20331

Value added tax – cash accounting scheme – reg. 64(1) Value Added Tax Regulations SI 1995/2518 – Appellant invoicing related company – Appellant required to withdraw from scheme for the protection of the revenue – whether decision of Commissioners unreasonable – no – appeal dismissed

LONDON TRIBUNAL CENTRE

INTERNATIONAL CORPORATE RESTRUCTURING & INSOLVENCY LTD
Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	EDWARD SADLER (Chairman)
MRS SHEILA EDMONDSON FCA

Sitting in public in London on 23 July 2007

Mr Vladimir Joannou representing the Appellant

Mr Sarabjit Singh of Counsel instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
Introduction
1.	This is an appeal by International Corporate Restructuring & Insolvency Ltd (“the Appellant”) against a decision of the Commissioners for Her Majesty’s Revenue & Customs (“the Commissioners”) given in their letter dated 19 October 2006 that the Appellant ceased with effect from 31 October 2006 to be entitled to continue to operate the cash accounting scheme.  The grounds on which the Commissioners relied in reaching that decision were that they considered it necessary for the protection of the revenue that the Appellant should cease to be so entitled.  
2.	In summary, the circumstances of this case are as follows.  The Appellant was permitted to account for VAT under the cash accounting scheme (accounting for VAT by reference to the time of payment or receipt of tax, rather than by reference to the date of invoices).  The Appellant rendered a very substantial invoice for standard-rated supplies of services made to an associated company engaged in the business of trading in mobile phones at the time that that company became subject to the “extended verification” process adopted by the Commissioners in relation to traders in mobile phones and similar goods.  The Commissioners were of the view that the amount invoiced could not be justified by reference to the services to which the invoice purported to relate; that the invoice related in part to services to be supplied after the invoice was issued; and that the circumstances of the associated company (which accounted for VAT by the normal, invoice-based, method) could result in a VAT benefit accruing to that company notwithstanding that it might not be in a position to settle the invoice rendered by the Appellant (in which case, because of the cash accounting scheme, the Appellant would not have to account for the VAT charged on the invoice).  The Commissioners decided that in these circumstances they should require the Appellant to withdraw from the cash accounting scheme for the protection of the revenue.
3.	As explained below, our jurisdiction in a case such as this where the Commissioners are exercising a discretionary power is restricted:  we can allow the Appellant’s appeal only if we find that, in short, the decision of the Commissioners requiring that the Appellant withdraw from the cash accounting scheme was such that no reasonable body of persons taking account of all the relevant factors (and those factors to the exclusion of irrelevant factors) could have reached that decision.  On the facts as presented to us at the hearing of the appeal we cannot conclude that the decision of the Commissioners was unreasonable in this way.  We therefore must dismiss the Appellant’s appeal.
The law
4.	There is no dispute between the parties as to the interpretation of the law which applies to this appeal.
5.	The authority for the cash accounting scheme is found in paragraph 2(7) of Schedule 11 to the Value Added Tax Act 1994 (“VATA”):
“Regulations under this paragraph may make provision whereby, in such cases and subject to such conditions as may be determined by or under the regulations, VAT in respect of a supply may be accounted for and paid by reference to the time when consideration for the supply is received;  and any such regulations may make such modifications of the provisions of this Act (including in particular, but without prejudice to the generality of the power, the provisions as to the time when, and the circumstances in which, credit for input tax is to be allowed) as appear to the Commissioners necessary or expedient.”
6.	The regulations made under this power are found in Part VIII of the Value Added Tax Regulations 1995 SI 1995/2518 (“the VAT Regulations”).  In their amended form as they apply to this appeal, the relevant parts of the regulations are as follows.
7.	Regulation 57 sets out the basis of the cash accounting scheme:
“A taxable person may, subject to this Part and to such conditions as are described in a notice published by the Commissioners, account for VAT in accordance with a scheme (hereinafter referred to in this Part as “the scheme”) by which the operative dates for VAT accounting purposes shall be – 
(a)	for output tax, the day on which payment or other consideration is received or the date of any cheque, if later; and
(b)	for input tax, the date on which payment is made or other consideration is given, or the date of any cheque, if later.”
8.	Regulation 58 sets out a number of circumstances where the cash accounting scheme cannot apply.  Thus, for example, a taxable person is not eligible to operate the scheme if it is expected that his annual taxable supplies will exceed a specified amount (currently £660,000).  For the purposes of this appeal the following constraint on the operation of the scheme is relevant:  it is stated in regulation 58(2):
“This scheme shall not apply to – 
…
(f)	supplies of goods or services in respect of which a VAT invoice is issued in advance of the delivery or making available of the goods or the performance of the services as the case may be.”	
