19352
ASSESSMENT – Imported second-hand cars from Ireland – Incorrect use of margin scheme – Whether assessment is to best judgment – Appeal dismissed

LONDON TRIBUNAL CENTRE

	LEON PHIPPS	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MR C SHAW FCA 

Sitting in public in Cardiff on 2 November 2005

There was no appearance by the Appellant 

Mr A Edwards of counsel for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	There was no explanation for the non-appearance of the Appellant and we proceeded to hear the appeal in his absence under the provisions of Rule 26(2) of the Value Added Tax Tribunals Rules 1986. The appeal is against a re-amended assessment issued on 29 April 2002 in the sum of £8,980 plus interest.  The original assessment was issued on 10 April 2001 in the sum of £16,525 plus interest, and an amended assessment was issued, following local reconsideration, on 21 September 2001 in the sum of £15,440 plus interest.

2.	The Appellant was a sole trader whose main business activity was the wholesale and retail of used motor cars.  Part of this business was the purchase of used cars in Eire which the Appellant imported into the United Kingdom and sold on in the United Kingdom.  The Appellant was registered for VAT with effect from 29 June 1998 and was deregistered as of 24 January 2000 as he had ceased to trade.  

3.	In part this appeal is against the Respondents’ decision that the margin scheme for the supply of second-hand cars did not apply to five of the motor cars bought by the Appellant in Eire on which he had paid a sum expressed to be VAT in Eire.  It was not clear either from the Respondents’ statement of case or from the evidence given by Miss Caroline Jane Phelan, a VAT officer who gave evidence on behalf of the Respondents, to what the rest of the assessment pertained, the amount of the assessment relating to those five vehicles was calculated by Mr Edwards as being £3,936.67, leaving a sum of approximately £5,044 which related to other matters.  It was initially submitted by Mr Edwards that, as the grounds of appeal in the Appellant’s notice of appeal refer only to matter of the five cars in that the grounds of appeal are: “I have paid tax once and do not think it just that I should pay a second time” therefore that was the only issue for consideration for the Tribunal.  However, we took the view that since the Appellant stated the approximate sum of money in dispute to be £9,000, i.e. an amount which also related to matters other than the five vehicles from Eire, and as the facts of the case were entirely unclear from the statement of case, and because we were dealing with the matter in the absence of the Appellant, we also considered the issue of whether the assessment was made to best judgment and whether the Respondents had adopted the proper approach to the other items in respect of which undeclared output tax was assessed.

4.	The only witness was Miss Phelan, and she had carried out a visit to the offices of the Appellant’s accountants on 15 February 2001. She was informed that the Appellant was frequently away and the accountants had difficulty in obtaining all the records for her. The accountants provided a stock record and corresponding sales and purchasing invoices, but there was no proper audit trail. The Appellant had not produced a VAT account, and there was not a complete list of purchases to substantiate the input tax claims made on the returns. There was no quarterly sales listing. Miss Phelan was provided with bank statements and paying-in books. As there were no sales or purchase day books available, Miss Phelan attempted to reconstruct sales records from the stock records.  

5.	Miss Phelan removed the records from the accountants in order to examine them and to attempt to reconstruct sales records from the stock records.  On doing this she identified six cars on which VAT had been paid in Eire and in respect of which she considered that the Appellant had wrongly applied the margin scheme. In addition to these vehicles there were a number of additional sales on which value added tax had not been accounted for on the returns.  

6.	Miss Phelan had attempted to contact the Appellant by telephone, but at no point had she written to him. She was unable to contact him by telephone and raised an assessment on the basis of schedules she had prepared from the documents she had and then sent copies to the Appellant and to his accountants.  The assessment was in the sum of £16,525. It was Miss Phelan’s evidence that the records were totally inadequate and she was unable to do an in-depths check of the purchases but had to accept those that were listed. In making the schedule for the assessment she listed sales for each period and calculated the output tax which she then compared with the output tax declared on the returns. She found that a number of items which were unidentified had been included as vehicles sold. There was money which had come into the bank which appeared unrelated to any specific sales.  Some of the cars had no related sales invoices. Where this was the case she assumed that these vehicles remained in stock and she therefore calculated output tax on the basis of there having been a deemed supply at the same price as the cost of the vehicles shown on the purchase invoices.

7.	The sales were reconstructed from the stock records which showed a mixture of margin supplies and fully taxable supplies. The purchases were not reconstructed as sales were relatively small and reconciled to the purchases shown on the accounts.  The Appellant had been correctly accounting for EC import sales as fully taxable and VAT had been paid. The sales were correctly calculated on the margin scheme, but Miss Phelan was unable to reconcile the sales or acquisition. She examined the annual accounts. She found a variety of posting and arithmetical irregularities in the sales.  She did not doubt the Appellant’s overall credibility.

