19404
	ASSESSMENT — underdeclaration of output tax and over claiming of input tax — validity of certain transactions — appeal dismissed with the exception of one small element

MANCHESTER TRIBUNAL CENTRE

 
 	
	INSTANTACTION LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Lady Mitting (Chairman)
						Howard J Middleton

Sitting in public in Manchester on 23 and 24 November 2005

Ian McDonald for the Appellant 

Joanna Vicary of counsel instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	Instantaction Limited (“Instantaction”) appeals against an assessment to tax in the sum of £2,518 plus interest, covering the period 10/98 to 10/99 inclusive, notified on 28 June 2000.  We heard oral evidence from the assessing officer, Mrs Pamela Shanker, the Appellant’s one time company secretary, Mr John Bone, and a director of the company, Mr Ian McDonald.
The Evidence
2.	On 2 February 2000, Mrs Shanker carried out a routine visit to a company called Merchandise Bulk Buyers Limited (“MBB”), a wholesale distribution company.  The visit took place at 8 Firs Avenue, Old Trafford, Manchester, the home address of Mr McDonald, who was also a director of MBB and whom she met on her visit.  Mrs Shanker produced both her visit report and her notebook in which she made contemporaneous notes during the meeting.  She told us that she was shown purchase invoices for MBB and that company’s VAT account.  She was also shown a set of Sage computer print outs from the MBB day book, all of which were shown to have been run off on 2 February 2000 between 8.21 am and 9.29 am.  The print outs consisted of several pages listing supplier invoices from March to October 1999 and two sheets headed “Customer Invoices (Detailed)”.  One of these two sheets showed just two invoices, both dated 31 July 1999, to Instantaction for a total of £29,869.82 gross on which the tax was £2,997.22.  The second sheet also showed just two invoices, both dated 31 October 1999, again to Instantaction and this time being for £63,941.85 gross; tax £5,169.85.  MBB’s VAT account for 07/99 showed VAT due of £2,997.22 reflecting the two customer invoices for that period to Instantaction.  The VAT  account for 10/99 showed VAT due of £8,167.07, a total of the tax on the two invoices for 07/99 and 10/99.  Why there should have been this duplication was not revealed.  
3.	From these printouts, Mrs Shanker realised an apparent relationship between MBB and Instantaction, a company which was described to her by Mr McDonald as being a business management company.  She thought this sufficiently significant to merit a routine audit of Instantaction’s books.  Instantaction appeared to have no sales invoices, at least none were presented to her but she told us that she did see the VAT account for Instantaction which tallied with these supplies to it by MBB.  Copies of the MBB computer print outs which Mrs Shanker saw were produced to us by the Respondents as were copies of MBB’s VAT accounts.  It should be said at this stage that Mrs Shanker did not take a copy of the Instantaction VAT account and it could not be found amongst the bundle of documents which Mr McDonald brought along to the tribunal.  
4.	Mrs Shanker told us that Mr McDonald told her that MBB made all the purchases.  MBB then sold all goods to Instantaction plus 7.5 per cent.  Instantaction reclaimed its input tax and then made onwards sales to four retail outlets, adding a mark up of 7.5 per cent and declared the appropriate output tax on these sales.  Of the four retail outlets through which the sales were made, three were frozen food stores in Prestatyn, Towyn and Holyhead, and the fourth of which was a general store, the Britannia Food Store, in Failsworth.  
5.	Mrs Shanker recognised that this constituted a retail scheme of sorts and she needed to assure herself that the correct amount of tax was being declared.  For this, she needed to visit one of the outlets to establish the selling price of the goods.  The three frozen food outlets would, in the main, be dealing in zero-rated frozen foods and she therefore visited the Britannia store.  This visit was fully documented in her notebook and listed the selling prices of a vast range of goods.  Mrs Shanker took most of the prices from the price tags displayed on the goods or from what she was told in the shop.  For a few items, where for some reason there was no price displayed, she took her figures from a local cash and carry.  Mrs Shanker then carried out an extremely extensive weighted mark up exercise for the most recent period 10/99, which again was fully documented in her notebook.  She wrote to Instantaction asking for details of goods for own use, pilferage and stock changes.  She received no reply but in an earlier discussion which she had had with Mr Bone, he had put a figure of £20 per week on own use, which she adopted.  No figures were ever supplied for pilferage or stock and no allowance was therefore given.  Mrs Shanker calculated that the true mark up should have been 17.97 per cent rather than 15 per cent.
6.	Mrs Shanker also carried out an analysis of the VAT returns for Instantaction for periods 10/98 to 10/99 and compared them with the VAT account.  The returns declared sales and outputs as follows:
10/98		£  4,951
01/99		£  9,371
04/99		nil
07/99		£30,903
10/99		£62,873

