VALUE ADDED TAX — output tax — retail sales of conservatories etc — appellant purporting to sell on commission-only basis — whether credible — cross-check against annual accounts — whether rendered unreliable by accounting adjustment — input tax credit claimed exceeding maximum possible — absence of any evidence from appellant — appeal dismissed save for small reduction in amount assessed

MANCHESTER TRIBUNAL CENTRE

 
 	
	MICHAEL BRIAN PAICE	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Peter Whitehead	

Sitting in public in Manchester on 5 June 2003 

Nigel Ferrington, VAT consultant appeared for the Appellant

James Puzey of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2003 

DECISION

1.	In this appeal Michael Brian Paice, who trades as MPA Leisure Buildings from premises in Chesterfield, challenges assessments to value added tax totalling £144,657.99 (later reduced to £142,486.99) plus interest.  The assessments cover the three years from 1 March 1997 to 29 February 2000.

2.	Before the hearing began, Nigel Ferrington, the VAT consultant who represented the Appellant, applied for a postponement.  The application was resisted by James Puzey, counsel for the Respondent, and we refused it.  We did not give reasons at the time and, not least for the Appellant’s own benefit, we think it appropriate we should do so now.

3.	The assessments were made in their original form in May and June 2000 and amended in September 2000.  Notice of Appeal was lodged (by Mr Ferrington) on 29 June 2000.  It was apparent from the correspondence included within the bundle produced for use at the hearing, which we had had the opportunity of considering before the hearing began, that for most of the periods since the assessments were made the Commissioners had been inviting the Appellant, through his advisors, to provide them with information by which the correct amount of tax due might be determined, but that very little of that information had been provided.  The case had previously been listed to be heard in April 2003, but had been postponed administratively when Mr Ferrington indicated that he had now provided information to the Respondents which, he thought, would be sufficient to resolve the appeal.  His hopes, however, were not realised; the Respondents did not consider that the information was material.  

4.	Mr Ferrington’s application for a postponement had three limbs: first, the Appellant was not available, since he was on holiday; second, that the Appellant’s accountant was not available; and third, that Mr Ferrington needed further time to prepare properly for the hearing.  It became apparent, as we went into the matter, that the Appellant’s holiday was in the North of England and we had no doubt that it would not have been in the least difficult for him to attend the hearing had he wished to do so.  Mr Puzey suggested that arrangements could be made for his evidence to be heard on the second of the two days allocated for the case.  Mr Ferrington, significantly, did not take up that suggestion.  The accountants unavailability was due to his being without instructions.  Mr Ferrington had first been instructed almost three years previously but it became clear – and indeed was confirmed as the hearing proceeded – that he too had been labouring under much the same difficulty as the Commissioners, that is the failure by the Appellant to produce useful information.  

5.	We took the view that the application for a postponement was entirely without merit.  Appellants cannot abuse the jurisdiction of these tribunals in order to delay payment of the tax due from them (in this case the Commissioners had acceded to the Appellant’s hardship application).  Nor can they allow their appeals to drift, by failing to devote to them the necessary time and effort.  Once an appellant has started the appeal process, in the absence of special circumstances which do not pertain here, he must expect his appeal to be brought on for hearing within a reasonable period.  It is wasteful of the tribunal’s own resources, and unfair to other appellants who are genuinely waiting for their appeals to be heard, to have cases taken out of the list at the last minute.  This appeal had been working its way extremely slowly to a hearing for nearly three years.  There was quite clearly no excuse for any further delay and it was for that reason that we refused Mr Ferrington’s application.

6.	The Appellant’s business consists of the  retail sale of conservatories, summer houses, garden sheds and greenhouses.  With the limited exception of supplies made in the course of construction of a new dwelling, those products are standard-rated for VAT purposes.  The Appellant’s VAT returns showed that his zero-rated supplies represented only about 4% on average of his total turnover.  Despite that fact, the majority of his returns were repayment returns and, overall, he was a repayment trader.

