20427
ASSESSMENT — (i) relief in respect of credit note claimed — no evidence of issue of valid credit note — (ii) IT claimed on importation of furniture — insufficient documentary evidence — (iii) OT assessed on invoices claimed by appellant not to have been paid — appeal dismissed in entirety

MANCHESTER TRIBUNAL CENTRE

 
 	
					YUEN MAN TSANG	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Lady Mitting (Chairman)

Sitting in public in Birmingham on 24 July 2007, 22 August 2007 and 28 September 2007

Simon Poon, chartered accountant, for the Appellant on 24 July and 22 August and Mr Lipman on 28 September 2007
 
Nigel Bird, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellant, who is sole proprietor of a commercial property business, trading as “Team One” appeals against an assessment to VAT in the sum of £27,000 plus interest for periods 11/04 and 02/05.  The assessment was dated 22 November 2005.  
2.	The tribunal heard oral evidence from Mr Kwan Biu Tang and Mrs Yuen Man Tsang on behalf of the Appellant.  The Respondents had put in witness statements from Mr Steven Brogan and Mrs Val Piper, both of which had been agreed and the Respondents therefore called no oral evidence.  
The Respondents’ evidence
3.	The Appellant registered for VAT with effect from 1 June 2004, the nature of her business activity being described as “Estate Agency”.  She submitted returns for periods 08/04; 11/04 and 02/05, each of them being a repayment return.  She submitted an application to cancel her registration with effect from 1 April 2005.  As all three returns had been repayment returns and following receipt of the return for 02/05 and the application for deregistration, the Respondents decided a verification visit was called for and on 4 October 2005, Mr Steven Brogan attended at Messrs Farmiloes, accountants to Mrs Tsang, where he met with Mr Poon and Mr Nip.  It appeared from an inspection of the records that the nature of the business activity was commercial refurbishment.  Mrs Tsang was not herself present at the meeting and the records made available to Mr Brogan were not in themselves complete.  He was shown no sales day book but he did find the following sales invoices for period 02/05:
		Date	Customer	Net £	VAT £	
(1)	30/12/04	Fine Diners	3920.00	686.00	
(2)	11/02/05	Fine Diners	33045.95	5783.04	
(3)	11/02/05	Fine Diners	400.00	70.00	
(4)	11/02/05	Ruby Cantonese	63500.00	11112.50	
(5)	11/02/05	Ruby Cantonese	8644.02	1512.70	
(6)	11/02/05	Ruby Cantonese	350.00	61.25	
(7)	11/02/05	Fine Diners	(1370.00)	(239.75)	
		TOTAL	£108489.97	£18985.74	

4.	Also with the paperwork for 02/05 were two documents marked “refund notes”.  They were both dated 11 February 2005, one made out to Ruby Cantonese in the sum of £4,429.77 plus VAT of £775.21.  The second was made out to Mai Mai Garden in the sum of £17,028 plus VAT of £2978.72.  Mr Brogan totalled the sales invoices which he had found and the VAT element came to £18,985.74.  The VAT return for the period had declared output tax of £6,893.09, a shortfall of £12,092.65 which on the basis of the evidence in front of him Mr Brogan believed to be an underdeclaration.  
5.	In the same period (02/05) input tax of £2,547.76 had been claimed in relation to an import of furniture in November 2004.  The C79 import certificate was not amongst the records, without which input tax could not be allowable.  
6.	For period 11/04, Mr Brogan located a sales daybook but no invoices or credit notes.  The daybook summarised six invoices, five of which were made out to a Mr Cheng, trading as Mai Mai.  The net value of the invoices to Mr Cheng totalled £97,890.89.   Also listed was a credit note made out to Mr Cheng in the net value of £70,638.30, the relating VAT being £12,361.70.  The VAT return for 11/04 was not before the Tribunal but it was Mr Brogan’s unchallenged evidence (letter 24 October 2005) that the tax shown therein was in line with the daybook entries, the assumption being that credit had been claimed for the credit note.  Mr Brogan however took the view that without sight of the credit note itself or other supporting evidence then the credit note would have to be disallowed. 
7.	On 24 October 2005 Mr Brogan issued a pre-assessment letter detailing what he saw to be errors in the two periods 11/04 and 02/05 and advising that the following assessment would be raised unless further information was received within 21 days:
	“Period 02/05 (Sales)		£12092.00
	 Period 02/05 (Purchases)		£2547.00
	 Period 11/04 (Sales)		£12361.00