7.	In the light of Mrs Shanker’s mark up exercise, it was apparent from the VAT returns and her discussions with Mr Bone that there had been a resulting under declaration for periods 07/99 of £1,058 and for 10/99 of £132.  
8.	Apart from this weighted mark up exercise, Mrs Shanker also realised other apparent errors in the VAT returns.  At the Britannia Food Store, she saw that they rented out videos.  She assumed that this was also being operated by Instantaction and the rental did not appear to have been declared so from the records she assessed £82 for each of the periods 04/99, 07/99 and 10/99. 
9.	Mrs Shanker had also spotted certain input tax errors.  First, input tax had been reclaimed on rents for which no VAT had been charged and she assessed £673 for 07/99 and £336 for 10/99.
10.	Further, certain items of input tax on cars had been claimed for which no supporting evidence was produced and she assessed £113 in 01/99; £550 in 10/98 and £122 in 10/99.  Finally, she spotted that certain input tax had been under claimed in 01/99 and 10/98 and she added back into her calculation credit for the underclaim.  
11.	This, therefore, was how Mrs Shanker made and calculated her assessment.
12.	In cross examination, Mr McDonald put it to Mrs Shanker that she knew Mr Bone or had had previous contact with him, which Mrs Shanker did not think she had ever had.  He also asked her if she had seen at Britannia’s premises any evidence of a trading link between MBB and Instantaction.  She confirmed she had not but had been relying on what Mr McDonald and subsequently Mr Bone had told her and on the Sage printouts.
13.	Records from Companies House for Instantaction showed that throughout the period covered by the assessment, Mr McDonald and a Mr Mario Farquharson had been directors and one Frank John Brennan, later to be known as John Bone, company secretary. 
14.	Mr McDonald told us, in evidence in chief, that he had bought the company off the shelf and he and Mr Farquharson both became directors in 1998.  Instantaction was a business management company, he told us, dealing in property management and advising small businesses.   The company’s income was from fees it charged for its management and consultancy services.  Mr McDonald said that the company at no time, during the relevant period, traded in food stuffs and specifically did not enter into any retail scheme with MBB.  He was unable to say definitely that the two companies never traded with each other.  He said that there may have been transactions for which there would have been invoices but any such activity would have been minimal, without formal arrangement and would have been too small to constitute a retail scheme.  Initially, he said that any such transactions would only have been “one or two” but later said that there may have been slightly more than that but certainly not many.  MBB, he told us, had been owned by himself and Mr Bone.  During Mrs Shanker’s visit, it was mooted for the first time that Instantaction might expand into retail outlets by purchasing goods from MBB and then supplying retail outlets.  This was only a suggestion for future activity and up until then we were told there had been no tangible link between the two companies.  
15.	In cross examination, Mr McDonald was asked repeatedly whether the VAT returns of Instantaction were correct.  He declined to answer, being either unable or unwilling to say.  Miss Vicary referred Mr McDonald to the Sage printouts showing the invoices from MBB to Instantaction.  She put it to him that these revealed four large sales of goods from one to the other.  He replied that this was only an inference which she was drawing and that Instantaction had not sold any goods.  In support, he referred us to the annual accounts for the periods to 30 April 1999 and 30 April 2000.  In the profit and loss accounts, the only income declared in 1999 was for rents of £31,534.  In the 2000 accounts, rents amounted to £11,200 and commission £2,533.  Nowhere, Mr McDonald pointed out, was there any record of food purchases or sales.  There were therefore none.  