7.	It was apparent from the bundle of documentation, and not disputed by Mr Ferrington, that in September 1999 the Appellant received a visit from a Customs officer, Mrs Farrugia, in order that the accuracy of his most recent returns could be verified.  It is clear that Mrs Farrugia spent most of the time available to her upon checking the detail of the input tax for which credit was claimed and she seems to have spent little or no time on output tax.  She did make the point to the Appellant, in a subsequent letter, that his accounting records were inadequate and that improvements were required.  She also made an assessment to recover incorrectly claimed input tax credit; her assessment was not challenged and the tax due has been paid.  Mrs Farrugia’s concerns were such that she caused the Respondents’ computer to refuse to pay the amount claimed by any future repayment return, until it had been verified by a Customs officer.

8.	 The Appellant’s return for 11/99 was a repayment return, and accordingly verification of the claim was prompted.  That verification was undertaken by Keith Allison, who made two visits, on 19 and 31 January 2000.

9.	Mr Allison discovered that the Appellant’s purchase records, which were by this time maintained by a book-keeper, were now in good order.  Rather surprisingly, the book-keeper had no access to the sales records, which were maintained by the Appellant himself on a laptop computer.  The Appellant was not present when Mr Allison first arrived, but attended later when an attempt was made to examine the sales records on his computer, which was found not to be working properly.  The Appellant was able (or perhaps willing) to provide very little by way of documentation regarding his sales, though one example of an order for a greenhouse was produced; a copy of it was in the bundle, together with a copy of the corresponding purchase invoice, which Mr Allison was able to find in the purchase records, and married to the order.  It  showed that the customer had ordered a greenhouse and accessories for an aggregate price of £745, of which he had paid the Appellant £180 by way of deposit.  The customer was required to pay the balance of £565 to the manufacturers who would deliver the greenhouse, apparently in kit form, to the customer’s home.  The purchase invoice showed that the Appellant paid the manufacturers £517.46 plus VAT of £90.56, a total of £608.02, of which £565 was satisfied by the customer’s payment on delivery, and £43.02 by the Appellant.

10.	Mr Allison told us that the Appellant insisted that this was a commission sale, that he was required to account for VAT only on the £180 which he had received from the customer, and that he had done so.  In the absence of a proper VAT account, Mr Allison could not check whether VAT on the £180 had indeed been accounted for, but it was apparent from the purchase records that the Appellant had claimed input tax credit for the entirety of the VAT included in the manufacturer’s invoice.  It was quite clear, as indeed Mr Ferrington accepted, that the claim for input tax credit was incompatible with the assertion that this was a commission sale.  Mr Allison did not doubt some of the Appellant’s sales were on commission-only basis – indeed one of the other documents produced to him was a commission statement provided by a different manufacturer – but he formed the view that the Appellant’s history of repayment returns could well be explained by his claiming input tax credit for the cost of the goods while accounting for output tax only on his profit element.  It seems to us that Mr Allison is probably correct.

11.	As we have already commented, the correspondence indicates that Mr Allison and, later, the review officer Michael Thomson, from whom we were also to hear evidence, had been asking for documentation to back up the Appellant’s claim that his VAT returns were correct from immediately following Mr Allison first visit, until the present time; indeed both said they would even now consider further evidence if it were provided. Some evidence was produced in the shape of the Appellant’s trading accounts for the relevant period which, as was pointed out, showed turnover consistent with the turnover revealed by the VAT returns.  The Customs officers rejected that fact as significant, however, because it was apparent that both the accounts and the VAT returns were based on the same source material, and therefore inevitably would show the same turnover figures.

