19469
VALUE ADDED TAX — input tax — trader making only exempt supplies of land — site services rendered by third party — claim for input tax relief disallowed — Appellant claiming that some of the services rendered for associated companies — no documentary support — evidence of inter-company adjustments not including relevant services — no sufficient evidence of onward supply — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	HIGHGROVE BUILDERS LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Christine Owen

Sitting in public in Manchester on 13 January 2006

Mark Simpson, chartered accountant, for the Appellant 

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	In this appeal, Highgrove Builders Limited (“Highgrove”) challenges the Commissioners’ decision, set out in a letter of 4 April 2005, to disallow input tax credit of £6,674 claimed by Highgrove in its VAT returns for the periods 12/01 to 06/04 inclusive. In all, a substantially greater sum was disallowed but Highgrove accepts that, save for the disputed amount, the Commissioners were correct.
2.	Highgrove was represented before us by Mark Simpson, a chartered accountant who had corresponded with the Commissioners about the matter for some time, and we heard evidence from Highgrove’s managing director, James Dempsey. The Commissioners were represented by James Puzey of counsel, who led evidence from the assessing officer, Stephen Doyle, and the reviewing officer, Sandra Ewington. He also provided us with a bundle of documents. The essential facts of the case were not materially in dispute, and can be stated quite briefly.
3.	As its name indicates, Highgrove is engaged in the construction industry. It is one of 17 companies of which Mr Dempsey and his business partner are the only directors. Mr Dempsey explained that he and his partner form a new company to deal with each development they undertake, for simplicity of financing and accounting. The companies share the same offices and facilities such as telephones. Those companies which are required to be registered for VAT are registered separately, and none of the companies is in a VAT group. Highgrove has been registered since 1993, and it has made some standard-rated supplies, although most of its supplies related to land in respect of which it had not exercised the election to waive exemption (see paragraph 2 of Schedule 10 to the Value Added Tax Act 1994) and those supplies therefore remained exempt. 
4.	During the period from August 2002 to June 2004, Highgrove received, and paid, invoices sent to it by an organisation known as Contact Construction (“Contract”). The invoices related to Contact’s supplies of various services, of carrying out surveys, examination, measurement and supervision. The value of Contact’s services varied from month to month, but rather than undertake detailed calculations, they were paid a monthly retainer of £2,500, and disbursements. Their supplies were standard-rated and VAT was added to their charges. It is the VAT included in Contact’s invoices which is the subject of the current dispute.
5.	The Commissioners’ enquiries began with a visit Mr Doyle made to Highgrove’s offices on 12 November 2004. His visit was prompted by Highgrove’s VAT return for the period 09/04, by which a repayment of over £60,000 was claimed. As there had been no visit to Highgrove by Customs and Excise, as the Commissioners then were, since 1996, he decided to investigate Highgrove’s records for the previous three years. He discovered that, in that period, Highgrove had made very limited taxable supplies, and none at all since September 2002. Contact’s invoices appeared, by their heading, to relate to a site which Highgrove had previously owned but had sold in July 2002, treating the sale (correctly) as an exempt supply. It appeared, therefore, that Contact’s supplies to Highgrove could not be attributed by Highgrove to anything but an exempt supply, with the consequence that the VAT included in Contact’s invoices could not be recovered as input tax (see section 26(1) and (2) of the 1994 Act). Mr Doyle discovered other errors, which are admitted and which, as we have said, are not now the subject of any dispute. 
6.	Mr Dempsey’s explanation, set out in the correspondence which passed between Mr Simpson for Highgrove and the Commissioners, was that Contact’s work had been carried out initially on the site which Highgrove had sold, but also, after the sale, on another Highgrove site and on two sites owned by sister companies. Mr Dempsey told us that Contact seemed not to have changed the heading on their invoices despite the change, or additions, to the site on which it had originally been employed, but had continued to send monthly invoices referring only to the site which it had sold in July 2002 to Highgrove, which had paid them without thinking any more of the matter. He thought it would be a fair course if Highgrove were to raise invoices against the sister companies for, it was suggested, one third each of Contact’s charges in the relevant period; that, he considered, would amount to a reasonable reflection of the value of the work Contact carried out for each company. By that means, as Mr Simpson argued, Highgrove would make taxable supplies to its sister companies which would enable it to recover a proportion of the tax charged to it by Contact. 
7.	Mr Dempsey agreed that there was no agreement between Highgrove and the other companies about such a re-charge, although there had been some other inter-company adjustments to cover shared expenses, such as telephone bills. Mr Doyle told us he had identified one charge in particular, which constituted Highgrove’s last taxable supply, in September 2002, which consisted of a management fee charged to one of the other companies, but which clearly did not include any element of Contact’s services. Highgrove did in fact raise invoices of the other two companies, charging each a third of Contact’s fees and disbursements, but only after Mr Doyle’s visit, when (as Mr Dempsey accepted) he first realised that, without some action on its part, it would be unable to recover any part of the VAT charged to it by Contact. He agreed that he could have asked Contact to cancel the existing invoices and re-issue them, but he had not thought of doing so.
8.	The proposal that Highgrove should charge portions of Contact’s fees to other companies was not made at the time Mr Doyle’s visit, but only later when Highgrove realised that its claim for credit for all of the input tax included in Contact’s invoices was to be rejected. Mr Doyle was altogether unaware of the proposal, and even when Mrs Ewington came to undertake her review, no suggestion was made that Highgrove might raise invoices, although she was aware that it was claimed that some of the work had been undertaken for the other companies.
9.	Mrs Ewington took the view that the mere assertion that some of the work had been undertaken for other companies was not enough: she required much more before she would feel able to change the decision to disallow the claimed input tax. We think she was right to do so. We had Mr Dempsey’s evidence on the point but it was very vague. He produced no records, whether of the other companies or of Contact, to substantiate what he said. Even his description of what Contact did was vague, although we do not doubt that the invoices are genuine in themselves. There was evidence of re-charges between the companies, but none of those re-charges, or at least none which had been made before Mr Doyle’s visit, included any of Contact’s work. We agree with Mr Puzey that the claim, whether or not it is genuine, was made as an afterthought, only after Mr Doyle had indicated that the input tax was to be disallowed. 
10.	The relevant invoices are addressed to Highgrove, and appear to relate to work carried out by Contact exclusively for Highgrove. It is for Highgrove to show that it is entitled to recover some of the input tax because it has made an onward, taxable, supply and to do so in good time (that is to say, before seeking relief for the tax, and not after a verification visit). It did not make any attempt to account for the output tax which it should have charged on those supposed onward supplies. Even now the evidence that some of the work was undertaken for other companies is very vague and certainly insufficient to satisfy us that an equal division of the charges or, indeed, any division is appropriate. Mr Doyle was, in our view, quite correct to reject the claim for relief when he made his visit—there was then no evidence at all that Highgrove was entitled to it. The burden is on Highgrove to satisfy us that it is, in fact, entitled to relief of an ascertainable (even if not absolutely accurate) amount. It has failed to do so, and the appeal must be dismissed. Mr Puzey did not seek a direction for costs, and none will be made.

COLIN BISHOPP 
CHAIRMAN
Release Date: 23 February 2006
MAN/05/0263