16.	It had been Mr McDonald’s contention that the four retail outlets were operated by MBB who purchased goods and distributed them through the various outlets, Instantaction having no involvement in this arrangement or with the four outlets.  Each party produced documentary evidence to attempt to prove which of the companies ran the outlets.  The Respondents produced invoices for the insurance cover for the Prestatyn and Towyn outlets.  Both were addressed to Instantaction and both named the insured as Instantaction Limited trading as Merlin Frozen Foods.  Mr McDonald maintained that this was an error by the brokers who dealt with all the insurances for both companies.  Mr McDonald then produced to us utility and rates bills.  The rates bills for the Towyn shop were addressed to MBB, trading as Merlin Frozen Foods.  The electricity account for the Towyn shop was addressed to MBB’s head office in Manchester.  Two supplier invoices for the Britannia store were addressed to MBB, one of them showing MBB trading as Britannia Food and Drink. 
17.	Mr Bone (or Mr Brennan – it was not clear which his original name had been), in evidence in chief, confirmed the content of a witness statement which he had provided to the Respondents and in which he said that he had, since 1996, been company secretary of both Instantaction and MBB.  He was responsible for maintaining the accounting records of both.  He maintained the purchase records from the purchase invoices.  He had no access to primary sales records and relied for this information on what he was told by the directors.  He entered both purchase and sales details on to the computer, which automatically generated the VAT returns for both companies.  He said that Mr Farquharson signed all the VAT returns for Instantaction and Mr McDonald, those for MBB.  In fact, this was shown to be incorrect as of the five returns we saw for Instantaction, those for 04/99, 07/99 and 10/99 were signed by Mr Bone (as F J Brennan in 07/99 and 10/99).  
18.	Mr Bone went on, in his statement, to describe the trading link between the two companies.  MBB bought goods for resale, mainly food stuff and household cleaning products.  It sold these at a small profit to Instantaction who in turn sold the goods through various retail outlets it operated in North Wales and Manchester.  This scheme was in operation from 1998 until shortly after Mrs Shanker’s visit in 2000. 
19.	In his oral evidence, he was asked how he completed Instantaction’s VAT returns.  He told us he worked from the invoices from MBB to Instantaction and applied a mark up to the purchases which Instantaction had sold on.w  
20.	In cross examination, Mr Bone was asked by Mr McDonald to explain why he had changed his name from Frank John Brennan to John Bone.  Mr Bone’s initial answer was that when Instantaction was set up, it was dormant.  As it had to have a director and company secretary, he became a director under his true name and adopted the pseudonym of John Bone to be company secretary. This explanation was not borne out by the Directors Register from Companies House which showed John Bone to have been director from May 1992 to 1 April 1996.  Frank John Brennan had been company secretary from 1 April 1996 to 17 March 2000 and John Bone had been company secretary from 16 March 2000 to 6 June 2001.  We, the tribunal, put this to Mr Bone to which he responded that he could not actually remember.  Mr McDonald asked what the purpose of his resignation and re-appointment as company secretary was in March 2000, but again, Mr Bone could not remember.  Mr McDonald put it to him that the discussion with Mrs Shanker about the trading relationship between MBB and Instantaction was only a discussion about a proposed intention.  Mr Bone remembered that there had been a discussion but not what was said.  Mr McDonald pointed out that the VAT returns which were “raising red flags” were those signed by Mr Bone and he asked why he and not Mr Farquharson had signed them.  Mr Bone thought this would have been agreed with Mr Farquharson.  He was asked why, if he was aware of trading activity between MBB and Instantaction this was not referred to in the accounts.  Mr Bone’s reply was that the accounts would have been discussed with Mr McDonald and Mr Farquharson and would have been prepared in conjunction with them and not of his own volition.  
Submissions
21.	It was the Respondents’ case that there was a trading relationship between MBB and Instantaction, evidenced by the Sage printouts and Mrs Shanker’s notes.  Miss Vicary thought that Mr McDonald had read more into the phrase “retail scheme” than had been intended.  The name given to the arrangement or whether a formal scheme had been entered into was irrelevant.  What mattered was the nature of the relationship between the two companies and that relationship was quite clearly a trading relationship.  
