Rahman & Anor v Revenue & Customs [2006] UKVAT V19550 (18 April 2006)

                                                                                                     19550
ASSESSMENT – Disallowed input tax – Cut, make and trim – Whether Appellant using sub-contractors – No evidence of work being carried out at alleged sub-contracting companies’ premises – Whether Respondents considered exercising discretion to allow claim – Appeal dismissed

LONDON TRIBUNAL CENTRE

MOZIBUR RAHMAN AND GAZIBUR RAHMAN
	T/A S & H FASHIONS	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MRS J M SMITH

Sitting in public in London on 13 and 14 March 2006

Mr T Brown of counsel, instructed by Chiltern Plc, for the Appellant 

Mr Richard Smith of counsel, instructed by the Solicitor’s Office, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal by Mozibur and Gazibur Rahman trading as S & H Fashions (“S&H”) against an assessment for VAT dated 12 June 2003 disallowing input tax claimed by S & H on invoices from Delux Clothing Ltd, Golden Tower Clothing Ltd and Oriental Clothing Ltd in the total sum of £244,246 claimed for the periods from 1 May 2000 to 31 July 2002.  

The Issues

2.	The Tribunal has to decide:

(i)	whether the supplies upon which S&H have claimed input tax did in fact take place 
(ii)	if the supplies did take place, whether they were taxable supplies giving rise to the right for S&H to deduct input tax in respect of them
(iii)	whether the invoices in relation to the supplies were valid, and 
(iv)	if the invoices are not valid, whether the Commissioners should have considered exercising their discretion in relation to any other evidence there might be that the supplies were genuine and allowed the claim to input tax.

The background

3.	S&H registered for VAT on 1 November 1998.  It is a cut, make and trim business supplying garments at the other end of the retail trade, principally to Hobbs Ltd (“Hobbs”) and Burberry.  It has its own in-house capacity to produce a large number of garments, but claims to have regularly used sub-contractors since 07/99.  

The legislation

4.	Section 3(1) of the VAT Act 1994 (“the Act”) provides that:

“A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.  

5.	Section 4(1) of the Ace provides that:

“VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.”

6.	Section 24(1)(a) of the Act defines “input tax” as,

“VAT on the supply to him of any goods or services … being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

7.	Section 24(6)(a) of the Act provides that regulations may provide for VAT,

“to be treated as input tax only if and to the extent that the charge to VAT is evidence and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases.”

8.	Regulation 13(1) under the heading “obligation to provide a VAT invoice” provides that, where a registered person:

(a)	makes a taxable person in the UK to a taxable person, he shall provide such persons with a VAT invoice.  

9.	Regulation 29(1) of the VAT Regulations 1995 provides:

“Subject to paragraphs (1a) and (2) below, and save as the commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act.

10.	Regulation 29(2) of the VAT Regulations 1995 provides that a taxpayer claiming a deduction of input tax must hold a valid VAT invoice, Regulation 14 provides that a VAT invoices must include, inter alia, the name, address and registration number of the supplier.

11.	Regulation 29(2) also provides that the Commissioners may direct in particular cases that a taxpayer may hold other evidence of the charge to VAT.

The evidence

12.	A bundle of documents was produced by the Commissioners on behalf of both parties, and a further supplementary bundle was produced on behalf of the Appellant.  We heard oral evidence from Mr Mozibur Rahman (“Mr Rahman”), Mr Morris Paul and Mr Abdul Shaddek on behalf of the Appellant.  Both Mr Paul and Mr Shaddek were employees of S&H. We also heard oral evidence from Mr Lawrence Paul Zussman, Mr Ian McKenzie Marshall, Mr James Lewis Nicholas, and Mr Peter Loveridge Clarkson, all of Her Majesty’s Revenue and Customs. In addition we heard oral evidence from Mr Jason Charles Needham, the production director of Hobbs on behalf of Customs.  

The facts

13.	The Rahman brothers had both started work in 1986 for a firm called Honey Fashions as machinists. They continued in this work up until 1998 when the men who owned the business decided to retire and the Rahman brothers bought the business in November 1998.  They took over the lease of the premises at that time.  

