicitor for HM Revenue and Customs, acted for HMRC and called Mr John Patrick Foy (Mr Foy) the assessing officer. This appeal was called on for hearing at 10.30am on 11 February 2009.  There was no one to represent Mr Mahmood.  The Tribunal started the appeal at 10 50 am, the clerk having been asked to contact Mr Mahmood, who had not respond to the telephone call.  No other information was provided indicating what Mr Mahmood’s intentions were. We decided to proceed and hear the appeal in the absence of Mr Mahmood, in accordance with Rule 26 of the VAT Tribunals Rules.  It is important that Mr Mahmood should bear in mind that Rule 26(3) enables him, as the absent party, to apply in writing to the Tribunal to have the decision set aside on such terms as the Tribunal thinks fit.  It is also important to note that, if Mr Mahmood wishes to pursue this course, he must attend the hearing of the application to have this decision set aside.
It would appear that Mr Mahmood has appealed against the assessment and the misdeclaration penalty which have been listed separately under numbers MAN/2008 /0641 and MAN/0640. We have amalgamated the appeals so that they can be heard together
The Facts
3.	In the absence of Mr Mahmood we have had to rely on his witness statement and the evidence deduced by Mr Sheilds. In his witness statement Mr Mahmood states that his english language is poor and that his statement was prepared by McGrigors LLP with his wife in attendance to act as translator. HMRC confirmed that his grasp of the english is poor. Mr Mahmood owns his home at 19 Carter Street, Bolton, and subsequently, with the help of a mortgage, he purchased house numbers17 and 21 Carter Street, Bolton. 17 and 21 Carter Street are let to tenants, who pay him rent. Mr Mahmood started trading in mobile telephones, as a result of an introduction by his brother, in 2004. He had rendered returns for VAT purposes up to and including the period to the end of July 2005. His brother was one of the shareholders in Noon 2000 Limited (Noon), the registered office is at 23 The Broadway, Greenford, Middlesex, UB6 9PN. Mr Mahmood has annexed to his witness statement copies of those accounts for Noon to 31 December 2007. They indicate that the turnover for 2006 was £26,450,342 and for 2007 £10,267,489.  Mohama Baccai, known to Mr Mahmood as Noor, explained to Mr Mahmood that some shops sold mobile telephones at a higher price than other stores. As a result, if Mr Mahmood purchased such telephones cheaply from shops such as Argos, Woolworths, and Asda, Noor would buy the telephones from Mr Mahmood, in lots of 100, presumably to sell on to the more expensive shops. Mr Mahmood said he made a gross profit of £2 to £3 on each telephone. Mr Mahmood was given a list of the telephones, which Noor wished him to purchase, initially, he went to the shops and purchased the telephones on a retail basis himself, which he then sold on to Noon. Mr Mahmood would attend at the shops and ask how many telephones of the particular make he might purchase. If this was only a few he appears to have paid for the telephones himself. If there were up to a 100 then Noon appears to have provided the purchase money. 
4.	The telephones he purchased were always sold on a ‘pay as you go’ basis. Those telephones came in a box with a SIM card inside and the packaging would be branded by one of the network providers such as Vodafone or 3G. It appears that in many cases Noon did not want the SIM cards, as they required the owner to sign up to a company to provide the ‘pay as you go’ contract. As a result many SIM cards were thrown away. As the business grew Mr Mahmood acquired a property at 55 Derby Street, Bolton by way of a lease for two and one half years. He had intended to use the shop to store the telephones before he sent them on to Noon. Unfortunately the shop was broken into on one or two occasions and Mr Mahmood lost some of his stock. The burglaries were reported to the police. No evidence as to that issue was produced to the tribunal. Apparently Mr Mahmood also fell into arrears with the rent and the Landlord repossessed the shop and threw away the remaining contents, which included some telephones, the SIM cards and Mr Mahmood’s paperwork. He also purchased a van at about this time to deliver the telephones to Noon and other customers. When the business had grown larger he purchased 3 cars to help in collecting the telephones.