22.	Mr McDonald contended that no such trading link existed between the two.  He denied that he had told Mrs Shanker that it did and he further denied that the Sage printouts had originated from him or from Mr Bone.  He pointed out that he had brought to the tribunal the entire records of MBB and Instantaction and a search through them had not revealed the existence of these printouts.  He also pointed out the lack of primary documents or the actual invoices to verify the entries on the printouts and given this he invited the tribunal to reject them.  Mr McDonald relied on the annual accounts to show that in 1999 and 2000 there was no inter trading between MBB and Instantaction.  He also relied on the VAT returns to demonstrate there was no retail scheme in operation as the box on the return for entering the detail of any such scheme had been left blank.  
Conclusions
23.	The assessment consists of five elements, of most of which there has been only minimal mention and only one of which was fully challenged by the Appellant, although all elements were, we were told, in dispute.  We will address each element in turn but will begin with the mark up as this is the one on which the hearing concentrated.
24.	The correctness of the mark up element depends on two factors.  First, that there was the trading relationship between the two companies, as maintained by the Respondents and secondly, that the VAT returns submitted on behalf of Instantaction understated the actual mark up.  The evidence put forward by the Respondents in support of such a link consisted of: (i) the Sage printouts recording the four high value sales transactions; (ii) that Mr McDonald told Mrs Shanker about the arrangement on her first visit; (iii) it was confirmed by Mr Bone in his evidence and (iv) the VAT returns.  
25.	We found Mrs Shanker to be an honest and straightforward witness.  She maintained that she had been told by Mr McDonald of the arrangement and we see no reason to reject this oral evidence.  However, beyond her oral evidence there is also the supporting evidence of her contemporaneous notebook.  Her notes were neat, meticulous and extremely full.  In the middle of page two of the notebook, her record of what she was told is documented by means of a flow chart.  It clearly shows that MBB made the purchases, supplied the goods to Instantaction with a mark up of 7.5 per cent and that Instantaction made onward sales with a further 7.5 per cent mark up, declaring output tax on the sales.  This entry in the notebook was not, in our view, added later, or fabricated but accurately records exactly what she was told.  Equally, we have no reason to doubt the authenticity of the two Sage printouts.  As shown from the time and date entries on them, they were clearly run off at the same time as the remaining print outs which Mrs Shanker was given.  The entries can be verified by reference to MBB’s VAT returns in that the VAT on the transactions can be cross checked and matched the output tax claimed by MBB on its returns for 07/99 and 10/99.  The purchases are declared in Instantaction’s returns and the input tax reclaimed.  Mrs Shanker’s notes also confirm that she traced the input tax claims back to the actual purchase invoices, not just the printouts  The records brought to the tribunal by the Appellant did not include these invoices.  Mr McDonald claimed that this was proof that they had never existed.  Mrs Shanker, very fairly, said she could not actually recall seeing the invoices but deduced that she must have done from her notebook.  Again, we see no reason why she should record something in her notebook that she did not actually do and we accept that she would have seen the supporting invoices.
26.	As to the VAT returns, we can see no reasons why they should declare purchases and sales which did not take place.  After all, the only assessment being raised by the Respondents is for a correction in the mark up applied.  
27.	Mr Bone’s evidence has to be treated with circumspection.  He was clearly not being honest with the tribunal over his double identity.  If the VAT returns are correct, the annual accounts clearly are not and he prepared and signed off these accounts.  In relation to the accounts, we should comment firstly that they are not audited.  Secondly, we note that the March 2000 accounts were signed off, and therefore presumably prepared and completed, before the end of the period.  In relation to his preparation of the VAT returns however, we can see no reason why he should have included non-existent purchases and sales.  