	 Total				£27,000.00”

8.	Nothing further was heard and the assessment was duly raised.  It should be noted that in relation to the output tax assessment for 02/05, Mr Brogan made no adjustment in respect to the two refund notes made out to Ruby Cantonese and Mai Mai Garden.  He did not treat them as invoices and assess them but neither did he treat them as credit notes and make any deductions therefor.  
9.	On 29 September 2006, Mr Poon wrote to the Respondents seeking a reduction in the assessment in the following manner:
	“The original assessment			£27,000

	 Less
	Errors on VAT returns (Appendix I)	£22,892.00
	Input Tax import of furniture		£2,547.76
	Accountancy Fees – Farmiloes		£175.00

	Total					£25,614.76

	Balance					£1,385.24”

10.	The “Errors on VAT returns” were set out in a voluntary disclosure form, describing the errors as (i) invoices omitted in output tax and (ii) amount due from customers over six months, therefore entitled for bad debt relief.  The form listed seven entries totalling £22,892.00.  The list included the VAT on the credit note for 11/04 (£12,361.00).  It included the first three of the Fine Diners invoices for period 02/05.  It also included, presumably as an invoice, what Mr Brogan had seen for 02/05 as a credit note for Fine Diners for which the VAT element was £239.75.  
11.	In relation to the importation of the furniture, Mr Poon provided a document headed “Trader Input Plain Paper C88”.  This showed Team One as consignee but did not specify that it was also the importer.  Mr Poon provided copies of the invoices listed in the claim for bad debt relief, including an invoice for what had previously been the 02/05 credit note in the sum of £239.75.  He also submitted a copy of what purported to bethe 11/04 credit note made out to Mr Cheng.  However, the original day book entry had referred to the credit note as being in the net sum of £70,638.30 plus VAT of £12,361.70.  The credit note itself, however, was in the net sum of £70,634.29 with a VAT element of £12,361.00. 
12.	To support the claim for bad debt relief, Mr Poon provided a “Bad Debt Account” which listed the invoices.  The dates of five of the six were given as 11 February 2005 and the sixth as 30 December 2004.  Given as the VAT period in which the refund was claimed was February 2005 in respect of each.  As further evidence in support of the 11/04 credit note, the following statement from Mrs Tsang was submitted:
“I, Yuen Man TSANG, C/o Winston Churchill House … hereby confirm that, the Credit Note issued to Mai Mai Garden … was refunded by cash taken from Bank of East Asia.” [dated 19 March 2007] 
13.	All this additional information submitted by Mr Poon came before Mrs Piper on a reconsideration.  She declined to allow the bad debt relief because the invoices had all fallen to be accounted for in the 02/05 return and had also been claimed as bad debts in the same period.  The invoices had not therefore remained unpaid for the necessary period of six months.  She also pointed out that the total input tax declared by the Appellant in 02/05 was £6,983.09 as against the bad debt relief claimed of £10,532.72.  She declined to give credit for the bad debt relief.  She also stated that she could not allow the claim in respect of the 11/04 credit note, her reasoning being that the Appellant had put in only two VAT returns for periods 08/04 and 11/04.  The total output tax claimed in the two returns taken together was only £9,206.33.  This could not therefore justify the issue of a credit note for £12,361.  She asked to be told when the amount had been declared as output tax.  
14.	In respect of the importation of the furniture, Mrs Piper again stated that the C79 was essential and suggested where a duplicate could be obtained.  The only other document submitted in respect of the furniture was a letter to the Appellant from the Respondents stating that a C79 could not be issued because the VAT number of the Appellant did not match that of the importer on the importation documentation.  
15.	There the matter lay until the case came up for hearing before the tribunal.
The Appellant’s evidence
16.	Prior to hearing, Mr Kwan Biu Tang had put in a witness statement which formed the major part of his evidence in chief.  His statement was in the following form:
	“I was the manager of Team One.
I hereby confirm that the following invoices were issued under the instruction of our clients in order for them to take further advance from the bank, however, no payments were never received:-
Client	Invoice No.	Amount	VAT	
Mr Chan, Fine Diners	REFB90CHI230804V2-A	3,920.00	686.00	
Mr Chan, Fine Diners	REFB90CHI230804V2	33,045.95	5,783.04	
Mr Chan, Fine Diners	REFB90CHI230804V2-B	400.00	70.00	
Mr Chan, Fine Diners	REFB90CHI230804V2	1370.00	239.75	
Mr M Ho, Ruby Restaurant	REFLEOHO110205	4429.77	775.21	
Mr Cheng, Mai Garden		17,021.26	2978.72	