5.	As the business grew, Mr Mahmood was unable to supply the quantity of telephones that Noon required and he asked his wife’s relatives to purchase the telephones from the retailers. His wife has five sisters and three brothers. One of the brothers and two of the sisters live in the London area and three of the sisters live in Bolton. The brothers and sisters would sometime allow their children to buy the telephones. When Mr Mahmood started in business, the stores had no restrictions on the number of telephones he could purchase at any one time. By the time the family were involved, the retailers were limiting individuals to the purchase of one or two telephones at most. Apparently Mr Mahmood did not pay his wife’s relatives for purchasing the telephones, as they bought them as a favour for him, although it seems that he might have paid 50p to £1 to others than the immediate family. As the business expanded he sourced other retailers who would allow him to purchase more than one or two telephones at any one time. Annexed to Mr Mahmood’s witness statement are the details of Cashco Ltd (Cashco) whose registered office is at 221 New Hall Lane, 2nd Floor, Preston, PR1 5XB and which had a warehouse in Preston. Mr Foy, in his witness statement, states that Noon and Cashco were known to be involved in MTIC type deals in quantities of about 100 telephones at a time, the number of telephones that Noon had asked Mr Mahmood to sell to him.  Mr Mahmood also had a contact, a Mr Zulfakar in Birmingham, to whom he sold the telephones. It appears that he also sold telephones to Mobilezone Ltd.  Mr Mahmood had been told by HMRC, in an interview on 9 July 2004, about the problems that HMRC were having with companies involved in the MTIC trade sector. They supplied Mr Mahmood with   VAT Notice 726- Joint and Several liability; 700/52- Notice of Requirement to give security;, and the input Tax Statement of Practice – input deduction without a valid invoice. Mr Foy also explained that Mr Mahmood should make enquires of his customers and Redhill, to verify that they were VAT registered, and gave him the details. Mr Mahmood has also annexed to his witness statement, in addition to the family, the names of 6 further people, who he says worked for him buying the telephones. (Hereinafter together referred to as his assistants). No evidence has been deduced as to whether these people were employees, although it has been suggested that they acted as Mr Manmoods agents. If they did act as his agents, which is not agreed, it is clear that they could only have purchased the telephones personally, and not as businessmen, as they allegedly purchased the telephones from retail stores. There is no evidence that they were registered for VAT, on the contrary, Mr Mahmood alleges that any VAT incurred should be allowed as input tax to him. Mr Mahmood states that sometimes these people would drive the van for him. On other occasions he would collect the telephones, which they had purchased. He would give his assistants cash to buy the telephones sometimes he would reimburse them because they purchased the telephones with their own money. He provided the individuals between £50 and £100 presumably to assist in buying the telephones, but did not pay them any commission. He used cash because the retail shops could not easily trace who had bought the telephones and the quantities.  He had banked with Lloyds TSB but the account had been closed and no further accounts were available. We were told by Mr Sheilds that Lloyds TSB had closed the account because they thought Mr Mahmood was involved in ‘carousel’ fraud. 
6.	Mr Mahmood has annexed to his witness statement details of the input tax that he believes should be allowed as a deduction from his output tax. From these figures, for the period of six months from October 2005 to March 2006, his business appears to have turned over £3,767,181. It is difficult to know, from the evidence, what his average price for each telephone was, but with a generous estimate and assuming that they all cost the top price of £79, this represents the sale of 47,686 telephones for the six months or 7948 telephones each month. He has indicated that he had 14 assistants involved in purchasing the telephones and himself, making 15 people in total purchasing telephones from the retailers.  On that basis he would expect each of his assistants to purchase at least 529 telephones each month or 26 telephones each day, assuming the assistants all worked for five days of the week, which we suspect is unlikely as far as the family is concerned, as they were apparently not being paid. Mr Mahmood has indicated that in many cases the retailers would only sell one or two telephones at any one time. In fact, the bulk of the receipts, which he has exhibited to his statement, identify the purchase of only one telephone on each occasion. On that basis each of the assistants, family included, would have to visit at least 20 shops every day. If the average price of the telephones is reduced to £59 then, on the same basis, the assistants would have to visit approximately 30 shops each day. Using the above figure of £79 for each telephone Mr Mahmood would have to make available to each of his assistances £41,857 each month in cash, a total of £627,855 for all 15 each month. None of this is credible. Mr Mahmood has confirmed that when the bank account closed he had to use cash. There is no indication as to where the cash came from. On any showing £627,855 in cash is a substantial amount of money and we do not believe, on the balance of probabilities, that Mr Mahmood personally had that amount of money available to him. Further Mr Mahmood has not produced enough receipts for the six months trading.  There must be in excess of 25,000 receipts over the period, if there were two telephones to each receipt. If there were receipts with only one telephone purchase detail, as there appear to have been in many circumstances, then the number of receipts would increase significantly. Mr Mahmood annexed 338 invoices to his statement although he had provided boxes of mixed up receipts to Mr Foy during the course of the investigations. Mr Mahmood has made no attempt to collate the receipts to the appropriate periods to at least show that they might relate to his subsequent sales. 