12.	 Mr Thomson was allocated the task of reviewing the assessments made by Mr Allison, once the appeal had been brought.  It was he who made the small reduction to which have referred; he approached the arithmetic of the assessment in a slightly different manner from Mr Allison, and achieved a result a little more favourable to the Appellant.  Accordingly he decided that the assessment should be reduced to reflect his different arithmetical approach.  On matters of principle, however, he agreed with Mr Allison; he could not accept that the Appellant’s business was likely to result in his being a repayment trader and he shared Mr Allison’s views that nothing had been put forward to undermine Mr Allison’s approach to the calculation of the correct amount of tax due.

13.	That approach was based on a comment which Mr Allison told us the Appellant had made during the course of their discussions in January 2000.  He explained that they were in the course of discussing the Appellant’s returns – indeed they had one open on the table between them – when Mr Allison asked how the Appellant calculated his selling prices.  The response that he has recorded is that Appellant expected a 35% mark-up on all of his purchases, that is not merely the goods themselves but on his overheads – put another way, his net profit should be 35% of turnover.  Mr Allison accepted that that was an unusual way of describing a mark-up, which he would normally expect a trader to determine by reference only to the price of the goods he was buying for resale, but he was quite certain that that was what the Appellant had said and it is what is recorded in his visit report.  Even so, we might have been inclined to the view that there was a misunderstanding, were it not for the fact that it has been clear from an early stage that the assessments were based upon that comment, and it has at no time until now been suggested that the comment was not made, that Mr Paice misunderstood Mr Allison’s question, or that Mr Allison misunderstood Mr Paice’s reply.

14.	In fact, Mr Allison did not go quite so far as the comment might have justified; he took the value of the Appellant’s taxable purchases (that is, leaving out of account any supplies which were exempt or which were made by traders below the registration threshold) and applied a mark-up of 35% to those purchases.  Other items such as interest therefore do not form part of the base figure for the calculation of the gross turnover.

15.	In the course of his review Mr Thomson carried out a cross-check, by comparing the profit figure adopted by Mr Allison with the profit figure he extracted from the Appellant’s accounts for the period ending 30 September 1999.  He found that the net profit was just over 33% of the cost of purchases and all of the expenses (that is including the exempt purchases) combined.  He also carried out a  further check, comparing the purchases and expenses set out in the accounts, excluding those which were not taxable, with the amounts of input tax claimed by the Appellant and found that in the course of the year to 30 September 1999, input tax of  £29,000 more than the amount apparently capable of justification had been claimed.  That discrepancy has never been explained; indeed, at the hearing Mr Ferrington said nothing about it.  He did, however, seek to undermine Mr Thomson’s cross-check against the profit shown by the accounts.  The figure for purchases was, he said, distorted because in that year a number of creditors had been written off.

16.	There was  some support for this proposition in a letter written by the Appellant’s accountants to Mr Thomson, of which a copy was in the bundle.  The letter identified a movement in the creditors figure from the previous year (which is indeed reflected in the accounts) and the accountants maintained that “a large amount of creditors were written off” on the Appellant’s instructions.  It is conspicuous that they do not identify the value of creditors written off and it is also conspicuous that they do not suggest that the adjustment was effected by a reduction in the value of purchases.  We would have found it extraordinary if the accountants had affected an adjustment of creditors for one year by a reduction in purchases for another.  Accordingly we are not satisfied that any adjustment in creditors which might have been made was effected in that manner and that Mr Thomson’s cross-check – and it was no more than that – is thereby undermined.

17.	The burden of proof in a case of this kind rests on the Appellant.  It is, therefore, for him to show that the assessment in is some way inaccurate, and should be reduced.  The notice of appeal had brought into question the use by the Commissioners of their best judgment, as is required by section 73(1) of the Value Added Tax Act 1994, but Mr Ferrington accepted that the argument  that there was any failing on their part on this account could not be sustained and he did not pursue it.  We were left therefore with the argument that the assessment was excessive.  In support of that point, Mr Ferrington pointed to the criticisms he had made of Mr Thomson’s cross-check, and also to the fact that the amount assessed implied that the Appellant had concealed almost £1,000,000 worth of sales which, he said, was simply incredible.