17.	These invoices were exactly those which made up the first six on the form of voluntary disclosure and the entirety of the claim for bad debt relief.   Accompanying the statement were six supporting copy invoices.  The invoice to Mr Cheng was dated 11-02-05.
18.	Mr Tang described himself as a contract manager for the Appellant.  He had very little involvement in the book keeping although he would come across some paperwork as he liaised with the clients but would then pass instructions on to the company’s book keepers.  Mr Tang was asked at great length about the various invoices in cross examination but his evidence was confused and he could not seem to remember specific invoices.  He did state that the invoices did not relate to work done by the Appellant but were created for banking purposes for individual customers.  He said that the Appellant would start a project but the customer would not then have enough money to make the upfront payments for materials.  The invoice would therefore be raised to enable the customer to obtain funding from the Bank to enable the Appellant to be paid to carry on with the job.  At the date of invoice therefore, Mr Tang confirmed that the work described in the invoice had not been done.  When asked whether it was subsequently done, he did not know.  He said initially that he did not know whether or not any of the invoices had been paid as that was not his concern and being a matter for the book keepers.  Later, however, he stated that the invoices had definitely not been paid.  He described a falling out with Mr Cheng of the Mai Mai Garden.  He believed that the invoice of 02/05 in the net sum of £17,021.26 would have been the final invoice issued to Mr Cheng.  He told us that the invoice was issued at the request of Mr Cheng.  The invoice purported to include equipment and materials which Mr Tang said was certainly false as Mr Cheng provided his own materials.  It was put to him by Mr Bird that, he, Mr Tang, had listed six invoices and he was asked whether they were genuine or not.  Mr Tang said that they had been issued by the book keepers but the Appellant would only have done approximately one third of the work shown on the invoices and out of payments received two thirds would be refunded.  It was totally unclear whether this related just to Mr Cheng or to all invoices.  
19.	Mr Tang was asked in cross examination about the 11/04 credit note and asked when it was created.  Mr Tang pointed out it was dated 30 November 2004 but said that he did not really know and the date “seems wrong to me”.  He confirmed that repayments were made to Mr Cheng.  The repayments were in four or five instalments which he handed over to Mr Cheng in cash as Mr Cheng refused to accept cheques.  Mr Cheng would give him a hand written receipt in respect of each instalment but Mr Tang did not know where they were now.  We were told by Mr Tang in relation to the credit note that an invoice had been drawn up and submitted direct to the bank and the bank, in accordance with their normal procedures, had paid the Appellant.  Mr Cheng then, after approximately one third of the project had been completed, demanded cancellation and the Appellant refunded to Mr Cheng the remaining two thirds of the payment from the bank.  Mr Tang did not know how the amount of the credit note had been made up although he talked about having issued invoices to the bank on calculations which he had carried out of work done and materials used.   
20.	Mrs Tsang’s evidence in chief was brief and limited to the issue of the credit note in period 11/04.  She told the Tribunal that she had been approached by Mr Cheng of the Mai Mai Garden restaurant and asked to refurbish his restaurant.  The work was started and as staged payments were needed to pay for wages and materials, Mrs Tsang issued a series of invoices to Mr Cheng.  He gave the invoices to his bank who transferred the monies in payment of the invoices direct into Mrs Tsang’s bank.  Mr Cheng had started complaining about the quality of the work at the outset of the job and towards the middle of it he told Mrs Tsang that he was not satisfied and he would be asking someone else to complete the job for him.  He demanded the balance of his monies back to enable him to pay for the remainder of the job to be done elsewhere.  Mrs Tsang issued him a credit note for the amount which had been calculated as due to him and she repaid the credit note bit by bit.  