7.	Mr Mahmood, states in his witness statement, that whenever a telephone was purchased he kept the receipt or obtained one from the person who had purchased the telephone. He has annexed to his witness statement copies of numerous receipts for every retailer, who sold the business telephones between August 2005 and May 2006. The receipts show the telephones were purchased from Argos, Argos Extra, Asda Price, Boots, Choice UK, Curreys, Dixons, Jessops, Phones4U, Rainbow Foodstore, Saver Stores, Selfridges, Superdrug, Tesco, The Link, TJ Hughes, Toys R Us, Virgin Megastore, Woolworths, and shops branded with the name of the network provider – ‘3’ Orange, O2, T-Mobile, Virgin Mobile, and Vodafone. The receipts show the purchase of one or two phones at prices ranging from £20 to £79. They have no names on them, other than the store from which the telephones were purchased, so that it is impossible to know that these telephones were purchased by or on behalf of Mr Mahmood. Although the retailers had been told that they must only sell one or two telephones at a time to customers. Mr Mahmood persuaded some of the managers to give him several receipts for a small number of telephones, so that the owners would not know that he had purchased a larger quantity. Mr Mahmood has attached samples of receipts issued on the same day by The Link at Cheetham Hill, Manchester. Again there is no way of knowing who bought the telephones and whether they were purchased for Mr Mahmood. These receipts could belong to anyone. 
8.	He also arranged with some of the managers that he would collect the receipts over a period of days so that it would appear that the telephones had been purchased separately. Sometimes the name of the purchaser would appear on the receipts, but frequently names such as My Three Pay or Swift House would appear. Mr Mahmood annexed to his witness statement examples of those receipts. There are large numbers of such receipts and they seem to relate to the purchase of a single telephone. The prices all appear to be £64.04.
9.	Mr Mahmood stated that, if he found the make of telephone that Noon required at a particular store, he would ring round all the stores in the same group, so that he could purchase a larger quantity of the telephones by driving round to the individual store. He has annexed to his witness statement a list of those purchases all of which appear to have been from O2. Again it is impossible to know whether these were telephones purchased by or for Mr Mahmood. The prices appear to be £59.99 and £77.99 respectively and represent individual telephones. The receipts are variously from Oldham, Manchester, Peterbough, Derby, Hemel Hempstead, Rochdale, St Albans, Leicester, Macclesfield, London, and other areas. We find it difficult to believe that Mr Mahmood was able to collect these receipts from so many different areas and collate them for this appeal, but that he was unable to collate them for the purposes of his accounts. It is impossible to know if these receipts represented business that Mr Mahmood or his assistants had carried out. He also states that he purchased old telephones at car boot sales, Sunday markets, and at a discount from The Link and Vodafone. This enabled him to use them to obtain a discount of £10 on the new telephones that he purchased. There is annexed to the witness statement examples of those purchases. Interestingly, one of the receipts for O2 in Accrington dated 6 October 2005 is made out to Rafiq Patel and is for £99 less the discount of £10. Rafiq Patel does not appear on the list of the 6 people Mr Mahmood stated worked for him. The receipt clearly demonstrates that the telephone was not purchased by or for Mr Mahmood.
