EXEMPTION – Input tax – Deduction of tax in respect of exempt supplies treated as attributable to taxable supplies – “De minimis” limit – Partner in Appellant made purchases for Appellant but paid personally expecting reimbursement – Whether purchases made on date when partner paid or when reimbursed – Purchases attributable to exempt supplies – Appellant’s claim therefore exceeded limit – VAT Regs 1995, reg 106 – VAT Notice 731 para 3.4

LONDON TRIBUNAL CENTRE

	THE LITLE BRADLEY FARM PARTNERSHIP	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	ANGUS NICOL   (Chairman)
						MRS R A WATTS DAVIES AHICMA,FIPM

Sitting in public in London on 30 September 2003

Christopher D Spokes, chartered accountant, of Bidwells Accounting Services, for the Appellant

Shaheen Rahman, counsel,  for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	The Appellant is a partnership which carries on arable farming at Little Bradley, Haverhill, Suffolk, and has been registered for value added tax from 1 April 1973.  The appeal relates to a claim by the Appellant to deduct £7,464.82 as input tax in respect of refurbishment of and improvements to certain domestic properties which it rented out, and the income from which was exempt.  The amount claimed fell below the de minimis limit for partial exemption for the year which ended on 31 March 2000.  The Commissioners contended that a further amount of input tax directly attributable to exempt supplies, of £412.68, had also been incurred during that year, together with a portion of the business overheads also so attributable, as a result of which the total amount exceeded the de minimis level, and the Appellant was, therefore, not entitled to recover the input tax claimed.  A misdeclaration penalty in the sum of £968 was also issued to the Appellant in respect of the period 3/02.

2.	At the Appellant’s request, a reconsideration of the assessments was carried out by the Commissioner, as a result of which the assessment to VAT was reduced from £7,876 to £7,673, and the misdeclaration penalty was rescinded.

The facts

3.	The facts were not in dispute, and we find them to be as follows.  No evidence was given by any of the four partners, and the facts upon which they rely are to be found in the correspondence.  The Commissioners called two witnesses, Mrs Gillian Parkes, who carried out a visit to the Appellant’s premises on 14 February 2002, and Mr  Anthony Fuller, who was the reviewing officer.

4.	The four partners in the Appellant were Ronald Colin Clifton-Brown and Emily Joan Clifton-Brown, both of Little Bradley Hall, and Robert Lawrence Clifton-Brown and Florence Elizabeth Clifton-Brown, both of Maltings Farmhouse, Little Bradley.

5.	Following her visit to the Appellant’s premises, on 28 February 2002 Mrs Parkes wrote to the Appellant to inform the partners of her findings.  She said,

“I noted that you had identified a total of £7,464.82 input tax directly attributable to exempt supplies in the partial exemption year to 31 March 2000.  Of this £1,116.64 had been reclaimed during the year, on the date the VAT was incurred, and the remaining £6,348.18 had been recovered in period 03/00.

During my visit I found the following additional input tax which appeared to be directly attributable to exempt supplies but which had not been included in your figure above:

									          £
29/6/99 Bidwells (professional services re alterations to Norley Moat)   294.74
24/9/99   Bidwells (as above)						         65.35
14/6/99   EMAP (advert for cottage to let)				           4.81
18/6/99   EMAP (as above)						           3.85
15/9/99   Advert to let Lark Bungalow				           2.19
23/9/99   Advert to let Lark Bungalow				           2.89
22/9/99   Cambridge Detective Agency (search for previous tenants)        35.00
17/3/00   Advert for cottages to let					           3.85
								Total		       412.68

In addition to the above list, a proportion of the business overheads would be attributable to exempt supplies under the partial exemption standard method.  I did not have time during my visit to calculate the exact amount.

In view of the above figures, I consider that the business exceeded the partial exemption deminimis [sic] limit, ie exempt input tax of more than £625 a month on average, for the year to 31 March 2000 and was not entitled to recover any exempt input tax incurred during that year.  The deminimis limits are explained in more detail in chapter 6 of the enclosed Notice 706.”

The letter allowed the Appellant 28 days to put forward any further relevant information or comment before the assessment would be issued.

6.	Mr Christopher Spokes, a partner in Bidwells, property consultants, replied on behalf of the Appellant.  Mr Spokes also represented the Appellant at the hearing.  He contended that the following items should have been excluded from the Commissioners’ calculation:

“1.	Expenditure on 2 New Cottages - We believe that at the year end a decision had not been made regarding the occupation of this property, therefore it was perfectly reasonable to treat it as business expense.