9.	Other provisions in the regulations require a trader to withdraw from the scheme if the annual value of his supplies exceed a certain amount, and deal with the transition from the cash accounting scheme to the “normal” basis for accounting for VAT on supplies made and received.  There is also provision dealing with traders who cease business or cease to be registered for VAT purposes and other changes in circumstances.
10.	Regulation 64, which is relevant to this appeal, sets out the circumstances where a trader is required to withdraw from the cash accounting scheme.  Regulation 64(1) provides:
“A person shall not be entitled to continue to operate the scheme where – 
…
(d)	the Commissioners consider it necessary for the protection of the revenue that he shall not be so entitled.”
11.	The tribunal has jurisdiction to hear the Appellant’s appeal against the decision of the Commissioners that the Appellant is not entitled to continue to operate the cash accounting scheme by reason of section 83 VATA:
“Subject to section 84 [which is not relevant for the present appeal] an appeal shall lie to a tribunal with respect to any of the following matters – 
…
(y)	any refusal of authorisation or termination of authorisation in connection with the scheme made under paragraph 2(7) of Schedule 11;”
12.	It is clear from the case law that where, as in the present case, an appeal lies to the tribunal in relation to a decision of the Commissioners where there is a discretion on their part as to the taking of that decision (and not simply a decision as to a matter of fact), then the jurisdiction of the tribunal is limited in that it cannot substitute its own decision for that of the Commissioners.  The tribunal can allow the appeal against the decision only if it concludes on the evidence that no reasonable body of Commissioners could have reached that decision – the matter is then to be referred back to the Commissioners for them to reconsider the decision.  
13.	In the present case the decision of the Commissioners is that they consider it necessary for the protection of the revenue that the Appellant should be required to withdraw from the cash accounting scheme within the terms of regulation 64 of the VAT Regulations.  Such a decision is discretionary in its nature, as decided by the Court of Appeal in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941, where it is stated that the tribunal “could not exercise a fresh discretion.  The protection of the revenue was not a responsibility of the tribunal or the court.”
14.	The extent of the tribunal’s powers to review a decision of the Commissioners which is by way of exercise of a discretionary power is set out by Lord Lane in Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1980] STC 231:
“[The tribunal] could only properly do so [i.e. allow an appeal against the exercise of a discretion] if it were shown the Commissioners had acted in a way which no reasonable panel of Commissioners could have acted;  if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight.”
15.	The Appellant, therefore, does not succeed in its appeal simply by demonstrating that it would have been reasonable for the Commissioners to decide that the Appellant should continue to remain in the cash accounting scheme; nor by convincing the tribunal that the tribunal would have reached a different decision from that of the Commissioners:  to succeed the Appellant must cross the higher threshold of demonstrating that the decision of the Commissioners was so unreasonable that no reasonable body of Commissioners acting with the knowledge of all relevant facts and circumstances as known at that time could have reached that decision.
The facts not in dispute
16.	The following facts were not in dispute between the parties:
(1)	The Appellant is a limited liability company incorporated on 15 July 2004 and registered for VAT with effect from 1 November 2005.  It operates from 67 Old Park Road, Palmers Green, London N13.
(2)	The principal business activities of the Appellant are the provision of accountancy, strategic financial planning, management consultancy and corporate restructuring services.
(3)	The sole shareholder of the Appellant is Mr Vladimir Joannou, who is also a director of the Appellant.
(4)	Since it became registered for VAT the Appellant has accounted for VAT within the terms of the cash accounting scheme.  At no time has the Appellant been in default in relation to its VAT affairs, and in particular has at all times complied with its VAT filing and payment obligations.
(5)	4 Distribution Ltd is a limited liability company whose sole shareholder is Ms I Nemcova.  Ms Nemcova is the wife of Mr Joannou.  Ms Nemcova is a director of 4 Distribution Ltd, and Mr Joannou has become a director after the events leading to this appeal.  4 Distribution Ltd operates from the same address as the Appellant, which is also the home of Mr Joannou and Ms Nemcova.
(6)	The principal business activity of 4 Distribution Ltd is trading in mobile telephones.  4 Distribution Ltd is registered for VAT.  The value of the supplies made by 4 Distribution Ltd is such that it is not entitled to operate the cash accounting scheme, and therefore it accounts for VAT in the normal way, by reference to invoices received and invoices delivered.
(7)	The Appellant provided certain services to 4 Distribution Ltd for the purposes of its business (the nature and scope of those services and the period during which they were provided is a matter of dispute between the parties, and is referred to below).
(8)	The Appellant issued an invoice dated 30 June 2006 and numbered 50  to 4 Distribution Ltd for the sum of £125,500 plus VAT of £21,962.50 (“Invoice 50”).  The narrative shown on Invoice 50 reads: “In connection with the day to day running of the company including Book Keeping and Accountancy Services, Corporation Tax and Budgeting”.  There is no statement in Invoice 50 as to the period during which the invoiced services were rendered.
