19013
	VAT — Interest on input tax claim — whether payable under section 78 of VAT Act 1994 when supplement paid under section 79 — no — whether section 85 agreement reached concerning interest — no — appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

 
 	
	RABI AND NADER KOHANZAD	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Richard Barlow (Chairman)
						 Marjorie Kostick BA FCA CTA	

Sitting in public in Manchester on 2 November 2004 and 21 January 2005

Mr Nader Kohanzad representing himself and Mr Rabi Kohanzad 

Mr James Puzey of counsel instructed by the Solicitor’s office for HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal by a partnership consisting of Mr Rabi Kohanzad and his son Mr Nader Kohanzad trading as Giltedged Stationery.  The appeal is against the Respondents’ decision contained in a letter dated 24 July 2001 by which they refused to pay the Appellants interest under section 78 of the VAT Act 1994, or on any other basis.

General background

2.	The Appellants registered for VAT from 1 June 1997 in respect of a business described as stationery manufacture.  The only stationery referred to in this appeal was a type of ring binder called lay-flat binders and Mr Nader Kohanzad had had some involvement with these items in the USA with a Mr Mazurek for whom he had worked as a bookkeeper.  The Appellant’s evidence was given by Mr Nader Kohanzad (from this point in our decision we will refer to him as Mr Kohanzad and will refer to his father by his full name).

3.	The Appellants acquired a large quantity of the ring binders from Mr Mazurek’s company and paid for them through a ‘barter account’ which represented the accounting record for payments involving various transactions between the Appellants, Mr Rabi Kohanzad’s son in law and Mr Mazurek concerning the ring binders, several properties in England and several expensive motor cars.

4.	Mr Kohanzad was prosecuted by Customs and Excise and Mr Mazurek was a witness against him.  The trial was concluded before the jury was asked to reach a verdict, apparently because the Judge was not satisfied that Customs and Excise had prepared the case properly or disclosed evidence to Mr Kohanzad correctly.  It appears the Judge was also dissatisfied with Mr Mazurek’s evidence.  The prosecution was concluded on 11 July 2000 when Customs and Excise offered no evidence at the resumed hearing; possibly following a ruling that to do so would be an abuse of process.  The details of the prosecution are not relevant to our decision and we mention it only because Mr Kohanzad clearly felt aggrieved about being prosecuted and partly based his claim for payment of interest on the effects upon him of the prosecution.  He even alleged that the prosecution had been mounted to avoid or delay the resolution of tribunal proceedings; which is a contention we reject, there being no evidence at all to support it.

The underlying issue

5.	The Appellants claimed input tax of £94,500 in their VAT return for the prescribed accounting period ending October 1999 in respect of the purchase of lay-flat ring binders from Mr Mazurek or his company.  On 21 October 1997 Mr Kohanzad had written to Customs and Excise saying he did not have invoices to support an earlier claim for input tax of £94,500 and appearing to admit that he had submitted false invoices to make such a claim on the Appellants’ return for a prescribed accounting period in 1997 (it is not clear which one).  It appears Customs and Excise did not repay the Appellants any input tax on that earlier occasion.

6.	When the same £94,500 was claimed in the October 1999 it was the Appellants’ case that it was supported by the first version of the barter account, rather than by invoices.  The first version of the barter account contains an entry “purchase of lay-flats with no invoice to support the same £634,500-00”.  Assuming that figure is VAT inclusive £94,500 is the correct calculation of the VAT element. 

7.	Customs and Excise did not pay that input tax claim and the prosecution followed.  The Appellants produced a completely different version of the barter account showing the value of the ring binders acquired from Mr Mazurek as £337,425.00 (tax included would be £50,254.79).  We note that not only was the purchase figure substantially different but that the payments side of the account now equalled that figure, as the payments side of the account had done when the purchases figure had been £634,500.  Remarkably the purchase price of a Ferrari motor car at £128,500 in the first barter account was now shown as £47,125 and several other transactions had either disappeared or been added when the two accounts are compared.  

8.	There may be a complete explanation for the differences, though if there is we were not given it.  For the purpose of this appeal it is sufficient for us to hold, as we do, that Customs and Excise were perfectly entitled to withhold the original repayment claim in the absence of invoices or other evidence and to withhold the revised repayment claim until they had verified it, which is what happened with the second claim.