10.	 Noon had told Mr Mahmood to register for VAT, which he did, through his accountant Mr Mohammed Ishaq on the 2 February 2004. The application for registration appears to have been signed by someone other than the accountant. We assume the signature is Mr Mahmood’s, as it is similar to the signatures on the letters addressed to Mr Foy. Mr Mahmood ceased business on 31 May 2006. Mr Ishaq appears to have been able to complete the quarterly returns for the business from information provided by Mr Mahmood. Mr Mahmood had provided HMRC with handwritten invoices with regard to the telephones he stated he had sold to Noon, Cashco, and Mr Zulofakar.  Mr Foy, in his witness statement, indicates that Mr Mahmood’s VAT registration was cancelled on 6 October 2004 because he had failed to render appropriate VAT returns. An appropriate return was subsequently rendered on 26 October 2004 and Mr Mahmood’s registration was re-instated. Mr Mahmood had been unhelpful in responding to correspondence from HMRC and he had been threatened again with the cancellation of his registration if he failed to make appropriate returns. Mr Foy visited Mr Mahmood on 16 June 2006 and Mr Mahmood’s wife acted as interpreter. At that meeting, Mr Mahmood told him that he had no employees. His accountant was Mr Ishaq of Wilmslow Road Manchester.  Mr Mahmood gave Mr Foy Mr Ishaq’s mobile number. Mr Foy had attempted to contact the accountant but without success. Mr Ishaq was untraceable. Mr Foy had received information from an HMRC Officer, Mr Scanlon, who had been monitoring Mr Mahmood’s sales, that there had been sales to Noon totalling £256.111.49 between 13 March 2006 to 27 April 2006 in the name of Mr Mahmood trading as MFM Traders, and three further supplies in May 2006 totalling £21,155.88 including VAT of £3,150.87. Mr Mahmood had also made wholesale supplies to Subhan Universal Ltd in February 2007. As a result Mr Foy made several attempts to contact Mr Mahmood from May 2007. On 5 July 2007 Mr Foy raised an assessment of £498,970, which was based on known sales between 1 October 2005 and 31 May 2006. He allowed a nominal amount of £150 input tax for expenses during the period. It was not until 9 November 2007 that Mr Mahmood attended at Mr Foy’s office and left with him several sheets of paper with figures on them. These are annexed to Mr Mahmood’s witness statement and appear to be based on the schedule of the invoices prepared by Mr Foy running from 4 January 2006 to 28 April 2006. Mr Foy raised assessments of £145,914 for the period 01/06; £62,525 for the period 10/05; and £237,848 for the period 04/06. Mr Ishaq, as a result, prepared a further schedule of the input VAT on the purchases of the telephones for the periods 10/5, 01/06 and 04/06 showing input tax of £561,069 on purchase of £3,767,181. In preparing the schedule Mr Ishaq appears to have accepted the turnover figures, as he has used those figures to arrive at the input tax figures, which he believes should be allowed against the assessments.
11.	 Mr Mahmood had not rendered any VAT returns, but on 22 November 2007, left with Mr Foy, VAT returns for the periods: 1 August 2005 to 31 October 2005 (P1005); 1 November 2005 to 31 January 2006 (P0106); 1 February 2006 to 30 April 2006 P0406); and 1 May 2006 to 31 May 2006 (P9999). The output tax figures for each of the returns had been taken directly from Mr Foy’s assessment of 5 July 2005. The input figures for each of the returns had obviously been calculated using the monthly totals of the purchase values, which appeared on the schedule brought into the office on 9 November 2007 referred to above. These returns had to be incorrect as they showed a repayment for the period P1005 of £213,150.43 and for P0106 of £56,425.92. As Mr Mahmood only purchases telephones in the United Kingdom he would not be entitled to receive repayments as repayments are triggered by an export, not a sale in the United Kingdom. As a result Mr Foy wrote further to Mr Mahmood on the 21 December 2007 indicated that he had revised his earlier assessment on the following basis:
•	Using the figures on the returns submitted by Mr Mahmood, for the periods 07/04 to 07/05 he calculated the profit for each period and found the average profit to be 6.63%
•	He made an allowance of 1% to account for the small number of telephones Mr Mahmood stated had been sold at cost or at a loss
•	He had calculated the output tax due for the VAT periods above (P1005, P0106, P0406 and P9999)  at 5.3% profit for the period.