(9)	The Appellant issued an invoice dated 12 July 2006 and numbered 53 to 4 Distribution Ltd for the sum of £10,000 plus VAT of £1,750.  The narrative shown on this invoice reads: “Consultancy and Accountancy Fees for Jun (sic) 2006   £5,000.00;   Consultancy and Accountancy Fees for July 2006   £5,000.00”
(10)	The Appellant issued an invoice dated 31 August 2006 and numbered 61 to 4 Distribution Ltd for the sum of £5,000 plus VAT of £875.  The narrative shown on this invoice reads: “Consultancy and Accountancy Fees for August 2006   £5,000.00”.
(11)	The Appellant issued an invoice dated 14 September 2009 and numbered 62 to 4 Distribution Ltd for the sum of £5,000 plus VAT of £875.  The narrative shown on this invoice reads: “Consultancy and Accountancy Fees for September 2006   £5,000.00”.
(12)	For the year to 31 December 2006 the management accounts of the Appellant show that it had income of £227,767.34 and net profit of £67,548.88.
(13)	4 Distribution Ltd had submitted claims to the Commissioners for repayment of substantial amounts of VAT (approximately £1.4m) in respect of its trading in mobile phones. On 28 June 2007 the Commissioners wrote to 4 Distribution Ltd to advise 4 Distribution Ltd that its claims would be subject to the process of “extended verification” adopted in respect of traders dealing in goods (which included mobile phones) where there were or could be “missing traders” in the series of transactions in which the goods were traded (that is, possible so-called “carousel fraud” or “missing trader fraud” cases).
(14)	By reason of this “extended verification” process the VAT repayment claims made by 4 Distribution Ltd were left outstanding (and, since it appears that the Commissioners have not yet completed that verification process, remained so as at the date of the hearing of the appeal) with the consequence that 4 Distribution Ltd has not been able to pay the amount due under Invoice 50.
(15)	On 11 September 2006, following an earlier letter advising the Appellant of the visit, two officers of the Commissioners visited the Appellant’s offices.  The letter warning of the visit stated that “The purpose of the visit is to help you meet VAT requirements in rendering accurate VAT returns and to answer any VAT queries or problems that you may have”.  The Appellant was asked to ensure that all relevant records, accounts and documents were available.
(16)	By their letter dated 19 October 2006 the Commissioners notified the Appellant that they had decided to require the Appellant to withdraw from the cash accounting scheme as from 31 October 2006.  The letter is in the following terms as it relates to the grounds for such action by the Commissioners:
“Under Regulation 64(1)(d) of the Value Added Tax Regulations 1995, Part VIII Cash Accounting, HM Revenue & Customs have the power to withdraw use of the Cash Accounting Scheme.
HM Revenue & Customs have decided to withdraw the scheme from 31st October 2006.  This is because during the visit of the 11th September 2006 you confirmed to the officers that sales invoice number 50, dated 30 June 2006, covers 4 months from May to August 2006 for the services provided to 4 Distribution Ltd.  As per Regulation 58(2)(f), the scheme shall not apply to supplies of goods or services in respect of which a VAT invoice is issued in advance of the delivery or making available of the goods or the performance of the service as the case may be.”
(17)	On 23 October 2006 the Appellant wrote to the Commissioners asking them to reconsider their decision, contending that regulation 64(1)(d) of the VAT Regulations was not relevant (it transpires that the Appellant was mistakenly referring to that provision before its terms were amended) and that regulation 58(2)(f) of the VAT Regulations was not in point as Invoice 50 was in respect of services up to 30 June 2006 and therefore was not in respect of services to be provided after that date.
(18)	The Appellant also claimed in the letter of 23 October 2006 that the action of the Commissioners in requiring the Appellant to withdraw from the cash accounting scheme was vindictive and part of a series of unfair actions currently being taken against the Appellant and its related companies.  The Appellant also claimed that the only reason 4 Distribution Ltd had not paid Invoice 50 “is because you are illegally refusing to pay their money and as a result you are frustrating the whole process”.
(19)	On 17 November 2006 the Commissioners wrote to the Appellant correcting the Appellant’s misunderstanding of the terms of regulation 64(1)(d) of the VAT Regulations.  As to regulation 58(2)(f) the letter states:
“We have checked and noted from the officers that visited you on 11th September 2006, that the invoice in question (no 50, dated 30 June 2006), was stated as covering four months (May to August 2006) for the services provided to 4 Distribution Ltd.”
(20)	In subsequent correspondence the Appellant continued to assert that the actions of the Commissioners were punitive since they were continuing to refuse to repay to 4 Distribution Ltd the substantial amount of VAT due to it, which in turn meant that 4 Distribution Ltd could not pay Invoice 50.  The Appellant also asserted that Invoice 50 was not for future services, and that there were no grounds for claiming that revenue was at risk since the Appellant’s business was financially sound, with insignificant creditors apart from the Commissioners.