2.	The invoices relating to Osborne and Little, B&Q and Robert Sayle - whilst they were dated prior to the year end they were not reimbursed to Mrs E Clifton-Brown until after the year end and should therefore be excluded.  As you will appreciate, these are not proper VAT invoices, they are simply receipts issued by the appropriate companies to Mrs E Clifton-Brown and therefore technically the relevant date is the date when Mrs E Clifton-Brown was reimbursed.  The total VAT relevant to these items amounts to £456.32.  If it is agreed that these items should be put to the next year, then that amount of VAT will have to be paid over to Customs because we could not claim any VAT in the following year.  As you will appreciate whilst this is very close to the limit in the previous year partial exemption was not an issue as the calculation was well below £7,500.  In the following year no attempt was made to reclaim any VAT relating to exempt outputs because it was accepted that the possible sum recoverable was well in excess of £7,500.”

Mr Spokes suggests that it would, therefore, be more than reasonable to allow the VAT to be recovered.

7.	Three bills were produced.  One was a till-roll headed Osborne & Little, dated 02/03/00, for a total of £1,292.00.  Hand-written on it at the top were the words “Fabric for Norley Moat”, and at the bottom a note that the amount included VAT of £192.43.  The bill stated that it had been paid by Visa.  The sheet on which the copy is printed also bore a stamp saying “Paid 20 Apr 2000”.  The second bill was from B&Q, dated 21.03.00, for a total of £198.67.  This also had a hand-written note saying “For Norley Moat £60.67 (VAT £9.04)”, and a number of items in the bill, which do add up to £60.67, were marked.  This also bore a credit card number.  The third was dated 28/03/00, and was from Robert Sayle in Cambridge.  It was for “furnishings” and the total bill was for £348.10.  It had a stamp on it saying “Paid 25 Apr 2000”.  None of the bills bore a VAT registration number.

8.	The Appellant produced a copy of an analysis of cash book payments for the year to 31 March 2000, which shewed a hand-written calculation of the amount of VAT attributable to exempt supplies, the figures being extracted from that analysis:

“VAT not claimed to 31/3/00		£5,785.75
				+                22.12	PBM
					    192.43	Osborne & Little
					        9.04	B&Q (Lighting)
					      51.84	Robert Sayle
					    287.00	Welland Flooring
				           £6,348.18

Total de minimus VAT to 31/3/00        £6,348.18	Not claimed
				           £1,116.64	Claimed
				           £7,464.82”

9.	Mrs Parkes replied on 15 April 2002, her letter including the following paragraphs:

“1.	I note your comments regarding 2 New Cottages.  However, according to the notes made during my visit, 2 New Cottages was being advertised to let in March 2000, the input tax on the advertisement being posted to the accounts on 17 March 2000.  On this basis, the VAT incurred on the refurbishment costs etc became exempt input tax during the partial exemption year ending 31 March 2000 because the intention to let the property was taken before the end of that year.

2.	Under the cash accounting scheme, input tax is properly reclaimable in the tax period in which payment is made to the supplier.  Your letter suggests that Mrs E Clifton-Brown was simply making payment in her capacity as a partner in The Little Bradley Partnership, from her private funds, and was later reimbursed by the business.  I assume that she is not in business as a self-employed person in her own right.  On this basis I consider the supplies of goods and services from Osborne and Little, B&Q and Robert Sayle to have been made to the partnership at the time that Mrs Clifton-Brown paid for them and that the VAT incurred should therefore be included in the partial exemption calculations for the year to 31 March 2000.”

Mrs Parkes then stated her intention of issuing an assessment disallowing the input tax of £7,877.50.  She mentioned also that she had not included the exempt input tax on non-attributable business overheads, and that the Commissioners would need to know the amount in the event of an appeal.

10.	In a further letter of 23 April 2002, Mrs Parkes explained the calculation of the amount assessed inn the following terms:

“Total input tax disallowed	£7,464.82 (from your partial exemption workings)
			        +	     412.68 (from my letter of 28 February 2002)
			        =	  7,877.50	

1.	Because the partial exemption deminimis limits were exceeded in June 1999, I have disallowed the £718 exempt input tax relating to that month in period 06/99.  This is made up of £414.60 from your partial exemption calculations plus £303.40 listed in my letter.