•	He had accepted as correct the input tax totals calculated by your accountant for each period, which he had received with the VAT returns on 22 November 2007
However, as the telephones had not been purchased by Mr Mahmood, but by his assistants. Mr Mahmood was not entitled to claim the input tax against his sales. Despite that Mr Foy had made an allowance of 5% to account for any telephones purchased by Mr Mahmood personally. He also allowed £150 input tax for each quarter to cover input tax on expenses incurred in the business. The assessment was made up as follows.
	Tax			£547,117.00
	Surcharge		£    4,069.28
9.	Penalties 		£  66,942.00
Interest		            £  12,018.00
-------------------------------------------
Total			£630,146.38
12.     As a consequence of the failure to make the returns default surcharge notices were served pursuant to section 59 and 63 of the Value Added Tax Act 1994  as under:
•	Warning letter 	11 March 2005 no liability to surcharge
•	First default notice	16 December 2005 No liability to surcharge
•	Second default notice	17 March 2006  No liability
•	Third surcharge notice 23 July 2007  5% £3012 payable period 01/06
•	Letter 18 January 2008  £3012 recalculated to £4069.28, which appears on the assessment
13.    The assessments to tax notified to Mr Mahmood on 2/8/2007 & 10/2/208 caused a breach of the objective test for Misdeclaration Penalty under section 63, Value Added Tax Act 1994. A Notice of Assessment of Misdeclaration Penalty was issued to Mr Mahmood on 26/10/2007. Further assessments had been notified to him on 23/01/2008 and as a result the Misdeclaration penalties were amended as under:
Period		Revised Tax	Previous Penalty	Revised Penalty
		10/05		£272,922	 £ 9,378.00		£40,938.00
		01/06		£198,763	£21,887.00		£29,814.00
		04/06		£  67,923	£35,677.00		£10,188.00
		Final 99	£  12,692				£   1.903.00
	-------------------------------------------------------------------------------------
	Total				£66,942		£ 82,843.00        
The Law
14.	The payment of VAT by a taxable person is governed by sections 24 -29 of the Value Added Tax Act 1994 (the Act). Section 25 requires such a person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under section 26: see section 25(2). Section 26 gives effect to what is now Article 168 of EC Council Directive 2006/112 (the VAT Directive) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by the taxable person in the course or furtherance of his business. Regulation 29(2) VAT Regulations, VAT may be treated as input tax only if and to the extent that a charge to VAT is evidenced and quantified by a VAT invoice held by the taxable person. The requirements for a valid VAT invoice are set out in Regulation 14 and include the name and address of the person to whom the goods or services are supplied.
Summing Up
15.	Mr Shields submitted 	that Mr Foy was entitled to raise the assessments from 10.05 to 31 May 2006 given that Mr Mahmood had failed to submit proper returns. The assessments were based on the figures provided by Mr Mahmood and his accountant and they were to best judgment. The burden of proof is on Mr Mahmood to show that the assessments were incorrect. First, Mr Mahmood has to show that he was entitled to deduct the input tax shown on all the receipts. If he is to achieve that Mr Mahmood must show either that he purchased the telephones and produce the receipts in that regard or that the assistants were acting as his agents. It is accepted, as a matter of law, that, if the assistants purchased the telephones from the retailers, they did so as agents, Mr Mahmood is entitled to treat the sales as sales to him. Save for a list of names, there is no evidence about the assistants at all and certainly none as to the basis on which the telephones were purchased by them. Secondly, if Mr Mahmood succeeds in showing that the individuals were his agents, it is submitted that this still does not, in the circumstances, give rise to a contract with him. The retailers’ contracts are with the persons presenting themselves in the shop and paying the money. Mr Mahmood accepts that the head offices of the retail stores would limit sales only to a few telephones for each customer. As this was the case, the identity of the individual purchasing the telephones is important.  There is no evidence that the staff knew that the individuals were Mr Mahmood’s agents. In those circumstances, an undisclosed principal cannot take the benefit of the agent’s contracts. Mr Shields further submitted that, as the apparent arrangements with some of the retailers was on the basis that the records were falsified to enable the assistants to purchase more than the restricted number of telephones, the retailers would not have sold that number of the telephones to Mr Mahmood alone. The retailers were only prepared to sell the telephones in limited numbers to the individuals who attended at the stores as any sales above that number would be in breach of the manager’s authority. The contracts were undoubtedly with the individuals.