(21)	The Appellant appealed to the tribunal on 21 November 2006, stating the following as the grounds of appeal:
Refusal to allow/cancellation of cash accounting scheme facilities.
17.	We find the matters set out in paragraph 16 above to be findings of fact for the purposes of this appeal.
The disputed evidence and our additional findings of fact
18.	A number of matters of fact are in dispute between the parties – they largely concern the services supplied by the Appellant to 4 Distribution Ltd and in particular the services to which Invoice 50 relates, and the period during which those services were supplied.
19.	In evidence before us we had the following documents:  a copy of the Appellant’s VAT return (and supporting VAT report) for the quarter to 30 June 2006; a copy of the letter of engagement from the Appellant to 4 Distribution Ltd dated 7 January 2006 setting out the services which the Appellant agreed to provide to 4 Distribution Ltd and the basis on which it would charge for those services; copies of the correspondence between the Appellant and the Commissioners; copies of invoices rendered by the Appellant to 4 Distribution Ltd (including Invoice 50); management accounts (profit and loss account and balance sheet) of the Appellant for the year to 31 December 2006; an analysis, by age and amount, of the creditors and debtors of the Appellant with a report date of 31 December 2006; a report of “customer activity” of the Appellant for the period 27 March 2006 to 31 March 2007; a copy of a letter dated 21 November 2006 from 4 Distribution Ltd to the Commissioners; copies of the hand-written notes of the two officers of the Commissioners (Mr Richard Attfield and Ms Jill Evans) made at the time of their visit to the Appellant on 11 September 2006; and copies of the typed file notes and reports made by those two officers following their visit.
20.	At the hearing we heard evidence from Mr Vladimir Joannou for the Appellant (who was cross-examined by Mr Singh, for the Commissioners), and from Ms Jill Evans and Mr John Frances Gormley for the Commissioners (who were cross-examined by Mr Joannou, for the Appellant).  As mentioned, Mr Joannou is the sole shareholder and a director of the Appellant.  Ms Evans is one of the Commissioners’ officers who visited the Appellant and whose report following that visit resulted in the decision to require the Appellant to withdraw from the cash accounting scheme.  Ms Evans has an accountancy qualification and works as an operational accountant for the Commissioners.  Mr Gormley is a senior officer with the Commissioners, working in the section dealing with “missing traders” in cases of inter-Community fraud.  He is the officer responsible for taking the decision to require the Appellant to withdraw from the cash accounting scheme, and he wrote the letter dated 19 October 2006 formally notifying the Appellant of that decision.
21.	The evidence of Mr Joannou is that the Appellant essentially conducted all the business of 4 Distribution Ltd on its behalf.  In particular, it researched the market in trading in mobile phones; it carried out due diligence enquiries on suppliers; it dealt with all documentation relating to transactions with customers, suppliers, and freight forwarders; it corresponded with the tax and other authorities on behalf of 4 Distribution Ltd; and generally carried out the day to day running of the business.  In addition, the Appellant kept the books of account of 4 Distribution Ltd and advised it on tax, accounting, financial and certain legal matters and prepared and submitted all direct and indirect tax returns.
22.	The Appellant’s terms of engagement and remuneration were specified in the letter dated 7 January 2006 from the Appellant to 4 Distribution Ltd.  The services which the Appellant agreed to provide were as specified above.  The fees to be charged were stated to be “commensurate to the skills and time required in carrying out” the work, and in the absence of prior agreement there was specified an hourly rate of £275 (these terms are standard for all the Appellant’s clients).  For what was regarded as “due diligence work” there was a flat rate charge of £5,000 per month.
23.	Mr Joannou stated that the Appellant had provided such services to 4 Distribution Ltd for a considerable period prior to 30 June 2006 (the date of Invoice 50) (his evidence was not clear on the start date of such period – he mentioned 1 November 2004, when 4 Distribution Ltd was registered for VAT, November 2005, when the Appellant was registered for VAT, and early January 2006, when the terms of engagement were agreed – he stated that in any event it was for a minimum of 6 months’ work).  He said that Invoice 50 related to services provided for the period up to 30 June 2006.  He accepted that Invoice 50 does not specify the period for which the services were provided, but argued that the natural inference in such circumstances is that it relates to services provided up to the date of the invoice, and not to future services.  He referred to a letter from 4 Distribution Ltd to the Commissioners dated 21 November 2006 in which 4 Distribution Ltd confirmed that the invoice does not include charges for future services.