14.	Honey Fashions’ main customers were Hobbs, Burberry and a firm called Kerry Hope. The Rahmans changed the name of the business to S&H Fashions, which was run as an equal partnership, and continued to do work for these three main customers.  Honey Fashions had not used outworkers, but the Rahmans did so initially.  

15.	In April 2000 the landlord of the premises had told the Rahmans that he was not prepared to renew the lease of the building, and the business moved to its present premises in 2001. According to Mr Rahman, from that time they were able to produce more garments in-house, but also had to use outworkers. At that time he was producing around 250 garments per week in-house and the outworkers were making in the region of 600 garments a week.  

16.	S&H Fashions claimed to have been paying invoices to a company called Forwell Ltd between 16 April 1999 and 8 July 1999. In March 1999 the Commissioners had visited the registered address of that company and found empty premises.  The company had been deregistered for VAT from 20 May 1999.  

17.	There are invoices to S&H Fashions from a company called Avzone Ltd dated between 24 June 1999 and 23 December 1999. This company was registered for VAT as a wholesaler of jewellery. Its invoice address is a unit 16' x13' in area, which would be far too small to manufacture the number of garments shown on the invoices. This unit was rented by Avzone from 15 March 1999 to 15 October 1999. The Commissioners inquiries showed that no garment manufacture ever took place at that unit.  

18.	S&H records show invoices to a company called Chartwest Ltd between 22 December 1999 and 3 March 2000. That company had been deregistered for VAT from 23 July 1999. The city VAT office had visited the invoice address on 22 May 1999 and again on 16 September 1999 and found the premises to be locked and empty.  

19.	Given that S&H had apparently been paying the above three companies for producing garments for them between 16 April 1999 and 3 March 2000, it is curious that Mr Rahman makes no reference to them in his witness statement. He refers to his need for more production, and how he had been making inquiries of his friends.  He describes his apparent subsequent involvement with a company called Delux as follows:  

“One day a man came to my old factory before we moved and said he had a company called Delux Clothing Ltd and they were able to make the quantity and quality of the work I required.  I gave to the man who told me he was a director of the company, four pre-production samples for him to make up to see what their workmanship was like and when he brought it back I was delighted to see that the work was up to my own standards and we then started to supply them with bundles of cut work which they produced and delivered back to me as finished hanging garments on hangers on rails.  The method of working with the outdoor workers is that my own customers arranged to have materials delivered to me from which the garments are made …”

20.	The VAT number on the invoices from Delux between 30 September 2000 and February 2001 is shown as 794 3304 21. This number is incorrect, the correct number being 749 3304 21. The invoice address was given as unit 2A, 55 Wallace Road, London E9 5LH.  On 29 August 2000 Mr Zussman of Customs visited that address and could find no unit 2A. The first floor unit at No.55 was padlocked and Mr Zussman was told that there had been no activity at that unit for a long while. The monthly VAT returns submitted by Delux between periods 02/00 and 09/00 show very little or no output tax (a maximum of £491.05) or input tax, which would indicate the company was doing little work. In the course of his visit on 1 November 2000, Mr Zussman spoke to some people at the premises who confirmed that Delux Clothing was there, but they also told him that it had only started production approximately two weeks previously. He saw some 25 staff there and identified ladies’ coats for two companies: River Island and Prince, hanging up. He was told that, prior to two weeks previously, the unit had been empty for months. A letter from Delux to Mr Zussman dated 12 September 2000, written in response to a letter from Mr Zussman stating that he was unable to locate the company at its address, confirmed the unit 2A address and stated “You are requested to note that we have been on holiday since 25 August 2000-27 October 2000 inclusive.” The letter is signed by S Islam. The visit for 1 November had been arranged by Mr Zussman by a letter dated 27 September 2000. Delux had again replied stating that that date was not convenient as the accountant would not be available then. Mr Zussman had proposed a visit to inspect the books and records on 5 December, however he nonetheless carried out the visit on 1 November. 