16.	In any event, the receipts produced cannot be reconciled with the claim for the input tax deductions. Boxes of receipts were produced. The receipts exhibited in relation to Mr Mahmood’s statement do not, on the face of them, relate to Mr Mahmood. No evidence has been produced to show that the sums on the receipts were paid by M Mahmood or indeed, by whom they were paid. There has never been any cross-referencing between the receipts produced in November 2006, and retained by Mr Mahmood, and the schedules produced by him showing alleged purchases made. This lack of connection between the receipts and Mr Mahmood is particularly important given the information provided by Mr Mahmood to Mr Foy at the meeting on 12 June 2006 that all the business records had been thrown away by his Landlord, when they were stored at Derby Street Bolton. This is relevant on two levels. First, there is no proof that Mr Mahmood (as apposed to others acting on their own behalf) made the purchases from the retailers. Second, there is insufficient evidence as a matter of law to allow Mr Mahmood to deduct input tax - there is insufficient information to render the receipts as valid VAT invoices, and the receipts cannot be reconciled against the purchases to enable a valid calculation to be made for the purposes of input tax . In the circumstances, it was submitted that the appeal should be dismissed
17. Although Mr Mahmood did not attend both he and McGrigors LLP identified the issues in the Appeal Notice. Mr Mahmood submitted that the disputed decisions has been made on the basis that he is not entitled to claim an input Tax deduction, for a number of periods. He contends that he is entitled to deduct the input tax as this complied with the relevant statutory provisions. In Appendix 1 to the Notice of Appeal McGrigors LLP comment (after dealing with the fact that there appeared to be two separate cases) as follows:
a. The assessments for VAT which form the subject of the appeal have all been made on the basis of common facts. Mr Mahmood, during the periods covered by the assessments, has operated as a commercial trader in which capacity he has, either himself, or through agents on his behalf, purchased goods for the purpose of onward resale. The business model of Mr Mahmood is not common to the mobile telephone wholesale market, in that, Mr Mahmood sourced the handsets for onward resale from well know high street retailers.
b. Mr Mahmood has submitted claims, in his VAT returns, for credit of input tax in relation to the purchase of the goods, and he holds receipts from the high street retailers corresponding to the purchases. HMRC have rejected the claim for deduction for the relevant purchase on the basis that either (i) Mr Mahmood does not hold valid VAT invoices in relation to the purchase; or (ii) the goods were purchased from the retailers by private individuals acting in their own name and on their own behalf, and those goods were sold on by those individuals to Mr Mahmood. Mr Mahmood is entitled to claim deduction of input tax in relation to each of the relevant purchases on the basis that he, in relation to each purchase, holds either one or the other of the following documents:
a.	a document as required by regulation 14 of the VAT Regulations 1995 (SI 195/2518) (a “VAT” invoice);
b.	 a receipt which does not comply with the requirements for a VAT Invoice, but which adequately evidences a supply received by Mr Mahmood from a taxable retailer.