24.	As to the quantum of the fees charged in Invoice 50, Mr Joannou did not have time-recording records or other such basis to justify the fees:  he had determined the fees by reference to his assessment of the value of the services provided, and this had been agreed by 4 Distribution Ltd.  He customarily agreed fees with the Appellant’s clients on such a basis, that is, without reference to the hourly billing rate.  On the occasion of the visit of the VAT officers in September 2006 he produced three folders as evidence of work carried out by the Appellant for which fees had been charged in Invoice 50, one of 6 pages summarising correspondence with the Commissioners (together with copies of the correspondence), one relating to due diligence work, and one relating to research and marketing for the mobile phone industry, including a submission to a local MP:  these were produced to illustrate the nature of the work undertaken, rather than being the complete record of work done.  Over and above this work, the Appellant effectively ran the day to day business of 4 Distribution Ltd, and the fees invoiced reflected the considerable amount of work which this entailed.  (We note at this point that in his written submissions to the tribunal Mr Joannou states:  “The Appellants have produced all the files, documents, records and information for the work done for 4 Distribution Ltd.”)
25.	As to the “due diligence work”, that was separately billed by the Appellant to 4 Distribution Ltd on the agreed £5,000 per month basis, essentially as a retainer.
26.	Invoice 50 was issued on 30 June 2006.  At that time, and by reference to prior treatment of 4 Distribution Ltd by the Commissioners, the Appellant anticipated that 4 Distribution Ltd would shortly thereafter receive repayment of the VAT due to it out of which it could settle Invoice 50.  At the time Invoice 50 was issued, the Appellant had just been notified of the “extended verification” procedure to be applied to 4 Distribution Ltd, and it was not expected that there would be such a protracted delay in repaying the VAT due to 4 Distribution Ltd.
27.	The evidence of Ms Evans is that she, together with another VAT officer, Mr Richard Attfield, visited the offices of the Appellant on 11 September 2006.  The purpose of the visit was to examine the circumstances of Invoice 50: the concern of the Commissioners was that this was an invoice of a substantial amount between related companies in circumstances where 4 Distribution Ltd would receive a VAT credit (and repayment) for the VAT charged on Invoice 50, but would not be in a position to settle Invoice 50 unless and until the repayment of VAT on its mobile phone trading supplies was agreed, and until that time the Appellant would not, by virtue of the cash accounting scheme, be liable to account for the VAT charged on Invoice 50.  There was concern that the Appellant had inflated the amount of the invoice to increase the amount of the benefit from this “mismatch” in the VAT accounting treatment.
28.	At that visit Ms Evans met with Mr Joannou and Mr Shah, the company secretary of the Appellant.  Ms Evans took a manuscript note of the meeting and of the actions carried out at the visit, and she prepared a typed report from that note on 20 September 2006.
29.	Mr Joannou and Mr Shah explained to Ms Evans the relationship between the Appellant and 4 Distribution Ltd, and that the Appellant carried out due diligence enquiries on suppliers, research, marketing, legal and accounting work for 4 Distribution Ltd.  They explained that there was a fixed fee charge of £5,000 per month for the due diligence work, but that there was no other agreed fee basis for other work, although the hourly rates charged by the Appellant were £300 for legal services and £125 for accounting services.  The terms of engagement in the letter of 5 January 2006 were not disclosed at the meeting.
30.	When asked to explain what work had been carried out for which fees were rendered in Invoice 50, Mr Joannou produced three folders, saying that they were the work for which Invoice 50 had been rendered.  One folder comprised the due diligence enquiries and responses on 4 Distribution Ltd’s suppliers, one folder was correspondence with the Commissioners, and the third folder contained research on the mobile phone industry (including research on the VAT treatment, recent case law on “carousel fraud” cases etc), and included material for submission of a case to the local MP (Mr Joannou explained at the meeting that the Appellant would be billing 4 Distribution Ltd separately for this submission).  No folders or other evidence was produced to show the accounting and similar work carried out for 4 Distribution Ltd, although this was referred to at the end of the meeting.
31.	Mr Joannou explained at the meeting that there were no timesheets or other time records relating to Invoice 50, nor any breakdown or narrative beyond that on Invoice 50 itself to explain the fees charged:  he said this was not required as 4 Distribution Ltd was a related company which was fully aware of the work done, and that in any event fees could be charged between related companies as a means of distributing profits between the companies to maintain each company within the lower band of corporation tax.
32.	Mr Joannou further explained at the meeting that he and Mr Shah carried out a large amount of work for 4 Distribution Ltd, and had been especially busy during the four months May to August 2006, and this was reflected in the fees charged in Invoice 50.  Ms Evans specifically noted in her manuscript notes of the meeting that Mr Joannou related the fees charged in Invoice 50 to work carried out during the May to August 2006 period.