21.	On 5 December Mr Zussman again visited and found that another company, Jacob International, was there and Mr Zussman was told that they had been working there for two months. There were no directors or company officials present. Mr Zussman contacted River Island who initially informed him that they only knew of Jacob International, but later said that the company in the unit in question was “Corda London Ltd” which was allowed to subcontract work out to other units. On the premises on that date Mr Zussman found an invoice relating to Delux dated November 2000, as well as BT bills for Jacob International dated May and July 2000. These bills pre-date the date that Jacob International was said to have started working at the premises.

22.	The Appellant had claimed input tax in respect of invoices from a company called Golden Tower Clothing Ltd (“Golden Tower”) dated between 15 March 2001 and 19 June 2002.  That company was in fact deregistered for VAT as from 01/01/02. On 4 July 2002 two Customs officers visited the registered premises of Golden Tower at Unit 5, Lakes Industrial Park, Braintree in Essex. This was the address given to them by Golden Tower by a letter which was received by Customs on 28 September 2001.They found the unit to be empty with no sign of any machines or manufacturing. The unit was approximately 8x12ft in area. There were pigeonholes for post and there was post addressed to Golden Tower, Oriental Clothing Ltd and Tulip Fashions Ltd in the Unit 5 pigeonhole (the unit given as Golden Tower’s address).  A further visit by an officer of Customs on 16 July 2002 to a different address at Unit 1, Marchgate Lane, London E15, revealed a transport bill addressed to Golden Tower dated 3 July 2002. That officer, Mr Nicholas, had been making enquiries into both Golden Tower and a company called Bestman Ltd. The officer later succeeded in contacting the company secretary of Bestman Ltd, who informed him that Golden Tower had been based in an office at the same unit until approximately June 2001, but they had not done any cut, make and trim work at the unit.  

23.	Mr Rahman had not visited Delux before giving them the work. However, an interview had been arranged between Mr Rahman, Mr Augustus John his accountant, Mr Peter Clarkson and Mr Adrian Sutton of Customs on 23 June 2004.  This was at the request of Mr Rahman. In the course of that interview in relation to Forwell Mr Rahman said that he had asked the sub-contractor for its VAT certificate, and that he visited the unit physically and continued to visit about once a week. This visit was to a place in Stratford Grove, which is not the address on the VAT registration certificate. Similarly he said he had visited Avzone, again at a different address from that on the VAT registration certificate. Mr Rahman had no VAT registration certificate for Chartwest Ltd and said he had not visited them. With regard to Delux, Mr Rahman had visited them at an address in Leyton High Road, which again is not the VAT registered address of the company. He claimed to have seen a large workshop there. He had not, however, visited the premises before giving them the work.

24.	Mr Rahman informed us that he had asked for the VAT registration certificate of the various companies he was using as sub-contractors because he had been asked to do so by his accountant. When cross-examined he stated:  “As long as good product, good quality, I pay, I don’t care about the rest.” There was a disagreement between Counsel as to the proper interpretation of this comment.  

25.	It was not disputed by Mr Rahman that there was sufficient space in the new factory to produce the number of garments per week required by Hobbs and the other retailers. It was his evidence to us that the reason S&H did not produce the required number of garments in-house was that he could not get the staff. He informed us that all his staff were properly registered for P.A.Y.E. as required by the Inland Revenue.  However, Customs’ evidence shows that when Mr Clarkson visited the premises on 30 May 2002 he observed that there were at least 28 people working on the premises, whereas Mr Rahman at the time had told him he had only 17-18 employees, apart from himself and his brother.  Mr Clarkson noted that there were 23 clock cards in the clocking-in machine. It appears therefore that there were more employees on the premises than those actually on P.A.Y.E. In his witness statement Mr Rahman records the present number of staff as being around 40/41 apart from his brother and himself, and gives his present production in-house as around 550 to 600 garments a week, being the absolute maximum he could make with the space and staffing level, there being no room for any more machines or staff.