21.	In cross-examination, Mr Bird raised with Mrs Tsang the discrepancy between the amounts of the credit note as shown in the daybook and the amounts shown on the copy credit note later produced to the Commissioners.  The daybook entry showed the credit note as being in the net sum of £70,638.30 with VAT of £12,361.70.  In the assessment, in accordance with normal practice, the Commissioners had rounded down the sum assessed to £12,361.  He pointed out to Mrs Tsang that the credit note later produced to the Commissioners showed VAT of £12,361 exactly, with a net sum of £70,634.29.  He put it to Mrs Tsang that the credit note produced to the Commissioners had been created after the assessment.  The amount of the VAT had been taken from the assessment and the amount of the credit note worked backwards from there.  This was denied by Mrs Tsang.  She was adamant in her evidence that the credit note produced to the Commissioners was a copy of the original credit note produced to Mr Cheng.  It had not been recreated.  She explained that her copy of the credit note had originally been lost but was found some time later when she searched her house and computer.  She put the discrepancy down to an error by her bookkeeper who was responsible for making up the sales daybook and who also made up and issued the credit note.  
22.	Mr Bird also asked Mrs Tsang if the date of the credit note (30 November 2004) was the date when it was in fact issued.  Mrs Tsang thought not and put this also down to an error by her bookkeeper.  Mr Bird put it to Mrs Tsang that she had produced no evidence of the refund and in particular, there was no evidence of withdrawals from her bank account.  She explained that she had changed bank and that her former bank were refusing to allow her access to past transactions.  Mrs Tsang did not know personally how the amount of the credit note was calculated.  For this, she had relied on her project manager to calculate how much of the work had been done and how much the refund was therefore to be for.  Mrs Tsang explained that at the time she had just had a baby and was not really concentrating on the business which she left very much to her bookkeeper and her project manager.  She had little idea of what was going on. 
Submissions
23.	On behalf of the Appellant, Mr Lipman’s submissions were confined to the credit note in period 11/04.  He submitted that Chinese culture was different from English culture, although he did not expand upon this.  He urged the tribunal to accept Mrs Tsang’s evidence as factually correct and to find that she had issued the invoice and had issued the credit note, which she later refunded.   For reasons which she had explained, she had not been able to provide evidence of the refund and it was unfortunate also for Mrs Tsang that so many errors had been made by her bookkeeper.  
24.	In relation to 11/04, Mr Bird pointed out the discrepancies between the figures in the daybook and the figures on the credit note later produced.  He pointed to the lack of any corroborative evidence.  Although there were various alternative possibilities, as the Tribunal and the Commissioners were in the dark over the banking arrangements it was impossible to really see what was going on.  
25.	In respect of period 02/05, with regard to the importation of the furniture, the required documentation was not in place and input tax could not therefore be allowed.  With regard to the underdeclared output tax on the invoices in 02/05, the only evidence here was that of Mr Tang.  This evidence was confusing and uncorroborated and in his submission, no reason had been put forward why the assessment should not stand.
Conclusions
Period 11/04