33.	Mr Gormley’s evidence related to the policy of the Commissioners during 2006 in relation to traders in mobile phones and similar goods where there were, or could be, “missing traders”, and therefore, potentially, VAT fraud.  He explained that, following certain court decisions in January 2006, there was an increase in “missing trader” cases, and this led the Commissioners to introduce the policy of “extended verification”, that is, a careful review of each trader claiming substantial repayments of VAT, to ensure that in all the circumstances of any chains of trading there was a proper basis for the repayment claim.  The effect of this policy was to permit traders to reclaim input VAT on certain of the supplies they received (relating to their “administration” or other matters not directly related to the trading or shipping of the goods in question), but the repayment of input VAT claimed for the goods and shipping costs would likely be delayed whilst investigations were made as to whether there were any “missing traders” in the chain, and if so, whether the taxpayer knew that to be the case.
34.	Generally, this policy was applied to April 2006 VAT quarter and later returns, and traders subject to the policy were notified at that time, but because of staffing levels not all traders were subjected to the policy immediately.  In relation to 4 Distribution Ltd its April 2006 quarterly return was not subjected to extended verification, and the repayment claimed pursuant to the April 2006 return was paid in mid-June 2006.  On 28 June 2006 the Commissioners advised 4 Distribution Ltd that subsequent repayment claims would be subject to the extended verification process, with consequent delays in settling repayment claims.
35.	The Commissioners were concerned about the validity of Invoice 50 in circumstances where it had been rendered to 4 Distribution Ltd, a company subject to the extended verification process, and which would not have the resources to pay Invoice 50 unless and until the VAT repayment claims were settled.  The concern was that the amount invoiced did not reflect the value of the services supplied, and that it related, at least in part, to services to be supplied after 30 June 2006, the date Invoice 50 was issued.  That rendered Invoice 50 outside the scope of the cash accounting scheme.  In the view of the Commissioners the revenue would be at risk if the Appellant were to continue to operate the cash accounting scheme and issued further invoices which could not be substantiated, or further invoices for future services, especially to a company in the position of 4 Distribution Ltd, which could recover the VAT on its “administrative” input supplies, but which could not pay the amounts invoiced whilst extended verification procedures were being conducted and might not be able to pay them at all if it subsequently transpired that it was not entitled to recover input tax on purchases of its trading stock.
36.	It is clear to us from the evidence of Ms Evans and Mr Gormley that Invoice 50 was at the heart of the concerns of the Commissioners when they reviewed the question of whether or not they should require the Appellant to withdraw from the cash accounting scheme.  The concerns were two-fold: was the amount invoiced excessive in relation to the value of the services supplied by the Appellant to its related client, 4 Distribution Ltd; and did Invoice 50 relate in part to future services, that is, in the terms of regulation 58(2)(f) of the VAT Regulations, was Invoice 50 issued in advance of the performance of the services in respect of which it was issued.  The Commissioners entertained those concerns in a particular context, namely that of VAT invoicing between related entities (companies owned by husband and wife respectively) where the two companies operate different methods of accounting for VAT and where one of the companies is engaged in trading activities of a nature where there is known to be scope for VAT fraud.  If the Appellant is to begin to challenge the exercise of their discretion by the Commissioners in their decision to require it to withdraw from the cash accounting scheme the Appellant must show that those concerns were without substance and therefore should have been disregarded.  In an appeal such as this it is clear that the onus is on the Appellant to demonstrate, on the balance of probabilities, that the amount invoiced was reasonable having regard to the services actually provided by the Appellant to 4 Distribution Ltd and that those services were supplied on or before 30 June 2006, the date Invoice 50 was issued.
37.	As to the first of these two questions, we do not consider that the Appellant discharged that onus.  There was no evidence before us, apart from Mr Joannou’s forceful assertions, which showed us that the Appellant had carried out work to the value of £125,500 for 4 Distribution Ltd.  This is a very substantial fee on any basis, and for both the Appellant and 4 Distribution Ltd it represented a very large proportion of income and expenditure respectively (well over half of the income of the Appellant for the year to 31 December 2006).  
38.	The starting point is Invoice 50 itself, but its narrative detail is brief in the extreme (see paragraph 16(8) above).  There are no time records or other similar records which a professional firm would customarily maintain as the basis for charging fees to its clients.  When the Appellant was asked by Ms Evans and her colleagues at their visit to explain the work carried out for 4 Distribution Ltd, three folders were produced (they were not in evidence before us) and reference was made to other work, such as keeping accounting records and other aspects of the day to day running of 4 Distribution Ltd and its business.  At the hearing Mr Joannou claimed that the folders were produced to illustrate the nature of the work rather than to provide a comprehensive account of all work undertaken.  But neither subsequent to that visit, nor before us, did the Appellant produce anything beyond those three folders.  As we have noted, Mr Joannou’s written submissions to the tribunal state that all files, documents, records and information relating to the work carried out for 4 Distribution Ltd were produced to the Commissioners.  Some of the matters included in those folders, relating to “due diligence” enquiries made of suppliers to 4 Distribution Ltd, were matters for which the Appellant charged 4 Distribution Ltd a substantial monthly retainer.  