26.	Mr Clarkson produced a schedule from the VAT period 01/99 to 07/02 (see Annex A). This schedule shows the number of garments sold, the garments allegedly made by sub-contractors, the gross cut, make and trim value of all the work, the amount paid to outworkers (this relates only to periods 01/99 and 04/99) the net wages paid, the average staff numbers (taken from PAYE records) and the estimated number of garments made in-house. It purports to show that there was an average of 5.5 garments made per staff member per day. This conclusion was challenged by Mr Brown on behalf of S&H because it was Mr Rahman’s evidence that many of the staff worked only part-time and therefore a proper conclusion as to the amount of garments per worker cold not be drawn. Given the complete unreliability of Mr Rahman’s evidence as to the actual number of staff working at any one time, we are not able to draw any useful conclusions as to the number of garments made per employee. What is, however, clear from this schedule is that there is a very wide variation in the average numbers of staff employed, and in the estimate of the number of garments made in-house. The staff numbers recorded ranged from 5.5 to 22.5. Curiously, in the period 07/99 when 21.5 is the average staff number, only 429 garments were made indoors, whereas 7,405 were apparently made by the sub-contractors. In the period 04/02 19,289 garments were sold, at a period when there were only 10 recorded staff in-house, whether full-time or part-time, who made an estimated 3,313 garments. (The figure of indoor garments was arrived at by subtracting the number of garments on the invoices from the sub-contractors from the number of garments sold to the various retailers.)  It is curious that the lowest number of garments was produced in-house at a time (the period 07/99 referred to above) when the staffing level was almost at its highest, and also that in the period 07/01, when the average number of staff was only 11.5 (i.e. half the maximum number as recorded) some 5,700 garments were produced, which is the maximum number which could have been made in-house if the garments recorded on the invoices to the sub-contractors genuinely represented the number of garments made out of house.

27.	The schedule drawn up by Mr Clarkson shows that in the period 01/99 home workers were paid £34,286.20 and the period 04/99 they were paid £28,000.

28.	Another surprising aspect in relation to the staffing levels was that it was Mr Rahman’s clear evidence that he was at present having great difficulty finding workers.  He claimed that this was because they did not want to pay taxes, because if they did,. they were then unable to pay their rent, and therefore only wanted to work part-time.  He claimed that at the time of the hearing he was advertising in the job centre for more staff.  By contrast, Mr Paul stated that, at the present time, there was almost no work available at the factory, and at the job centre the majority looking for work were from S&H. This is also in conflict with Mr Rahman’s witness statement which is dated 10 March 2006 (i.e. three days before the date of the hearing), in which he states that his staffing level at present “is around 40/41”, as well as his evidence that he was currently advertising for staff. It was also in contrast to Mr Shaddek’s evidence, which was that only about 20 people could work in the factory, and there was no space for any more staff. Furthermore Mr Rahman stated that the reason for outsourcing the garments was that there was not enough space to hang the garments in the factory.

29.	Mr Shaddek was a fusing operator with S&H and worked full-time. He had worked for S&H since 1998, but had also worked for the previous owners. Mr Paul was also an employee of S&H and had worked for them as a cutter for three years. Both Mr Paul and Mr Shaddek described garments arriving in vans from “outdoor workers” which the employees helped to unload into the factory. Neither man claimed to have any knowledge of Delux. Mr Shaddek said that he was away in Bangladesh in 2001, but we note that the first invoice from Delux was 18 February 2000, and was not in 2001, as Mr Shaddek had seemed to think, and therefore it might be expected that he would have been aware of Delux.

30.	In his interview Mr Rahman had told the officers that he had visited Golden Tower at Mile End Road, and again had not asked why this address was different from the one on their VAT registration form.  He had never had any contact with the address at Braintree.  