18.    In accordance with Regulation 29 of the VAT Regulations, it is a general condition of a claim for deduction of income tax that a taxable person should hold a VAT invoice, though HMRC have the power to direct either generally or in relation to particular cases or class of cases that a claimant shall hold or provide other evidence of the charge to VAT as HMRC direct. Mr Mahmood contends that in respect of the receipts which he holds, which do not amount to a VAT invoice, HMRC should reasonably exercise their discretion. It is reasonable for HMRC to exercise their discretion in this matter as there can be no real doubt on the present facts as to whether the retailers in question accounted for output tax in relation to the subject supplies. The terms of Article 168 of Directive 2006/EC (the “VAT Directive”), upon which Mr Mahmood is entitled to rely in accordance with the principle of ‘direct effect’, provide that a person shall be entitled to deduct, in so far as goods and services are used for the purposes of taxed transactions of a taxable person, the VAT due in respect of supplies to him of goods or services carried out or to be carried out by another taxable person. The supplies in relation to which Mr Mahmood claims deduction were made to Mr Mahmood, on the basis that those supplies were procured by agents acting on his behalf, and those agents were not acting independently of Mr Mahmood’s business.
19.	The capacity in which the agents purchased the goods is evidenced inter alia, (a) the basis of the remuneration which was set by Mr Mahmood; (b) the condition required of those agents by Mr Mahmood that receipts or invoices should be retained and passed to him; (c) the handling and the use of Mr Mahmood’s monies by each agent for the purposes of purchasing the goods; and (d) the close control exercised by Mr Mahmood over the activities of the agents. HMRC have concluded that where telephones are purchased by persons, who are not employees of the business, then the business is not entitled to input tax. It is assumed, in so concluding, HMRC have considered the terms of Articles 9 and 10 of the VAT Directive. Article 9 (1) defines a ‘taxable person’ as being any person who, independently, carries out in any place economic activity, whatever the purpose or results of that activity. Article 10 of the VAT Directive, provides that the conditions laid down in Article 9 (1), that economic activity be conducted independently, shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by other legal ties creating the relationship of employer and employee as regards working conditions, remuneration, and the employer’s liability. Article 10 does not lay down an exclusive set of criteria for determining whether economic activity is to be conducted independently, and an agent may act for and on behalf of a business in circumstances where there is no relationship of employment.  It is contended that the agents acting on behalf of Mr Mahmood in the present circumstances are not  independently undertaking an economic activity on their own behalf, notwithstanding any findings as to whether they were, or were not, employed by Mr Mahmood. Mr Mahmood has satisfied all the conditions necessary to exercise the right of deduction, and accordingly, the appeal of the assessments should be allowed in full together with costs and interest.
19. 	In respect of the £4069.28 of default surcharge which also forms the subject of this appeal, the notice of assessment for default surcharge dated 23 July 2007 and originally in the amount of £3012 does not adequately  set out the reasons for default, or  provide any information in relation to the duration of the surcharge liability period in respect of which the default arises. The assessment on that basis is invalid.
The decision
20	We have considered the law and the evidence and we have decided that the assessments are to best judgment and that the misdeclaration penalty and the default surcharge have been properly assessed and must be paid. In the absence of Mr Mahmood we find it difficult to understand how his business was carried on. His accounts reveal a turnover of £3,761,181 in a six months period. Even using the highest cost for the telephone of £79 this amounts to the purchase of 47,686 telephones in the six month period. In his statement he suggests that he and his assistants were able to purchase 26 telephones each, every day, from 20 or more shops. This is in circumstances in which he admits it is only possible to buy at most 3 telephones each day from each shop and on many occasions only one telephone was purchased. It is not credible that either his wife’s family or the others were able to visit that number of shops every day. Mr Mahmood also wants us to believe that he was able to persuade some of the retailers, to allow invoices to be issued on separate days or discounts to be given, when he indicates that he has very poor english. As his wife had to interpret for him, we assume that he does have a good command of the english language. We find it difficult to believe that he could enter into quite complex negotiations of this nature. In addition we are told that he could not use a bank account and that he had to provide cash to his assistants. As indicated above he needed to provide £627,855 each month. No evidence has been given as to where the cash came from. It is also suggested that he made the money available to the people working for him in London. Random examinations of the receipts, almost all of them purchases from O2, reveal stores in disparate parts of the country. In the South: London, Hemel Hempstead, Ayelsbury, Islington, Watford, St Albans; in the Midlands: Peterborough, Huntingdon, Burton-on-Trent, Leicester; and in the North: Blackburn, Preston, Burnley, Manchester, Oldham, Keighley, Rochdale.