39.	Mr Joannou claimed that Ms Evans and her colleague did not, during their visit, examine carefully all the information in the folders produced to them.  Ms Evans in her evidence confirmed that she gave only a cursory look at the folder dealing with correspondence with the Commissioners, as she noted in her manuscript note, but she explained that this was because she would have copies of that correspondence on the Commissioners’ own file.  As to the other documents, as she said in cross-examination, since a principal purpose of the visit was to find out what work had been carried out by the Appellant which justified such a fee it would be strange if she did not, first, clearly ask for all the evidence of the work carried out, and secondly, when that was produced, look at it with sufficient attention to see the scope and extent of that work.
40.	The Commissioners were not persuaded by the evidence shown to them that the Appellant had provided to 4 Distribution Ltd services to the value of £125,500, nor are we so persuaded by the evidence before us.  We consider, and so find, that the Commissioners had grounds for a reasonable concern that the Appellant had, by Invoice 50, invoiced 4 Distribution Ltd for fees which were excessive in relation to the value of the services supplied.
41.	Mr Joannou argued at the hearing that the Commissioners have no entitlement to look behind an invoice to judge whether or not the fees charged represent the value of professional services rendered.  We do not agree, at least in relation to this case, where the parties were not independent parties acting at arm’s length, and where the wider VAT context in which the parties operated could give an opportunity for a VAT advantage, and thus present a threat to the revenue, if an inflated invoice were rendered.
42.	We now turn to the second question, namely whether the supplies to which Invoice 50 relates were made prior to 30 June 2006 or, in part at least, after that date, that is, whether Invoice 50 relates to future supplies, so that it is outside the cash accounting scheme.  Again, the onus is on the Appellant to show that the relevant supplies were made prior to 30 June 2006.  Again, we do not consider that the Appellant has discharged that onus.
43.	Invoice 50 itself is silent on the question (we note that all the other, “monthly”, invoices produced in evidence specified the period they cover).  The only other documentary evidence produced by the Appellant is the letter from 4 Distribution Ltd to the Commissioners dated 21 November 2006 in which 4 Distribution Ltd confirmed that the services described in Invoice 50 were performed in the period up to 30 June 2006 and that the invoice does not contain charges for future supply of services.  This letter was written after the Commissioners had reached their decision requiring the Appellant to withdraw from the cash accounting scheme (and indeed was written on the same day that the Appellant appealed to the tribunal).  In all the circumstances we are inclined to give it little weight.
44.	We give more weight to the point Mr Joannou made to us at the hearing, namely that it is reasonable to infer that an invoice relates to services already rendered unless the invoice specifically states that it relates to services yet to be rendered.  Against that we have the evidence of Ms Evans, supported by her manuscript note made during the visit to the Appellant, that at that visit Mr Joannou stated that Invoice 50 related to the four months, May to August 2006.  Ms Evans was told that during this period Mr Joannou and Mr Shah were particularly busy working for 4 Distribution Ltd.  We note that the manuscript note taken by the other officer, Mr Attfield, at that visit also refers to “any additional work [that is, additional to the “due diligence” work] at £300 p/hr, billing on agreement basis between May and Aug for one large invoice”.  Mr Attfield’s note also refers to the fact that the folder produced at the meeting relating to correspondence with the Commissioners related in part to the claim submitted on behalf of 4 Distribution Ltd for the June 2006 quarter with correspondence in August, that is, the time when it became clear that 4 Distribution Ltd’s claim for repayment of input VAT would be subject to the extended verification procedures.  Neither in the cross-examination conducted by Mr Joannou, nor by reference to any other evidence did the Appellant cause us to question this evidence given on behalf of the Commissioners.
45.	It is therefore our conclusion, and our finding, that Invoice 50 was issued in advance of the performance of some of the services to which it relates.  It is certainly the case that the Commissioners had grounds for a reasonable concern that the Appellant had supplied services where Invoice 50 was issued in advance of the performance of those services.  We note that the Appellant issued invoices to 4 Distribution Ltd on 12 July 2006 and 14 September 2006 which both in part related to future supplies (see paragraphs 16(9) and 16(11) above), although this was in the different context of monthly invoices for fixed amounts on a retainer basis.
46.	As a consequence of our finding, regulation 58(2)(f) of the VAT Regulations has effect so that the cash accounting scheme cannot apply to those services covered by Invoice 50 to the extent they were performed after 30 June 2006.  The Commissioners have gone further than this in that they have required the Appellant to withdraw from the cash accounting scheme completely.