2.	Similarly in period 03/00 I have disallowed the total exempt input tax of £6,459.63 actually claimed in that month which related to January and March 2000 because in both months the deminimis limits were exceeded.

3.	Because the exempt input tax was below the deminimis limits in the other months, I have attributed the remaining £699.87 of the assessment to period 04/00 because this is the month in which the partial exemption annual adjustment should have been carried out.  In each month the totals will be rounded down to the nearest pound on the assessment.”

The assessment (in forms VAT 641 and VAT 655) is set out in accordance with those paragraphs.

11.	On 10 May 2002, the Commissioners wrote to the Appellant imposing a misdeclaration penalty of £968 for the period 3/00, on the ground that as a result of the assessment the objective tests for misdirection had been breached.

12.	Mr Spokes wrote to Mrs Parkes on 14 May 2002 asking for a local reconsideration of the assessment, and said that the Appellant had done its best to ensure that the figures for input tax fell below £7,500.  He continued:

“1.	2 New Cottages - Whilst we do accept that a single advert was put into the newspaper in respect of this property no actual decision had been made as to whether it would be let out or occupied by a farm worker.  The advertisement was simply put in to gauge the market.  As it turned out, this particular advertisement did not generate any enquiries.  Indeed, looking at the minutes of the partnership meeting of 13 April 2000, it clearly states that a cottage for Mark Turner would be provided upon his redundancy from the dairy which took place at the end of April 2000.  At that stage we were not sure if he would remain in his own house (2 Hall Cottages) or be moved to another smaller house on the Estate (i.e. 2 New Cottages).

2.	Purchases by Mrs E Clifton-Brown - As you will appreciate Mrs E Clifton-Brown purchased the goods from Osborne & Little, B&Q and Robert Sayle by credit and store cards at the end of March but did not pay for them until April and was not reimbursed by the Partnership until she had paid for them.  The client’s reasonable view therefore is that these should not be included in the calculation to 31 March 2000.

We believe that the calculation was genuinely made under the partial exemption rules and therefore no repayment is due.

Mr Clifton-Brown has now received your Notice of Assessment of Misdeclaration Penalty.  We feel that this is totally unreasonable as our client did make the best efforts to try and keep the figure under £7,500 and it is only items in dispute that cause the threshold to be breached; we therefore feel the Application of a Misdeclaration Penalty is grossly unfair.”

13.	In a further letter of 28 May 2002, Mr Spokes gave further information relating to the letting of 2 New Cottages, as to which no decision was taken until the end of April 2000.  The total VAT involved was £203.  The letter also stated that the expenses paid privately by Mrs E Clifton-Brown amounted to £253.31.  As a result of those two letters, Mr Fuller wrote to Bidwells on 2 July 2002, reducing the assessment by £203 in respect of 2 New Cottages, and rescinded the misdeclaration penalty.  As to the purchases by Mrs Clifton-Brown, he said,

“As far as the purchases made on a partner’s credit card are concerned, Notice 731 which covers Cash Accounting includes the following text:  If you pay by credit or debit card: the date of payment is the date a sales voucher is made out for a payment by credit/debit card.  This text has the force of law.... As these were legitimate purchases made in the course or furtherance of the VAT registered business, the fact that a partner used her own credit card is not relevant to the recording of the transaction.”

14.	Following a meeting between Mr Spokes and Mr Fuller on 5 August 2002, Mr Fuller wrote summarising the situation with a calculation that shewed a shortfall of VAT of £7,876.00.  He repeated that the assessment would be reduced by the amount of £203, bringing it down to £7,673.  An amended assessment was duly issued.

15.	At that point, Bidwells referred the matter to a Mr Keith White, a retired inspector of VAT.  He observed that it was astonishing that the matter had to go to a VAT Tribunal since it was a borderline situation as regards the de minimis limit.  He made four main points.  First, that

“...in this particular case the various amounts of input tax that Customs originally decided related to exempt supplies, which then caused the de minimis limit to be breached, were all borderline.  In fact the one covered by your letter of 24 June 2003, relating to VAT of £65.35 on a Bidwell’s invoice, should not ever have been included in the first place.  This particular transaction was added in by the visiting Inspector, not the Little Bradley Farm Partnership, and does not seem to demonstrate ‘best judgment’ on the Department’s part.”