8.	It appears from the correspondence that some time in July 2001 there was a visit to the Appellant from a Miss Susan Parsons of the assessment review team.  Miss Parsons identified various matters which enabled her to reduce the assessment by £1,059.72.  It is not clear from the documents where the documents were obtained from which enabled her to reduce the assessment by that amount but she ascertained that five, not six, cars imported from Ireland had wrongly been treated within the margin scheme. She refers in her letter to discussions with the Appellant at their meeting but there is no record of what took place at the meeting. A further assessment was issued by Miss Parsons on 21 September 2001 in the sum of £15,440 plus interest of £462.28. Miss Parsons analysed Miss Phelan’s assessment and for the period 02/99 in respect of car registration H181 RKG she reduced the amount by £891.99 stating “No supply made, no output tax due”. The effect of this was that there was found to be no undeclared output tax for that period. In respect of period 05/99 and car registration G29 LAX she noted that Miss Phelan had charged £648.17 when what was due was £674.98 and therefore an additional £26.81 was owed by the Appellant in respect of that period.  Finally in respect of period 08/99 and vehicle registration L512 GNY she noted that the Appellant had been charged £1,384.61 where as what was due was £1,190.07, making a difference of £194.54 which had been overcharged.  In respect of the first and the third of these amounts it would appear that Miss Phelan had made an error, the reason for those errors was not however clear to us.  

9.	The Appellant asked for a reconsideration and all matters were thereafter handled by Mr S J Conyngham.  By a letter dated 8 September 2001 Mr Conyngham asked various questions of the Appellant to which the Appellant responded by a letter dated 15 December 2001. Further correspondence followed in which the Appellant refers to the accountant he had employed making a lot of errors, and to the fact that he had been trying to reclaim the tax that he ought not to have paid in Ireland but had been unable to succeed.  Following this correspondence, by a letter dated 3 April 2002 Mr Conyngham informed the Appellant that he would be reducing the assessment to £8,980 plus interest. Although Mr Conyngham refers to the sums which he has removed from the original schedule, his reasons for making the reductions are not clear in every instance. However there had been correspondence with the Appellant about a Mazda car in respect of which Miss Phelan had found a purchase invoice but had been unable to trace the sales invoice and had therefore assumed the vehicle was in stock at the date of deregistration. The Appellant had informed Mr Conyngham that he had no such vehicle in stock at the time and the matter was a mystery to him.  In respect of another car where the invoice showed it had been sold by the Appellant for the sum of £8,140.38, the Appellant had claimed that he only received £6,198.34, which was the sum paid into his account. Mr Conyngham accepted that there was a bad debt in respect of that vehicle and therefore the Appellant should only pay tax on the sum of £6,198.34.  The final assessment was issued on 29 April 2002.  

10.	It was suggested by Mr Edwards that this appeal was only against the final assessment whereas in considering best judgment it is established law that it is the original assessment that has to be considered as well as any amendments to that  assessment. The reasons for the subsequent amendments are not entirely clear, as stated above, however what is clear is that Miss Parsons made her amendments after having a meeting with the Appellant, there is no reference by her to any further documentation, but it appears that she was working from the same documents as were available to Miss Phelan. Mr Conyngham made his amendments having had a considerable amount of correspondence with the Appellant. The Appellant did produce at least one further document to him, namely the sales invoice for car registration J372 WHB.  

11.	It appears from the document before us that the Appellant was anxious to co-operate with the Commissioners and to make himself available and correspond as and when necessary. Miss Phelan issued her assessment without having done anything beyond telephoning on occasion (she did not tell us exactly how many times she had attempted to telephone and no record was shown to us of any failed telephone calls).  She did not attend the Appellant’s premises and she did not correspond with him in any way, had she done so she might well have had more documents at her disposal and certainly would have had more information. The fact that her two colleagues saw fit to reduce the assessment in the end by quite a considerable amount, points to the incompetence of Miss Phelan’s initial assessment. Mr Edwards addressed us on the matter of best judgment and submitted that there was no reason why the deductions were made and that Miss Phelan had adopted the obvious approach. It is inconceivable to us that experienced officers of Customs and Excise (and we conclude that they are experienced in that they are conducting reviews of Miss Phelan’s assessment and are therefore more experienced than her) would make deductions with “no reason”. Whilst it undoubtedly was the case that there were deficiencies in the Appellant’s record keeping, he did have documents beyond those held by the accountant and was not given the opportunity by Miss Phelan to produce these.