28.	We believe the evidence, both oral from Mrs Shanker, supported by her notes, and documentary to be compelling and we find that there was the trading link between MBB and Instantaction as recorded in the Sage printouts.  In the absence of any other evidence as to what became of the goods purchased, we also find that Instantaction disposed of them through the various retail outlets, declaring the sales in its own VAT returns.  
29.	The evidence as to whether MBB or Instantaction ran the retail outlets is contradictory but probably does not really matter.  What does matter is that Instantaction sold the goods through the outlets and accounted for the output tax on their sale in its VAT returns.  
30.	Mr McDonald did not challenge the accuracy of Mrs Shanker’s mark up calculation.  It appears to us to have been meticulously carried out and we have no reason to doubt its accuracy.  We uphold the mark up element of the assessment for periods 07/99 and 10/99 as raised.
31.	We heard very little evidence in relation to the assessment in respect of the video rentals.  Mrs Shanker confirmed that she personally saw no Instantaction records with regard to the videos but she assumed that because everything else originated from Instantaction, so did the videos.  We, ourselves, are not so certain.  Not only was there no evidence that Instantaction had any involvement in the video rental business, but amongst the documents put into us to show that MBB ran the Britannia store, there was an invoice from a company called Hollywood Rentals Limited.  This document was not referred to by either party specifically but we take it to be evidence that the videos rented out by the Britannia store originated from Hollywood rentals and not from Instantaction and there is no evidence that any of the income from the video rentals went to Instantaction.  We therefore allow the appeal against this element of the assessment.  
32.	Mr McDonald made no reference during his evidence or submissions to the assessment in relation to the overclaimed input tax.  He was asked in cross examination about his claim for input tax on rental invoices where no VAT had been charged.  He repeatedly sidestepped the questions.  No evidence was produced to show that this element of the assessment had been incorrectly raised and in the absence of any evidence, we uphold the assessment in relation to the overclaimed input tax.
33.	Finally, in respect of the underclaimed input tax, this is clearly in the Appellant’s favour.  There was no reference to it during the hearing and we leave that exactly as calculated by the Respondents.
34.	In summary, therefore, the only element of the assessment with which we do not agree is that relating to the video rental income in periods 04/99, 07/99 and 10/99.  The appeal is allowed in respect of that element only and in all other respects is dismissed.
35.	Miss Vicary made an application for costs.  The only ground for her application was that this was the second time the case had been heard.  It had originally been listed for the 14 and 15 March when the Appellant had not attended, despite having been served with notice, and the case was heard in their absence only for the decision to be later set aside.  We, with the agreement of both parties, checked the position over the application to set the earlier decision aside and we refer to a letter to the tribunal from Instantaction received on 7 June 2005.  This set out the Appellant’s grounds for its application which in effect was that they had been led to believe by the Respondents that the hearing would not go ahead on that date.  At a previous preliminary hearing, they had requested witness summonses, which they understood would be sent to them well before the hearing and these had not been received by the time they were notified of the March date. 
36.	It is not for us to comment upon that application or the result other than to say that the Chairman who heard the application was clearly satisfied that the application had sufficient merit to justify the setting aside of the earlier decision.  It therefore seems to us, that if the Chairman considered the Appellant to be sufficiently blameless to allow the application, it would be unfair for us now to penalise the company by the imposition of a costs order for that sole reason.  We therefore make no order for costs.

LADY MITTING
CHAIRMAN
Release Date: 22 December 2005
MAN/02/0780

££Instantaction Ltd v Revenue and Customs [2005] UKVAT V19404 (22 December 2005)