31.	There are invoices to S&H Fashions from a company called Oriental Clothing Ltd (“Oriental”) dated from 02/07/02 to an unspecified date in 2003. Oriental’s premises are an office approximately 8'x6' in area at their invoice address of 9 Como Street, Romford in Essex. An officer of Customs visited the unit on 25 September 2002 and found it empty. He was told that the occupants were hardly ever seen, and that two months rent was owed to the landlord. Some months after that visit the landlord re-possessed the unit. Mr Rahman claimed at interview to have visited Oriental’s premises at a different address, namely the ground floor, at No.2 Stepney Way. In his witness statement Mr Rahman claims that this visit was a chance visit when he happened to be in the area and he noticed that Oriental had the ground floor of a fairly large factory unit and garments were being made there. With regard to Delux, Golden Tower and Oriental, Mr Rahman said that in each case, just as with the three preceding companies, they abruptly stopped doing the work. In his witness statement, with regard to Delux, Mr Rahman said that: “All of a sudden, with no advanced notice, after they had made a delivery of the last of the garments that they had made in that week, they totally vanished off the scene …”.  In his evidence to the Tribunal he stated that in each case, with all of the three companies, they had given him either two weeks or one week’s notice that they would not be able to do further work. On no occasion had any of the companies failed to return to him work which they had been doing. He claimed that it was also the case that Golden Tower and Oriental had turned up unexpectedly just at the time when he was needing further work done.  

32.	The documents show that an individual called Bodrul Alom was connected with Delux, and that he signed their VAT returns.  A “B.Alom” signed a VAT return for Golden Tower, and Bodrul Alom witnessed the signature of a Mr Ela Uddin the landlord of premises let by a company called Urhan Ltd to Golden Tower. A Mr Mohammed Abdul Matlib signed on behalf of Golden Tower on 23 October 2000. This lease relates to the premises in Stratford, London East, and is a three year lease. Oriental’s VAT registration form is signed by “Alom”.  Its VAT return of March 02 is also signed Alom.  

33.	Company House documents show that a Mr Ferdous Alam, born on 13 January 1959, is a director of Avzone. A director of Golden Tower is a Mr Ferdous Al-Belal, date of birth also 13 January 1959.  A director of Delux is a Mr Ferdous Al Saba Khan, date of birth also 13 January 1959. The letter referred to above from Golden Tower to Customs giving their change of address to the Braintree address, which was received on 28 September 2001. Oriental registered for VAT at the same address seeking registration from 25 October 2001. This was only four days after the letter was received from Golden Tower.

34.	There is a note dated 12 December 2000 from a Mr Denis Marie of the Inland Revenue to a Mr Steve Percy, head of a Customs team, referring to Delux and also Jacob International Ltd. Mr Marie states in relation to Jacob International Ltd:  “This has the hallmarks of a classic phoenix trader except that the companies do not go into liquidation but simply cease to trade.”

35.	Mr Needham, is the production director of Hobbs, the company which provides the Appellant with majority of its work. His evidence was that Hobbs do not allow its contractors to subcontract work without giving prior approval. Such approval would include checking health and safety at the sub-contracting unit. It was Hobbs’ policy that if a contractor used a sub-contractor without first having Hobbs’  permission, then Hobbs would stop using that contractor. Although Mr Needham had only been production director since August 2005, he was aware that the same system had remained in place since at lease 1995. However, prior to 2005, there was no written agreement with the contractors, but a letter had been sent out in 1997 informing the contractors of the procedure.  

36.	Hobbs had used S&H Fashions since 1997. No approval had ever been given by Hobbs for S&H Fashions to subcontract work. It was Hobbs’ view that S&H Fashions had always been able to do in-house all the work that Hobbs gave to it.  In the past a team of quality controllers had regularly visited the various suppliers, including the Appellant, sometimes at often as once a week. The procedure was that, prior to using a supplier, Hobbs would look at trial garments and visit the premises to ensure they were up to standard. Hobbs would also make a check on other companies who used the same supplier. The work would be provided to the various contractors on dockets with instructions for quantities and sizes of garments to be produced.  Hobbs supplied the fabric and the trimmings to make up the garments. The amount of garments provided to any contractor each week would be monitored in order not to overload that contractor to avoid giving a poor quality of work. In addition to the quality controller, a production manager would visit the premises about once every six months. Mr Needham acknowledged that subcontracting did take place, but was adamant that Hobbs would never turn a blind eye to it.  