9.	A Mr Tonks, customs officer, who gave evidence which we find to be entirely truthful, told us that he had visited the Appellants on 13 September 2000 and, having seen the ring binders in storage at Mr Kohanzad’s home and having considered the revised barter account, he subsequently authorised the payment of £50,255 input tax, or made a report which led to that repayment; it matters not which.
The 13 September 2000 meeting/section 85 agreement issues

10.	At the meeting just referred to Mr Tonks met Mr Kohanzad and his VAT advisor, Mr Barnard.  Mr Kohanzad claims that an agreement under section 85 of the VAT Act 1994 was concluded at that meeting.  Mr Barnard gave evidence that he believed that to be the case.  We do not doubt that Mr Barnard honestly believed that such an agreement had been reached but whether an agreement has been reached or not depends upon both parties being in agreement in fact or, possibly, having made statements which would, viewed objectively, lead to the conclusion that an agreement had been reached.  

11.	Mr Barnard made notes at the meeting and they refer to the appeals being withdrawn subject to costs and disbursements.  The reference to appeals is because Mr Kohanzad had appealed in respect of several decisions and at that stage the question of the repayment of the revised input tax claim was still in issue but was, as is common ground between the parties, effectively agreed at the meeting.

12.	As far as the question of interest is concerned the note refers to a supplement and Mr Barnard said that was just sloppiness on his part and he meant interest.  We accept that, as there is also reference in the note to eight per cent which is certainly not the rate for a repayment supplement; though equally it was not the correct rate for statutory interest under section 78 of the VAT Act 1994 at that time.  Mr Barnard said that he had used eight per cent because he recalled that he had been involved in another case when that had been the correct rate and he used it for illustration purposes.  Mr Barnard said in evidence that as far as interest was concerned the participants in the meeting had “tried to make broad estimates”.  He recalled that as far as the rate was concerned Mr Tonks had said the computer would work it out and we find that that may well be the case as no doubt if an officer keys-in the relevant dates and capital sum the Respondents’ computer is programmed to apply the relevant rates.  However, what is absent from Mr Barnard’s note or his recollection of the meeting as described to us in his evidence is any suggestion that the dates from which and to which interest would be payable were agreed.  He said in evidence that he thought the principle (i.e. that interest would be payable) had been agreed and that that was sufficient.

13.	Mr Tonks on the other hand said that although before the meeting he was aware that some interest or a repayment supplement would be payable he had not decided which.  At the meeting either Mr Kohanzad or Mr Barnard raised the question of compensation or interest and that Mr Kohanzad wanted financial compensation for the delay which Mr Tonks took to mean interest.  He said that the actual figure to be paid to Mr Kohanzad was not finally determined by him until three days after the meeting.  The figure was not the input tax because the Appellants also owed output tax to be set against the input tax figure.  In fact a figure of £26,379.94 repayable to the Appellants, which had been put forward at the meeting, which was based partly on the input tax of £50,254.79 (rounded to £50,255), was determined to be correct.

14.	Mr Tonks wrote to Mr Kohanzad on 22 September 2000 saying £26,379.94 was repayable and making no reference to interest.  Mr Kohanzad endorsed the letter with a handwritten note and faxed it back to Mr Tonks on 23 September.  Mr Kohanzad’s note, so far as is relevant, reads as follows:

	“I have pleasure in confirming subject to reasonable costs together with interest in respect of the £95K dated 21/8/97 (as from Sept 97) which as aforementioned in my previous fax that the said £95K was rendered to the voluntary disclosure section on that date plus …”

	It seems obvious that the fact that Mr Kohanzad was claiming interest on the £95,000 sum, which had not been agreed at the meeting on any view, shows that agreement had not been reached at that meeting concerning interest.  Mr Tonks also told us, and we find it to be the case, that this was the first he had heard about the starting date claimed for interest. 

15.	 We have no hesitation in finding and holding that no agreement was reached concerning interest at the 13 September meeting.

16.	Mr Kohanzad was claiming interest on a figure that had never been due to the Appellants and continued to do so before us until the end of the case.  His rationale for doing so was that he felt he was entitled to compensation for the trouble he had been put to by the prosecution but there is no doubt in our minds that Mr Tonks would not have agreed to interest being paid on that basis, even if it had been raised at the meeting.  We find that it had not been raised on that basis at the meeting.