21	  Mr Mahmood could not have taken the money to London, even weekly, as he suggests, if he was also required to visit 20 shops himself. If a more realistic lower price is used for the cost of the telephones, then the position is totally untenable. Without the opportunity for Mr Shields to cross- examine Mr Mahmood, we cannot accept that Mr Mahmood purchased all or any of the telephones through his assistants as he has suggested. Mr Ishaq has, however, accepted that Mr Mahmood had a turnover of £3,767,181 for the period and Mr Mahmood has not produced any evidence to dispute that figure.  We have decided that the telephones have not been purchased in the way that Mr Mahmood suggests and as no other evidence has been deduced by him as to how the telephones were acquired against which he could claim the input tax suggested , we accept that the assessment, based on figures agreed to by Mr Mahmood, are to best judgement. As a consequence of the lack of alternative evidence, we have also decided that HMRC have provided sufficient evidence to justify the misdeclaration penalty, which must therefore be paid. It appears from the evidence that correct notices were served on Mr Mahmood in relation to the default surcharges. The notices were as follows:
a.	Warning letter 	11 March 2005 no liability to surcharge
b.	First default notice	16 December 2005 No liability to surcharge
c.	Second default notice	17 March 2006  No liability
d.	Third surcharge notice 23 July 2007  5% £3012 payable period 01/06
e.	Letter 18 January 2008  £3012 recalculated to £4069.28, which appears on the assessment.
The first default notice made it clear that the surcharge regime would run from 16 December 2005 until the 31 October 2006. The note attached to that letter indicates that the rate of surcharge will increase progressively to 5%, 10% and 15% for further payment defaults. The second default notice of the 17 March indicated that the next default would give rise to a 5% surcharge. There can have been no misunderstanding by Mr Mahmood of the amount of the surcharge he would have to pay. We therefore find that the surcharge has been correctly raised and is to be paid.
22.	If we are incorrect in our assessment that Mr Mahmood’s method of conducting his business is untenable and Mr Mahmood did purchase the telephones in the way he describes, we would still find that he was not entitled to any input tax, other than on those telephones which he purchased himself. There is no evidence connecting the receipts for the telephones to the telephones which were sold onwards to Noon, Cashso or Mr Zulfakar.  From the evidence, the scheme depended on the assistants buying the telephones at retail shops on the basis that they were purchasing them personally for their own use. Mr Mahmood has given evidence to the effect that the retailers would not have sold large numbers of telephones to him direct. As a result the retailers were unaware that the assistants were agents. It is difficult, on the evidence deduced, to assess on what basis the agency was created. We cannot agree with McGrigors LLP contention that all the necessary steps had been taken to create an agency. Mr Mahmood indicated that he did not pay members of his family. The others were given £50 to £100 to buy the telephones but …. “they did not receive any commission for buying the ‘phones”. It would not assist even if it could be established that they were undisclosed agents. An undisclosed agent is, for VAT purposes, treated as the principal. As none of the assistants were registered for VAT, or even working in a business relationship with the retailers, they could not recover the input tax on the supply of the telephones from the retailers. They could not, and did not as a result, raise a VAT invoice to Mr Mahmood so that he could recover any VAT. An undisclosed principal cannot take the benefit of the agent’s contract - see Halsbury, Agency paragraph 125 and Said v Butt [1920] 3 KB 497.
23     We reserve our decision with regard to costs. We direct that the Respondents submit their application for costs, if they intend to do so, to the Tribunal and to the Appellant within 28 days from the release of the decision. The Appellant shall reply within 56 days from the release of the decision with the Respondents right to reply within 70 days from the release of the decision. The tribunal will decide the costs on the basis of written representations.

TRIBUNAL JUDGE
Release date: 14 April 2010