37.	In the course of his interview on 23 June 2004 with Mr Clarkson of Customs, Mr Rahman told Mr Clarkson that Hobbs knew that he subcontracted work out. We prefer the evidence of Mr Needham on this point, particularly given the concern he had about health and safety issues and the machinery used by sub-contractors.  In the course of this interview Mr Rahman also had said that all of S&H employees were part-time and that all were on PAYE records. In that interview he said he expected to get 5-6 garments per person per day, which is much the same as his evidence to the Tribunal, and also is the number of garments that Mr Clarkson calculated from the schedule he had produced, although at a different point in his evidence Mr Rahman had indicated that only 1-2 garments per worker would be produced per day..

38.	Mr Clarkson had not only conducted the interview with Mr Rahman, but he had also raised the assessment. The interview had been conducted at the request of Mr Rahman and his accountants for the assessment to be re-considered. At the conclusion of the interview Mr Clarkson noted that he had heard nothing to make him change his mind about the assessment. Mr Clarkson had worked for Customs investigating cut, make and trim businesses since January 1986. In all those years he had never once seen a genuine case of subcontracting. He believed that on the occasions where S&H had been producing garments in excess of those that could be produced in-house, they were using home-workers, not sub-contractors. He did not consider that it was economic to use subcontracting, given the small profit margins. He pointed to the fact that in the cut, make and trim business he expected a ratio of output: input of 10:1, whereas in the present case the ratio was 1.35:1.  These figures were taken from the tax returns of S&H during the periods covered by the assessment.  In the cut, make and trim business there is very little input because the main expenditure is on wages, accountants and rent.  

39.	Mr Clarkson had not only been looking at the work done by Delux for S&H, and Jacob International, but he had also looked at the invoices made out by those companies to other people in the cut, make and trim business, which showed many different types of garments for many different traders, and it was his opinion that it was unlikely that that number and type of garments could have been produced by any one company. Whilst Mr Zussman had seen 25 workers at the premises of Delux, the garments being made on that occasion were for Prince and River Island, and these were companies for which S&H did not do work. The Commissioners had not only disallowed the invoices from Delux to S&H, but had also disallowed it for other companies who held invoices from Delux.

40.	Whilst there was evidence that on occasion Mr Rahman had paid out cheque in respect of the disputed invoices, Mr Clarkson was not prepared to accept that this was evidence that the companies had been paid, given that in his experience cheques could be written, cashed and then paid back to the writer. S&H’s account for the relevant period (June 2001 to September 2001) show the cheques being paid out of the account. We do not consider that we can conclude from this alone that the work was done by Golden Clothing Ltd.  

The Appellant’s case

41.	It was the Appellant’s case that the supplies did in fact take place as claimed.  The Appellant relied not just on the evidence of Mr Rahman to this effect, but also that of the two employees, Mr Paul and Mr Shaddek who had seen garments being moved into and out of the factory on a regular basis.  

42.	Mr Brown submitted that when Mr Rahman had said that he “didn’t care” who was doing the work, he was referring to the quality of the goods, not to the way in which any sub-contractor conducted its tax affairs.

43.	With regard to Delux, Mr Zussman’s visit had shown that 25 staff were working there, and therefore this was proof that manufacturing occurred at the premises.  It was submitted that Jacob International was the same company as Delux.  The fact that the VAT number quoted by Delux on its invoices was incorrect, in that it had transposed the second and third digits, did not mean that S&H could not reclaim the VAT charged as input tax – the Tribunal was referred to the case of Morshan Contractors Ltd (Decision No.1861). The Appellant also relied on the fact that the Respondents had not exercised their discretion under regulation 29(2) of the VAT Regulations. Mr Brown referred the Tribunal to Article 17(2)(a) of the Sixth Directive which states:

“A person is entitled to deduct VAT paid on goods or services used for the purposes of his taxable transactions”.

The Tribunal was referred to the case of Abbey National v CCE [2001] STC at paragraph 24:

“… it should be noted to begin with that the deduction system is meant to relieve the trader entirely of the burden of VAT payable or paid in the course of his economic activity. The common system of VAT consequently ensures complete neutrality of taxation on all economic activities, whatever their purpose or results, provided they are in themselves subject in principle to VAT.”