12.	The very way in which two other officers dealt with Miss Phelan’s assessment shows that it was not very satisfactory. However, the test now laid down in best judgment cases is a stiff one, requiring an appellant to show either that the assessments were made ‘dishonestly, vindictively or capriciously’, or were a ‘spurious estimate or guess in which all elements of judgment are missing’ or were ‘wholly unreasonable’. In the present case we do not think it can properly be said that Miss Phelan’s assessment, was any of the above, and the later amendments cured any faults there may have been.  

13.	With regard to the Appellant’s substantive ground of appeal, namely that, having accounted for value added tax on the five cars purchased in Ireland he was entitled to account for them on the margin scheme in the United Kingdom, there is substantial case law at tribunal level on this point. The relevant legal provisions are as follows:

“Article 8 of the VAT (Cars) Order 1992 (“the Cars Order”) provided at the relevant time:

8-(1)	Subject to complying with such conditions (including the keeping of such records and accounts) as the Commissioners may direct in a notice published by them for the purposes of this Order or may otherwise direct, and subject to paragraph (3) below, where a person supplies a used motor-car which he took possession of in any of the circumstances set out in paragraph (2) below, he may opt to account for the VAT chargeable on the supply on the profit margin on the supply instead of by reference to its values. 

(2)	The circumstances referred to in paragraph (1) above are that the taxable person took possession of the motor-car pursuant to –

(a)	a supply in respect of which no VAT was chargeable under the Act or under Part I of the Manx Act;
(b)	a supply on which VAT was chargeable on the profit margin in accordance with paragraph (1) above, … or a corresponding provision of the law of another Member State;

(3)	This article does not apply to –

…
( c)	any supply if an invoice or similar document showing an amount as being VAT or as being attributable to VAT is issued in respect of the supply.”

14.	It was the Respondents’ submission that the Appellant took possession of the cars pursuant to an acquisition rather than pursuant to any of the transactions specified in Article 8(2) of the Cars Order.  It was acknowledged by Mr Edwards that there was a lack of clarity in the Cars Order. It was submitted that the provision in 8(2)(a) would be of no effect if a supply in a different jurisdiction was the supply referred to in that section. It was not disputed by the Respondents that the Appellant had acquired the vehicles intending to import them to the United Kingdom, nor that he had purchased them from VAT regulated suppliers in Ireland. The Appellant had included value added tax on the full value of the sale in respect of some cars but not others.  The Tribunal was referred to the cases of Phillip John Martin (17809), Stephen Thomas McCarthy (18166), Richmond Cars Ltd [2000] V&DR 388 and Mrs E J Wood (17256).  In the case of Mrs E J Wood in which the facts are substantially the same on the relevant point, the Tribunal at paragraph 16 stated as follows:

“We do not find the Order particularly clear but on balance we favour the third interpretation and we think that the words in Art 8(2)(a) that the Appellant “took possession of the motor-car pursuant to a supply in respect of which no VAT was chargeable under the [VAT Act 1994]” are not satisfied when the supply in question formed part of a taxable acquisition.  If the Order had referred to a transaction pursuant to which the Appellant took possession of the car (as it does in paragraphs (c) and (d) relating to non-supplies), it would be clear that the provision was not satisfied where the transaction was an acquisition. We do not think it should make any difference that the Order referred to is a supply instead of a transaction.  The reason the Order referred to a supply rather than a transaction may be because acquisitions and imports into the United Kingdom are necessarily taxable and so it is only supplies that might not be taxable. The purpose of the provision is to ask whether tax is chargeable and it does not make sense to ignore the fact that the acquisition is taxable and concentrate on the supply contained in it being zero-rated in Ireland. If ‘supply’ in paragraph (a) included the supply contained in an acquisition it would be the only case of a fully taxable transaction in Article 8(2). Certainly there are no cases in Article 26aB of the Sixth Directive in which the margin scheme applies when the goods are acquired under a fully taxable transaction.  It would also be strange for the margin scheme to operate when input tax on the acquisition was creditable.”

15.	In the case of Richmond it was considered whether the appellant had been unfairly subjected to double taxation, and it was held that, had Richmond conducted its purchases from the Irish dealer properly, there would have been no double taxation and therefore neither any discrimination against Richmond, nor any deprivation of Richmond’s peaceful enjoyment of  his property.  The same point was considered in the case of McCarthy, where the tribunal followed the decision in Richmond and said that the appellant in fact had not been liable to pay Irish VAT on the purchase of the cars.  We agree with the tribunal in that case in that any “double taxation” only arises because of the appellant’s mistake in incorrectly paying Irish VAT, and not in the (correct) imposition of the UK acquisition tax or in the (correct) requirement to account for UK output tax on the full selling price of the cars. 

16.	For the above reasons this appeal is dismissed.  There is no order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 30 November 2005

LON/03/106
££Phipps v Her Majesty’s Revenue and Customs [2005] UKVAT V19352 (30 November 2005)