Secondly, he contended that a partner was in a similar position to that of a director or any other employee of the business purchasing goods on behalf of the business, and that ownership of the goods would not pass to the business until they were paid for by the business, in this case when the partnership reimbursed Mrs Clifton-Brown.  Thirdly, he pointed out that the receipts for those payments were not proper VAT receipts and would not be acceptable as shewing that VAT had been paid.  If those matters were accepted, Mr White continued, there would have been no breach of the de minimis limit.  Finally, Mr White said that no account had been taken of residual input tax, and he included a calculation illustrating this.

16.	In a further communication dated 9 September 2003, Mr White stated that he had discovered that the original assessment might have contained inaccuracies, and may not have been valid, that an additional £412.68 of exempt input tax had been included in the assessment in error, and that

“By my calculations the original assessment, based on Customs calculations, should only have been for £7,464.82.  The reason being that although Customs maintain that total exempt input tax exceeds the deminimis limit the amount of exempt input tax actually claimed by the Partnership did not.”

At the hearing, the point was not taken that the assessment was invalid.

17.	Nicola Joad, of the Solicitor’s Department of the Commissioners, replied to Mr White’s e-mails, explaining that once a taxpayer had exceeded the de minimis limit the exempt input tax was disallowed, a rule which had to be applied consistently.  She referred to the credit card rule in Notice 731.  She pointed out that the Commissioners have a discretion to accept a reasonable alternative if a tax invoice is not available.  She pointed out also that the £412.68 had not been included in the Appellant’s own partial exemption calculation, but it had been claimed by the Appellant and was therefore properly included in the calculation of the assessment.

18.	In her unchallenged oral evidence, Mrs Parkes said that the credit card payments had been included in the amount of the exempt input tax, and had therefore already been claimed.  She took the view that Mrs Clifton-Brown had paid for those goods on behalf of the Appellant.  Until she had received the letter of 25 March 2002 from Bidwells, she had not known about the credit card payments.  Her letter of 15 April 2002 was based upon Notice 731, the Appellant being on cash accounting; the rule was that VAT was accounted for in the period in which payment was made to the supplier.  Mr Fuller, dealing with the same point, said that the payments by credit card had been made in the course or furtherance of the business, and therefore under the cash accounting rule, the issue by a retailer of the credit card slip created the tax point.

The law

19.	The deduction of input tax is provided for in section 26 of the Value added Tax Act 1994:

“(1)	The amount of input tax for which a taxable person is entitled to credit at the end of an period shall be so much of the input tax for the period ... as is allowable by or under regulations as being attributable to supplies within subsection (2) below;

(2)	The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—
	(a)	taxable supplies;
	. . .
(3)	The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above....”

The regulations referred to are the Value Added Tax Regulations 1995.  Regulation 101 provides:

“(1)	Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.

(2)	In respect of each prescribed accounting period—
	. . .
(b)	there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies;
(c)	no part of the input tax on such goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies;
(d)	there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.”

Regulation 102 allows the use of other methods of accounting for input tax than that set out in regulation 101, but only if the Commissioners have approved the other method.  That does not apply in the present case.  Regulation 65 provides for accounting for VAT by the due date for the particular accounting period, and for the crediting of input tax:

“(2)	Input tax may be credited either in the prescribed accounting period in which payment or consideration for a supply are given, or in such later period as may be agreed with the Commissioners.”

It was not in dispute that the Appellant is on the cash accounting scheme, and made monthly returns.  VAT Notice 731, on cash accounting, gives the conditions provided for by the Commissioners pursuant to the 1995 Regulations.  Paragraph 3.4, which the notice states has the force of law, provides:

“If you pay by credit or debit card:  the date of payment is the date a sales voucher is made out for a payment by credit/debit card.” 

20.	Regulation 106 provides:
“(1)	... where relevant input tax—
	(a)	in any prescribed accounting period
	(b)	. . .
(i)	does not amount to more than £625 per month on average, and
(ii)	does not exceed one half of all his input tax for the period concerned
all such input tax in that period shall be treated as attributable to taxable supplies.
	. . .”
That is the so-called de minimis limit.