44.	Mr Brown submitted that fiscal neutrality required that amounts charged to VAT by an unregistered supplier or by one which does not provide a valid VAT invoice, should be allowed to be reclaimed as input tax.  

45.	It was the Appellant’s case that it was the various sub-contractors, all of whom were apparently controlled by Mr Alom, who were submitting fraudulent VAT invoices, and this did not invalidate the Appellant’s claim to recover its input tax. The requirement for the tax invoice in order to claim credit for input tax on a supply was confined to supplies made by registered taxable persons; there was no such requirement in the case of a supply made by an unregistered taxable person, that was to say, a person who was not, but ought to be registered.  (See Libdale Ltd Decision No. 11543.) 

46.	In the case of Ellen Garage (Oldham) Ltd (Decision No.12407) the tribunal had held that, as an unregistered person could never supply a valid tax invoice because it had no valid VAT number, it was sufficient for the tribunal to decide whether or not the supplies actually took place, and if they did take place, then the Appellant was entitled to reclaim.  It was not to be held against the Appellant that the sub-contractors had failed to account for the output tax on their supplies to the Appellant.

47.	With regard to Golden Tower, it could be seen from the value of the supplies made by Golden Tower to the Appellant that Golden Tower had far exceeded the threshold for being required to be registered for VAT purposes set out in Schedule 1 paragraph 1(1)(a) of the VAT Act 1994.  Section 4 of the Act states that VAT shall be charged on the supply of goods in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of a business carried on by him.  Section 3(1) of the Act states that a person is a taxable person while he is, or is required to be (emphasis added by Mr Brown) registered under the Act. Therefore Golden Tower was a taxable person, despite not being registered, and the supplies were taxable supplies made by a taxable person, given that the supplies were clearly made in the course or furtherance of a business.

48.	With regard to Oriental Clothing Ltd, the Appellant had produced delivery notes which were relied on as evidence that the supplies had taken place.

49.	Finally it was submitted that the Commissioners had not exercised their discretion properly with regard to the matters produced by the Appellant, in particular the defective invoices supplied by Delux. It was unreasonable of Mr Clarkson to have relied on the returns of Delux which showed very little or no output tax. There were links between the three companies which had been ignored by Customs.  

The Respondents’ case

50.	The Respondents’ case was that the invoices did not reflect genuine supplies, and the Appellant had not discharged the burden of proof upon it to show that the supplies did in fact take place. It was not accepted that the Appellant was an innocent victim of a fraud committed by one or two persons who controlled the companies which made the supplies to it.  

51.	If, in fact, the Appellant had been the innocent victim of a fraud, this would not help the Appellant, since the fraud must have consisted of supplying invalid invoices, and for the Appellant to reclaim input tax, a valid invoice was required. Since the invoices supplied did not have the correct trading address, and some had the wrong value added tax number, and some had been issued after the relevant company had been deregistered for VAT, it could not be said that any of the invoices were valid. It was not possible for Mr Rahman to claim to have been acting in good faith, since he had repeatedly said it did not matter who made the garments, as long as they were well made. He was either complicit in what had been going on, or he had turned a blind eye to it.  

52.	Of all the premises that were visited, only Delux was of sufficient size and had the equipment to enable it to carry out cut, make and trim.  Neither Golden Tower nor Oriental had the equipment.  If, as had been suggested by the Appellant, the work was done elsewhere by those companies, then it was for him to show why the companies would have premises which they were not using. Furthermore the existence of Delux was denied at the unit where the work was said to be being carried out. The Delux invoices started on 18 February 2000 when the premises were locked and no work was going on there. Despite this the invoices continued until February 2001.  

53.	Mr Rahman had large enough premises and enough machines to carry out the work. It was extremely improbable that he would leave the factory machines idle, as claimed, since the profits would be cut substantially by using sub-contractors. He claimed to be unable to get full-time employees, but he would be able to pay more than the sub-contractors because he had a greater profit margin. Furthermore Mr Rahman had been happy to let substantial amounts of cloth go away from his site to sub-contractors simply on the basis of trust. It was highly improbable that he would have allowed this without making full checks on the companies to whom he was supplying Hobbs’ material.  

54.	It was the Commissioners’ case that either all the garments were made in-house by the Appellant’s employees, or they were made by home-workers.  

55.	With regard to the cheques produced in respect of Golden Tower, there was no audit trail which might have shown where that money ended up, and therefore they were not sufficient of themselves to allow the Commissioners to exercise their discretion in respect of them.  

56.	Finally with regard to the Commissioners’ exercise of their discretion, the Tribunal was referred to the case of Reisdorf v Finanzamt Koln-West [1997] STC 180 for the proposition that for the Commissioners to exercise their discretion, there had to be evidence that the transaction in respect of which the deduction was claimed actually took place.  It was submitted that no such transactions had taken place in this case.  If however, the Tribunal were minded to consider that the Commissioners ought to have exercised their discretion, the Tribunal’s jurisdiction in this regard was only a supervisory one – see Kohanzad v Commissioners of Customs and Excise [1994] STC 967.

Reasons for decision

57.	We do not accept that any of the supplies were made as claimed by the Appellant. Prior to the alleged trade with Delux, Golden Tower and Oriental Clothing, the Appellant had traded with three other companies, Forwell Ltd, Avzone Ltd and Chartwest Ltd, and in respect of all six companies the pattern had been exactly the same. The Commissioners were unable to discover any trading taking place at the premises of those companies, the sub-contractors had all arrived unexpectedly at the Appellant’s premises, and they had all ceased trading with the very minimum of notice. As with the three companies which are the subject of the assessment, Mr Rahman had not visited their premises prior to giving them any work. He claims to have visited each of the companies at some stage after giving them work, however we do not accept his evidence as to this. Customs paid various visits at various times and were quite unable to find any evidence of the companies producing garments from those premises. The fact that on 1 November 2000 Mr Zussman saw work going on does not avail the Appellant. The Appellant’s first invoice with Delux was dated 18 February 2000, and the last was dated 15 February 2001. There had been nobody at the premises when Mr Zussman visited on 5 September 2000, and on 1 November he was told Delux had only been operating there for two weeks. When he returned on 5 December 2000 he was told that Delux was not operating there but Jacob International was.  

58.	Golden Tower Ltd had declared little or no output tax in the period 15 March 2001 to 19 June 2002 and had been deregistered on 1 January 2002. Visits by Customs revealed that they had small offices incapable of producing the amount of work claimed. In any event nobody had been seen working at the two addresses provided by the company for some time.

59.	With regard to Oriental Clothing Ltd, its invoices to the Appellant covered the period 2 July 2002 to 31 July 2002, whereas Oriental had rendered no VAT returns from December 2001 to December 2002. The premises consisted of a small office which was locked when visited in September 2002.  

60.	We accept Mr Needman’s evidence that at no stage had any of the sub-contractors been visited by Hobbs, and Mr Rahman had not requested permission to use sub-contractors, which was a precondition as far as Hobbs was concerned.

61.	There was considerable conflict of evidence between Mr Rahman and his employees, as well as internally in Mr Rahman’s own evidence, as to the number of employees that he had at any one time. Mr Clarkson’s evidence showed that there were more people working on the premises than were properly registered for PAYE.  It does not make economic sense for Mr Rahman to have used sub-contractors rather than home-workers, as he had initially been using when he first started the business.

62.	With regard to the Commissioners exercising their discretion, it is apparent from the evidence that Mr Clarkson did consider doing so, in that he was prepared to hold a meeting with Mr Rahman and his accountant, and gave them the opportunity to provide any evidence they wished.  However, all the evidence that the Commissioners had, pointed to the fact that these sub-contractors were not in fact making the garments as claimed by Mr Rahman and that, not only were the invoices invalid on their face, but that there was no reason for believing that the supplies had in fact been made.

63.	We do not consider this to be a case in which the Commissioners ought to have exercised their discretion to accept alternative evidence.

64.	In all the circumstances this appeal is dismissed and there is no order for costs.

MISS J C GORT
CHAIRMAN

RELEASED:

LON/04/1624