26.	The assessment for 11/04 relates to the single issue of the credit note.  If Mrs Tsang issued an invoice or invoices on which she accounted for output tax, and in respect of which she later issued a credit note which she repaid, then on production to the Commissioners of validating evidence, she should be entitled to reclaim the tax.  All of these conditions have to be met which unfortunately, Mrs Tsang has been unable to do.  Most importantly, there is no reliable evidence a credit note was ever issued.  She was unable to produce a copy of it to the Commissioners until almost a year after being first asked and when a copy was produced, not only did its figures not match those recorded in the Sales Daybook, but the figure for the VAT element matched exactly the rounded down figure in the assessment.  I do not accept Mrs Tsang’s explanation of a book keeping error, this would be just too co-incidental.  There can only be one explanation and that is that the document produced was created after the raising of the assessment in figures designed to match the assessment.  Both Mr Tang and Mrs Tsang accepted the date of the credit note was incorrect, but neither could give the correct date.  Mrs Tsang’s evidence that it was the actual copy of the original which she had lost but later found is unacceptable.  No acceptable evidence has been produced to the Tribunal to justify Mrs Tsang’s claim to credit in relation to the credit note.  Mr Brogan was therefore perfectly correct in disallowing the reduction in declared sales and the assessment was quite properly raised and must stand.  
Period 02/05
27.	The assessment for 02/05 is made up of two elements.  First, there is the input tax claim of £2,547 in respect of the imported furniture.  Regulations laid down by the Commissioners require an importer to verify his claim to input tax by way of Form C79.  Mrs Tsang has been unable to produce such a form.  No evidence was given either by Mr Tang or Mrs Tsang in relation to this element of the assessment and no submissions were made on it either.  All the Tribunal had before it was the C88 Form produced to the Commissioners by Mr Poon and rejected by them as not specifying Mrs Tsang to have been the importer.  Without any further oral or, more importantly, documentary evidence, this part of the assessment must stand.  Mrs Tsang has quite simply failed to produce the required documentary evidence to support her claim to input tax.  
28.	The second part of the assessment relates to the apparent underdeclaration of output tax on the six invoices found by Mr Brogan.  He quite simply totalled the VAT on the invoices, deducted the tax actually declared on the return and assessed the shortfall as an underdeclaration. The assessment is therefore quite specifically raised and is in relation to six specific invoices.  Mrs Tsang gave no evidence in relation to this aspect of the assessment and the only evidence was therefore that of Mr Tang.  He gave evidence of six invoices raised for clients to enable them to obtain funding for their bank but never paid.  Of these six invoices, three fell within Mr Brogan’s six invoices (those numbered one to three on the table in paragraph 3).  There would therefore, appear to be no challenge to the invoices numbered four to six on the table, all made out to Ruby Cantonese.  I therefore assume that it is accepted by the Appellant that these invoices were honest, valid invoices, that fall to be assessed.  None of them were included in Mr Poon’s claim to bad debt relief.  I found Mr Tang’s evidence unreliable and inconsistent.  He actually remembered very little.  He did not initially know whether the invoices were ever paid, although later he said they had not been.  He was uncertain whether they related to work already done or completed later.   I find his evidence as to how the invoices came into being unconvincing and unacceptable.  Without any further or better evidence, I have to accept that these were valid invoices upon which the output tax falls to be assessed.  These three invoices were included in the claim for bad debt relief.  I heard no evidence as to how the claim for bad debt relief came to be drawn up or calculated.  On the face of it, it relates to invoices issued in the period of claim and is therefore unacceptable.  If it is something other than what it appears, i.e. a mechanism to reclaim output tax on invoices which were never validly issued or paid, then clearly it must also fail.  For all these reasons, the six invoices identified by Mr Brogan appear to me to be validly issued and all therefore have to be brought into account in declaring sales for output tax purposes.  Mr Brogan therefore correctly identified a shortfall in Mrs Tsang’s declaration and the assessment was properly raised and must stand.
29.	In conclusion, therefore, all elements of the assessment stand and the appeal fails in its entirety.  No application was made in respect of costs and no order is made. 

LADY MITTING
CHAIRMAN
Release Date: 22 October 2007
MAN/05/0808