The Appellant’s contentions

21.	Mr Spokes relied upon the case that had been put for the Appellant in correspondence.  He said that the amounts paid by Mrs Clifton-Brown by credit card had not been reimbursed until either April or May 2000.  They had been included in the return for March 2000 in error.  The Appellant contended that Mrs Clifton-Brown was in the same position as an employee or a director of a company, and if she purchased goods, even though on behalf of the company, the goods would remain her goods until she was reimbursed by the business.  Under common law ownership passed on the date when the business paid for the goods.  Until then, the goods remained in Mrs Clifton-Brown’s personal ownership, after the credit card company had paid, until she was reimbursed.  He said that he did not know how the matter had been dealt with in the partnership accounts.  The Commissioners said that the amounts were manipulated so that the exempt input tax should remain under the de minimis limit, but if those amounts were paid after 31 March 2000 input tax could not have been claimed, because in that next tax year the amount exceeded the limit.  The input tax involved, of £253.31, was deemed to have been claimable at the time when Mrs Clifton-Brown was reimbursed, in April or May 2000.  That would result in the de minimis limit not having been breached, and the assessment should therefore be withdrawn.

The Commissioners’ contentions

22.	Miss Rahman, for the Commissioners, produced a helpful skeleton argument.  She also simplified matters by saying, which was not disputed, that the only issue was whether the credit card purchases by Mrs Clifton-Brown were in effect payments made by the Appellant within the partial exemption year to 31 March 2000.  It was not in dispute either that the purchases were made for the purposes of the business.  If the Appellant's argument is wrong on that issue, those amounts fall to be included in the amount of input tax claimed, and the total amount claimed exceeded the de minimis limit.

23.	Regulation 65 provides that input tax may be credited in the prescribed accounting period in which the payment was made, or in such later period as may be agreed: no later period was agreed, and therefore the input tax fell to be credited in the year to 31 March 2000.  The Commissioners also relied upon paragraph 3.4 of Notice 731, that the date of payment was the date on which a sales voucher was made out.

Conclusions

24.	We have already found as facts that the credit card purchases were made by Mrs Clifton-Brown, for the purposes of the business of the Appellant, on several dates in March 2000, and that she made the purchases using her personal credit card.  What, we ask ourselves, was the result of her so doing?  The immediate result was that certain goods were supplied to her by the three companies concerned.  But since Mrs Clifton-Brown was making purchases on behalf of the Appellant, she was acting as a partner and not in her own personal capacity, notwithstanding that the liability for payment for those goods fell upon her personally:  qui facit per alium facit per se; therefore the partnership, acting by one of the partners, was acting by itself.  It has been objected that Mrs Clifton-Brown was not reimbursed until some time in April 2000.  That may well be so.  However, if she was acting on behalf of the partnership, a debt immediately arose from the partnership to her for the amount of the goods purchased for the Appellant, and the Appellant was therefore liable for that debt from the moment it was incurred, which was on the dates of the purchases.  The contentions made in correspondence, that Mrs Clifton-Brown, as a partner, was in the same position as a director or employee of a company were not in fact correct, since, as a partner, Mrs Clifton-Brown was a principal. It was not suggested that she had no power to bind the partnership.  But it would make no difference, since she was acting on behalf of the Appellant, as a director or employee would be in parallel circumstances. The result is that the Appellant, through one of its partners, made purchases in March 2000 for which the Appellant immediately became liable.  Moreover, since the Appellant was on cash accounting, paragraph 3.4 of Notice 731 applies, with the result that the date of payment for VATpurposes was the date of the sales voucher in each case.  As Miss Rahman rightly said, were it otherwise it would leave the door open for widespread abuse, by arranging to pay for goods at some later, possibly considerably later, date so as to put off the risk of having to pay the input tax without the right to recover it.

22.	It was also contended in correspondence, though not at the hearing, that the amount of the input tax claimed was so close to the limit of £7,500 that the deduction should be allowed.  It was rightly said that such a case cannot be treated as a borderline case and deduction allowed even though the amount of exempt input tax was slightly over the limit set out in regulation 106.  The whole purpose of that regulation is to allow recovery of tax where the amount claimed in respect of exempt supplies is very small.  To allow a further “de minimis” over and above that would be to make nonsense of the whole scheme.  Where would it end?  Where would the line be drawn?  And suppose the amount were only slightly above the second de minimis : what then?  The absurdity is self-evident.

23.	For the above reasons, this appeal must be dismissed.  The Commissioners said that they would not be asking for costs, and accordingly we give no direction as to costs.

ANGUS NICOL
CHAIRMAN

RELEASED:

LON/02/773