18.	We do not accept that assertion.  Unfortunately we do not have reliable evidence of the scale of the Appellant’s true turnover.  What is apparent, however, is that it is appreciably higher than the amount he has declared.  We think it entirely possible that he has systematically been claiming that ordinary trading sales were in fact commission-only sales.  Mr Thomson has demonstrated to our satisfaction, and without any challenge from Mr Ferrington, that the claims for input tax credit and the purchases revealed by the trading accounts cannot be reconciled; one or the other; or both, must be wrong.  We observe too that although, in September 1999, the Appellant had seven employees (two or three of whom were part-time) his wage bill was just under £32,000 of which, according to his own statements, £6,000 was paid to his wife: in our view a total wage bill of £26,000 for four full time and three part-time employees as recently as 1999 is not credible.  It seems to us far more probable than not that some of the true wages were paid in undeclared cash.  

19.	We are satisfied from the evidence we heard, limited though it was, that the Appellant’s returns cannot have been right, and that some assessment is justified.  We turn therefore to the calculation.  We have expressed some slight reservations about the 35% mark-up which was mentioned to Mr Allison.  Despite those reservations, however, we do not think it appropriate that we make any downward adjustment on this account.  We bear in mind particularly that the figure itself has never been denied but perhaps more importantly that no alternative has been put forward, and we have no material on which we could justifiably substitute any other figure; it would be nothing more than a guess.

20.	On the other hand, we did have more severe misgivings about the Appellant’s zero-rated supplies.  Mr Allison told us that the proportion of 4% zero-rated supplies was merely an average and it is apparent from an analysis within the bundle of documents that the amount claimed in any particular period varied quite substantially from that average.  Mr Allison told us that he did not see any evidence of zero-rated supplies, but that was not the focus of his enquiry and he was not looking for the evidence.  Mr Thomson told us that when he made his calculations, which now form the basis of the assessments which are challenged, he did not make any allowances for zero-rated supplies because he did not expect his calculations to be the last word; at that stage he confidently expected that the Appellant or his accountants would produce further evidence and that his figures would need revision.  He had no evidence beyond the Appellant’s VAT returns – which he had concluded were in any event unreliable – to support the claimed proportion of zero-rated supplies.

21.	The difficulty for the Commissioners which we perceive is that they have, in the result if not by design, disallowed the Appellant’s contention that he had made zero-rated supplies without properly directing their minds to the issue.  Mr Thomson quite candidly accepted that it was at least arguable that he should have allowed for some zero-rated supplies.  We accept that he was not closing his mind to the matter and we also accept that he was indeed willing to review his workings in the light of any information which was produced.  The Appellant, as we have already commented, has failed to produce any reliable evidence to challenge the assessment, but we nevertheless think it proper that not all of his sales should be treated as standard-rated, without some evidence that his claim to have made some zero-rated sales was false.  We accordingly direct that the revised assessment, made by Mr Thomson, should be adjusted downward by allowing for zero-rated sales of the proportion identified by the Customs officers from the Appellant’s returns, averaged over the period covered by the assessment (4% is no more than an approximation) and that the appeal will be determined on that basis.  The Appellant’s remaining contentions are rejected.  The parties are at liberty to return to the tribunal for further directions should the resulting amount not prove capable of calculation.

22.	The Commissioners have also imposed on the Appellant a penalty under section 63 of the 1994 Act for his misdeclarations.  The aggregate amount of the penalty is £5,071.  Mr Ferrington accepted that, if the assessment stood, the penalty must stand with it and that there was nothing he could say in Appellant’s favour by way of mitigation.  Save that the amount of the penalty may need to be adjusted to take account of the reduction in the assessment which we have directed, we dismiss the appeal against the penalty.

23.	We make no direction in respect of costs

COLIN BISHOPP
CHAIRMAN
Release Date: