Monevate Services Ltd v Revenue & Customs [2006] UKVAT V19965 (15 December 2006)

19965

ASSESSMENT TO TAX and misdeclaration penalty – reclaim of input tax -
several companies – series of invoices – credit notes – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

	Appellants
MONEVATE SERVICES LTD

- and -

THE COMMISSIONERS FOR HER
MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	ELSIE GILLILAND            (Chairman)
ELIZABETH POLLAND   (Member)

Sitting in public in York on 18 October 2006 

Leslie Cantley for the Appellant 

Lisa Linklater of counsel instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

	© CROWN COPYRIGHT 2006

DECISION

1.    The appeal heard by the tribunal is that of Monevate Services Ltd. (the Appellant) against first an assessment to tax pursuant to s.73 of the Value Added Tax Act 1994 (the Act) in the sum of £16,970 (plus interest) in respect of Vat arrears for the period 10/03 and secondly the imposition of a misdeclaration penalty under s. 63 of the Act originally in the sum of £2,545 but reduced by Customs to £1,781 by way of mitigation.

2.    There are 3 inter-related companies relevant to the appeal and all of which operate from the same premises. The first is Oryon Corporation Ltd. (Oryon); the second Monevate Ltd. (Monevate); and the third the Appellant. Also at those premises is a partnership between Leslie James Cantley and C.A. Barrett. The issue relates to a series of invoices and credit notes.

3.    The first set of invoices for our consideration were those from Oryon to the Appellant (the first invoices). There are 6 invoices for expenses incurred by Oryon on behalf of the Appellant and for the consultancy services of Mr Cantley of Adrianne Johnson who as well as being an officer of the Appellant is the operations director of Oryon and Monevate and Paul J. Stansfield then the bookkeeper of the companies. These were dated between 25 February 2002 and 19 June 2002. Manuscript receipts on 4 of them show that each was paid shortly after issue. Copies are in the bundle of documents before us (pages 33 to 41). We have the confirmation of Customs that Vat was accounted for by Oryon but the input tax was not claimed at this time.

4.    We refer next to 6 credit notes which were raised against these invoices on 25 March 2003. These are in the bundle at pages 42 to 47. These credit notes are made out not to the Appellant but to Monevate but are for the expenses and consultancy services referred to above. The total Vat inclusive figure on the expenses invoice we note is less in the credit note (£38,657.17) than in the comparable first invoice (£44,001.25).

5.    On that same date 25 March 2003 6 further invoices were issued made out to the Appellant (the second invoices). These were as before for expenses and consultancy services (pages 48 to 53). The expenses invoice on this occasion totalled £38,687.23. None of the copies produced to us bears a receipt. It was on these that the Appellant claimed input tax on its first Vat return for 10/03 and it is on this sum that the assessment was raised.  Neither the credit notes or the re-issued invoices that is the second invoices were in Oryon’s records.

6.    The matter began when Raymond Scott a Customs officer made an assurance visit to one of the other companies on 23 May 2002. Mr Cantley sought some advice at that stage to the effect that he was developing a software package aimed at financial services providers and queried whether he could reclaim Vat on development costs.  Mr Scott advised him that he could probably register as an intending trader subject to providing evidence of intent to trade.

7.    Mr Scott is the assessing officer and a witness called by Customs at today’s hearing. Mr Cantley has presented the case for the Appellant and called one witness his colleague Mrs Johnson.                                                                                          

8.    The next event was a visit by Mr Scott on 26 October 2005 when he examined the Appellant’s books and records. He discussed these with Mr Cantley and Mrs Johnson though there is some uncertainty as to for how long she was present. Mr Scott became aware that the Appellant had not applied for registration at an early date but had done so with effect from 1 August 2003.  At this time Mr Scott was shown copies of the invoices of March 2002 from Oryon to the Appellant which were receipted.

9.     The case for Customs is that the services of Oryon had been invoiced and paid for by June 2002. The Appellant could not claim input tax as it occurred more than 6 months before its registration for Vat. It was the view of Customs that the credit notes and the second invoices had been effected only to enable the Appellant to recover input tax. The assessment was raised and the penalty was imposed as Customs considered that there was no reasonable excuse for the Appellant’s reclaiming input tax in 10/03. 

10.  Mr Cantley explained the background of the companies. Oryon was a consultancy with Mr Cantley and Mrs Johnson jointly producing intellectual property. Monevate was a financial services company and thus could not be registered for Vat purposes. It was set up by Mrs Johnson and him as a financial intermediary with innovative products. It now owed £162,000 to Oryon. The Appellant was established to separate off the intellectual property rights and also some of the income stream. It is a supplier of software technology. The reason to bill from Oryon to Monevate in the first instance had been to ensure that it was clearly established that Monevate had paid Oryon for the intellectual property rights for the business idea which was to form the basis of Monevate’s Business Proposition. This was important if venture capital investment was to be obtained. When the Appellant was set up the credit notes were issued to ensure that these rights were now in the Appellant. Further so far as the credit notes were concerned Oryon should have reclaimed the output tax but had not done so  because Paul Stansfield had agreed this with Customs in a fax or otherwise he deemed it an unproductive account. Mr Cantley contended that the Vat position was neutral and that no revenue had been lost on the transaction. Vat could have been reclaimed on the credit notes but this was left in favour of claiming input on the re-invoicing of the Appellant.

11.   At the hearing however Mr Cantley produced copies of a further set of 6 invoices. These match the first set referred to in paragraph 3 above being dated with the same dates relating to expenses and consultancy services as described before and endorsed with handwritten receipts. The dates of receipt on 4 of these match the dates of the receipted 4 referred to in paragraph 3 above. The total on the expenses account was £44,001.23. There were some copy bank statements supplied with these copies. There is however one crucial difference from the previous ones and that is these “new” invoices are made out from Oryon to Monevate not the Appellant. The bank statements are of Monevate’s Business Current account for several periods. Apart from a discrepancy in respect of the March and April consultancy total the figures on the bank statements appear to relate datewise but we have no evidence to establish that these payments were made to Oryon in respect of the third invoices and not for instance to the Appellant; nor as was put forward as a possibility by Mr Cantley that the Appellant paid on an adjustment of an internal loan.   

12.    The explanation which Mr Cantley has given as to why these invoices were not produced earlier is that they had only been found the previous day (Tuesday) after the receipt the day before that (Monday) of the skeleton argument of Customs. It was not until then that he had appreciated the confusion between the parties since Mr Scott had taken away the first set of invoices. These were erroneous as it was in fact Monevate and not the Appellant to whom the invoices should be and were correctly made out and Monevate was the payer. Mrs Johnson later told us that the Monevate invoices had been found in accounting files of Monevate which were not part of the audit trail. 

13.    Under cross-examination Mr Cantley explained that it was the bookkeeper Paul Stansfield who dealt with the Vat office and he (Mr Cantley) while he gave instructions to Mr Stansfield did not know what he in fact did. A copy fax was then produced which had not been made available earlier to either Customs or the tribunal. That fax was dated 16 December 2003 and was sent by Mr Stansfield to a Customs officer (Wendy Wood) and was re “Q/E 31 October 2003”. What that fax said re the 6 invoices attached identified as relevant to the appeal was that: “…they are all relating to developing the website, of which the first clients were engaged as from 1st August 2003”. These are however the second invoices addressed to the Appellant mentioned in paragraph 5 above and found at pages 48 to 53 in the bundle.

14.    In turn we were referred on from this fax to an email of 10 November 2005 from Mr Cantley to Mr Scott copied at page 16 of the bundle. In that email the fax was referred and the telephone conversation mentioned in it but Mr Cantley said that he had no file note of the telephone discussion which according to the fax had taken place between Mr Stansfield and Ms. Wood but as Mr Cantley put it: “… it does look like the reclaim using these invoices which clearly show work going back to 2001 had indeed been subject to discussion, submitted and presumably approved as this was prior to the reclaim being paid”. Mr Scott duly replied stating that the original invoices would stand and that he had no file note to substantiate the discussion.

15.   There is a confusion of paperwork in this matter but we are satisfied that all relates to one set of expenses and the supply of one set of services which emanated from Oryon and which relate to the period as billed from October 2001 to June 2002. Notwithstanding the appeal having been pursued throughout the proceedings by the Appellant as the appellant and indeed preceding correspondence having been conducted between Customs and the Appellant, it appears from what we are today told that there was in substance a clear misunderstanding between the parties as to whom the services were supplied and by whom the invoices were paid.

16.    The issue before us is whether the Appellant properly claimed input tax in respect of the second set of invoices. That the reclaim was allowed is agreed. Some evidence has been produced as to the basis on which this arose. There were emails exchanged between Mr Cantley and Mr Scott relating to the fax. The parties to the original fax have not given evidence nor completed witness statements. In fact it seems to us unlikely that the Appellant sought the observations of Mr Stansfield in view of the comments on his work in the evidence of both Mr Cantley and Mrs Johnson. Nor have we heard anything about Ms. Wood’s involvement other than the comment of counsel for Customs that reclaim decisions have to be taken quickly due to time limits imposed and an officer has therefore to rely to a large extent on what she has been told by the taxpayer. Whatever the circumstances input tax was claimed by and allowed to the Appellant. 

17.    The background to the matter has however been radically changed by the fresh submissions and paperwork produced by Mr Cantley for the Appellant. These included the fax mentioned above but it had at least been referred to in the emails between Mr Cantley and Mr Scott. More unexpectedly what came freshly to the attention of both counsel and the tribunal were the third invoices. Mr Cantley has today said that he had always wondered how there could have been such confusion in the mind of Customs but now it was clarified. The supplies had been made to Monevate who had paid as per the receipts. The bank statements which Mr Cantley said showed that payments did in fact come from Monevate’s bank account at the requisite time were also presented to us. As to the invoices to the Appellant on which the appeal has been based these had been printed off erroneously and the discrepancy had not been noted because Mr Scott had taken them away with him on his visit. Thus Customs had been examining the case from the point of view of invoices made out to the Appellant whereas the Appellant had been dealing with it from the position of invoices to Monevate. Mr Cantley apologised that the invoices had been incorrectly printed off and explained further that it was only on receipt of the skeleton argument of counsel for Customs that he realised where the problem lay. Mrs Johnson said that she made a check of all files and found the third invoices in accounting files of Monevate which were not part of the audit file. 

18.    Mr Cantley did not clarify which part of the skeleton argument pointed him towards the third set of invoices. An earlier warning was clearly in the witness statement of Mr Scott dated 5 July 2006, which the Appellant had received. In paragraph 3 he referred to the first not the third invoices and the rest of his statement is consistent with that.  Counsel also referred to the fact that these invoices were not mirrored elsewhere. The only explanation that Mrs Johnson could give was that they were in the sales invoices of Oryon. However Mr Cantley has submitted that the supplies were to Monevate duly invoiced and paid and as he pointed out the Appellant not being “ in existence” at the time of the supply could not have received any. On this also there is some query as the position is that Vat 1 which was signed by Mr Cantley gave the date of   incorporation of the Appellant as 15 February 2000 a date on which Customs were entitled to rely. The point made by Customs throughout has been that the Appellant was not registered for Vat purposes at such a time as to be entitled to claim in respect of a supply more than 6 months prior to its registration and that is what it was doing. Clearly the Appellant was subsequently in receipt of a reclaim to which it had no entitlement and its appeal against the assessment fails.

19.    Customs imposed a misdeclaration penalty initially in the total sum which could be demanded but reduced by way of mitigation.  That was on the basis of co-operation and a good compliance record. We are satisfied that there is no reasonable excuse for the misdeclaration and the reclaim sought. Mr Cantley on his own admission knew the supply had been made to Monevate and had simply been re-invoiced on. We have  had the third invoices produced only today with no satisfactory explanation offered as to why  a check of the books and records were not as part of the Appellant’s preparation for the appeal inspected earlier which course of action must have brought the Monevate invoices to light sooner. We have noted in correspondence in the bundle dated 25 January 2006 to Mr Scott and dated 22 February 2006 and 17 November 2006 addressed to the compliance officer Jane Blades (Ashton) that Mr Cantley has referred to the intellectual property rights and Monevate  “billing” but without clear reference to those invoices or payments concentrating rather on reversing the Vat and re-invoicing. Mrs Blades has not attended the hearing nor has a witness statement been served but it is clear from the evidence of Mr Scott that if a company is not Vat registered it is not looked at.  If as Mr Cantley suggests there was confusion because of the involvement of two companies Monevate and the Appellant and he was aware of it he should have made raised this. He thought that Customs held invoices made out to Monevate but we cannot find in the papers before us that Customs referred to that company and we accept the evidence of Mr Scott that nothing was said to him at his visit about Monevate transactions.    

20.    On the question of mitigation it has been contended that the transaction was revenue neutral in that whilst the reclaim had been sought Oryon had a repayment claim on the credit notes which was not pursued. We do not accept that the reclaim and a possible repayment are merely to be seen as balancing each other out. In any event that there has been no or no significant loss of Vat is excluded by legislation from being a factor in mitigation. (Paragraph 70 of the Act in respect of the mitigation of penalties under s. 63). We have the power to increase or reduce the penalty but propose to leave it unchanged.  Accordingly the appeal against the penalty in the sum claimed by Customs that is £1,781 fails. 

20.    The appeal against both the assessment and the penalty is dismissed 

21.    Customs did not seek costs and we make no direction as to costs.

ELSIE GILLILAND
CHAIRMAN
RELEASE DATE : 15 December 2006

MAN/ 06 /0208