The Appellant’s other arguments
47.	For the Appellant, Mr Joannou argued not only (as we have set out above) that Invoice 50 could be justified in its quantum and that it related only to past services, but also that the decision of the Commissioners to require the Appellant to withdraw from the cash accounting scheme was flawed because it was motivated by their desire to apply financial pressure to the Appellant in conjunction with the financial pressure they were applying to 4 Distribution Ltd by their delay in allowing 4 Distribution Ltd to claim the VAT repayment due to it for the June 2006 and subsequent VAT accounting periods (a delay which he considered to be totally unjustifiable, and which in itself resulted in 4 Distribution Ltd being unable to settle Invoice 50 and thereby enable the Appellant to account for the VAT on that invoice).  
48.	He argued also that there was no basis for arguing that it was necessary for the protection of the revenue that the Appellant should be required to withdraw from the cash accounting scheme.  He argued, first, that the Appellant was financially sound and therefore could be expected to pay all its VAT when due.  Secondly, he posited the situation where the Appellant was on the normal invoice-based method of accounting for VAT (so that it accounted for VAT on its invoices when the invoices were issued): in such a situation, if it eventually proved to be the case that 4 Distribution Ltd could not pay amounts due to the Appellant, the Appellant would be entitled to bad debt relief and recover from the Commissioners the VAT 4 Distribution Ltd had failed to pay – this would give the same overall result as leaving the Appellant in the cash accounting scheme in circumstances where 4 Distribution Ltd failed to pay the Appellant its invoices.
49.	We do not accept these arguments.  It seems to us that it is both reasonable and proper that the Commissioners should exercise the discretion they have in this matter having regard to all the circumstances and the context in which the Appellant is operating the cash accounting scheme.  The greater part of the Appellant’s business, so it appears from its management accounts, is with its related company, 4 Distribution Ltd.  4 Distribution Ltd, even though, as Mr Joannou strongly asserts, it may be proved to be acting entirely legitimately and fully entitled to recover all the VAT repayments claimed, is nevertheless active in a trade where the Commissioners have good grounds to be cautious, and where they have found it necessary to introduce special procedures.  The Appellant is correct in the narrow sense that those procedures contributed towards the delay in 4 Distribution Ltd settling its accounts (although if the parties were at arm’s length 4 Distribution Ltd might have been constrained to find other ways to finance settlement of its professional advisers’ fees), but there is no suggestion that 4 Distribution Ltd has been singled out for adverse treatment – the Commissioners, in considering possible loss to the revenue, are entitled to look at the consequences which follow from their proper application of a reasonable and legitimate policy. 
Decision 
50.	The “mismatch” between the timing of accounting for VAT between the Appellant operating the cash accounting scheme and 4 Distribution Ltd operating the conventional invoice-based accounting method gives scope for parties to manipulate matters to obtain an overall benefit in timing of VAT accounting, and perhaps also in the net amount of VAT paid.  As we have shown, the Commissioners had reasonable grounds for concern that the very substantial amount invoiced by Invoice 50 was both excessive in relation to the value of the services to which it refers and also in part related to future services, and therefore to that extent outside the terms of the cash accounting scheme.  Invoice 50 was rendered at the time 4 Distribution Ltd was advised that it would be subject to the extended verification procedures.  These are all relevant factors for the Commissioners to take into account in reaching their decision.  They are factors which could, in conjunction, plausibly result in a loss to the revenue.
51.	Regulation 64(1)(d) of the VAT Regulations provides that a person cannot operate the cash accounting scheme where the Commissioners consider it necessary for the protection of the revenue that he should not be entitled to operate the scheme.  The Commissioners exercised the discretion which this regulation confers on them by requiring the Appellant to withdraw from the scheme.  In taking that decision the Commissioners took into account all the relevant factors and concluded that there could be some risk to the revenue if they allowed the Appellant to continue to operate the scheme.  In taking that decision they did not take into account irrelevant or extraneous factors.  Their decision was a reasonable exercise of the discretion conferred on them and we see no grounds for impugning that decision.
52.	We think that the letter of 19 October 2006 in which the Commissioners notified the appellant of their decision is open to some criticism in that it refers to the “future services” aspect of Invoice 50 only as the ground for the decision.  As was made apparent in subsequent dealings with the Appellant and from the evidence we heard, the Commissioners took account, perfectly reasonably, of other factors.  It seems to us as a matter of proper procedure that the written communication of a decision such as this should set out the full grounds for that decision.  Any shortcomings in the letter of 19 October 2006 do not change our decision:  the ground specified in the letter in itself was sufficient to justify the decision taken by the Commissioners, and, as we have said, the full grounds have subsequently been made clear to the Appellant, which has been able to make its appeal to the tribunal in complete knowledge of those grounds and taking them fully into account.
53.	We therefore dismiss the Appellant’s appeal.
54.	At the hearing the Commissioners made no application for costs, and therefore we make no order as to costs.

EDWARD SADLER

CHAIRMAN
RELEASE DATE: 31 August 2007

LON/2006/1281