17.	Even if our findings and holdings about what was agreed at the meeting are incorrect any agreement that was reached about interest was not put into writing as required by section 85(3).

18.	We record the fact that Mr Puzey contended that an agreement as to interest could not have been the subject of a section 85 agreement because there were at that time no VAT tribunal proceedings in existence in which such a claim had been made.  That may be correct but we have not examined that contention because we were not fully informed about what proceedings were then current and in light of our holdings and findings about there being no agreement the issue is not one we need to determine.  
Interest and supplement that were paid

19.	In fact, Customs and Excise did pay interest to the Appellants on the £50,255 from 1 February 2000 until the day on which that sum was repaid to the Appellants.  Unfortunately, Customs and Excise mistakenly thought they were paying that interest under section 84(8) of the VAT Act 1994 and said so in a letter dated 28 June 2002.  That was an error because that provision only allows the Tribunal to award interest.  On the other hand Customs and Excise paid the interest at the statutory rates applicable under section 78 of the VAT Act 1994.

20.	Customs and Excise had also paid repayment supplements under section 79 of the VAT Act 1994.  These were paid on about 24 July 2001 and were said to be in respect of periods 10/99 and 04/00, £4,779.33 being in respect of period 10/99 and £188.41 in respect of period 04/00.  The £4,779.33 appears to exceed the amount that could have been due under section 79 as it is more than five per cent of the £94,500 incorrectly claimed at that time (which should have been £50,225).

21.	We were not asked to look further into the reason why these repayment supplements were in the amounts that were paid and we agree that it was irrelevant to do so.  Mr Puzey pointed out that interest is not payable under section 78 on an amount which “falls to be increased by a supplement under section 79” (section 78(2)).  The phrase “falls to be increased” was considered in the case of R (on the application of Elite Mobile plc) –v- Customs and Excise Commissioners [2005] STC 275 which was not reported until after the hearing in this case.  Lindsay J held in that case that “falls to be increased” meant, on the facts of that case, that if a supplement could be paid under section 79 interest under section 78 is precluded even if no supplement has yet been paid.  As that was not the situation in this case we did not consider it necessary to invite the parties to make any further submissions on that case.

Conclusions

22.	We agree with Mr Puzey that because the supplement had been paid under section 79 no interest under section 78 was payable.

23.	It might be argued that, as the Commissioners said they were paying interest under section 84, they have not paid interest under section 78 but as no interest was payable under section 78 (because the supplement had been paid) that argument would take the Appellants nowhere.  If it had been necessary to do so we would have held that the payment of interest was under section 78 despite the Commissioners’ statement that it was being paid under section 84.  As the Commissioners had no power to pay under section 84 and as they had paid at the rates applicable under section 78 common sense dictates that they should be treated as having in fact paid under section 78, whatever they thought the position was.  Even if that is the wrong approach there is no interest payable under section 78 and the Appellants have no claim in that respect.

24.	The last point we need to consider is whether the Appellants might now be entitled to interest under section 84(8) of the VAT Act 1994.  That section gives the tribunal power to award interest at rates set by it which may not necessarily be the statutory rates applicable under section 78.  Mr Puzey argued that we had no power to award interest under that provision because no capital sum upon which it might be awarded was in issue in this particular appeal.  

25.	He may well be right but, as the Appellants have been paid a repayment supplement apparently in excess of what they were entitled to and interest to which they were not entitled, in the exercise of our discretionary power under section 84 we would award interest at nil rate at best and so it is unnecessary to consider the point.

26.	It follows that the appeal is dismissed.

27.	Mr Puzey sought an award of costs against the Appellants on the ground that the appeal was vexatious but, although Mr Kohanzad put forward a case which was based on a claim for interest on a sum well in excess of the sum that could conceivably have formed the basis for such a claim, even if interest had been payable in law; we do not think he did so vexatiously.  Rather we think his sense of injustice about the prosecution spurred him on.  That should not be taken to mean that we in any way agree that he has suffered an injustice, we simply do not know.  

28.	We would like to thank Mr Puzey for the exceptional clarity with which he presented the Commissioners’ case in a matter which was complicated and in which Mr Kohanzad, as a litigant in person, was not himself familiar with the legal issues.

RICHARD BARLOW
CHAIRMAN
Release Date: 12 April 2005
MAN/01/0849
££Kohanzad & Anor v Customs and Excise [2005] UKVAT V19013 (12 April 2005)