20708
INPUT TAX – disallowed for various reasons – no proper substantiating evidence – subject to minor allowance for fuel tokens, appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					GERALD THOMPSON trading as ELATHANS	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: Lady Mitting (Chairman)
	     John D Kippest (Member)
					
Sitting in public in Birmingham on 23 April 2007 and 6 May 2008

The Appellant appeared in person 
 
Bernard Haley instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2008
DECISION

1.	The Appellant appeals against an amended assessment to tax dated 13 December 2005 in the sum of £8,091 plus interest.  The assessment covers periods 06/02 to 03/05 inclusive and was raised to recover input tax claimed by Mr Thompson and to which the Commissioners believed he was not entitled.
2.	The order of proceedings was reversed and on behalf of the Commissioners we heard oral evidence from the assessing officer, Mr Gurdial Suthi.  We also heard oral evidence from the Appellant who appeared in person.
3.	Mr Thompson carried on business as a sole proprietor trading as “Elathans”, running a hairdressing salon from premises in New Town, Birmingham.  He also retailed textile and household goods.  He registered for VAT with effect from 9 August 2000 and deregistered with effect from 23 December 2005 on the grounds of diminished turnover.
The Commissioners’ Evidence
4.	Mr Suthi paid a routine visit to the Appellant’s premises on 2 March 2005.  Mr Suthi wished to examine Mr Thompson’s trading records because of Mr Thompson’s returns for periods 06/02 to 12/04 inclusive, all but one had been a repayment return which was unusual given the nature of Mr Thompson’s trade.   Mr Suthi was unable to carry out any inspection of the records because they were poorly organised and VAT accounts had not been kept.  A further appointment was made for 8 April to allow Mr Thompson sufficient time to put his books and records into order sufficiently for Mr Suthi to validate figures on the VAT returns.  The visit on the 8 April had to be aborted when Mr Thompson was called away for an emergency and a further visit was made on 15 April 2005.  On this visit, Mr Suthi noted that the purchase and expenses invoices had been arranged into date order but he was still unable to reconcile the figures on the VAT returns as again no VAT accounts were produced.  On 20 April therefore, Mr Suthi issued Mr Thompson with a 21 day pre-assessment letter in which he enclosed a draft schedule of assessments covering periods 06/02 to 12/04 inclusive totalling £11,073 plus interest.  This assessment effectively recouped all input tax claimed over the relevant periods plus road fuel scale charges of £707.  
5.	Mr Thompson then wrote to Mr Suthi on 4 May 2005 informing him that his records were in disarray as a result of a change of business premises and that his accountant had been preparing his accounts but Mr. Thompson had retrieved the records for Mr. Suthi.  A further return was then received for period 03/05 which was again a repayment return and on 27 May, Mr Suthi issued Mr Thompson with a further letter informing him that he intended to disallow all input tax claimed on returns up to and including period 03/05 but he would not assess for the road fuel scale charges.  The revised proposed assessment was in the sum of £11,655 plus interest.  No response was received from Mr Thompson and an assessment in this sum was raised on 17 June 2005.
6.	Further meetings then took place between Mr Suthi and Mr Thompson in August and October 2005, during the course of which Mr Thompson produced a purchase daybook and a folder of miscellaneous invoices and receipts.  The purchase daybook had not been kept contemporaneously but had been compiled after the event.  It consisted of some 2,000 entries and the input tax shown in the daybook did not tally with the input tax claimed in the VAT returns.  Mr Suthi over the following days went through every individual entry in the purchase daybook and attempted to cross refer to the bundle of invoices.  One particular problem which was evident was that Mr Thompson had claimed a high proportion of input tax on road fuel for a number of vehicles that did not belong to him.  Mr Thompson had explained to Mr Suthi that he had borrowed vehicles for business purposes from friends and family.  He had put in the fuel and was therefore reclaiming the VAT.  A discussion had taken place as to whether or not fuel scale charges should be paid in respect of these vehicles and Mr Suthi had understood Mr Thompson to agree (in the meeting on 25 October 2005) that he would give up his claim for input tax rather than pay fuel scale charges on the vehicles as this would be to his benefit.
7.	On going through the records, which Mr Suthi kept from 25 October to 3 November, Mr Suthi was able to find verification for certain items of input tax claimed which enabled him to reduce the assessment by £3,564 to £8,091 and this he notified to Mr Thompson by letter dated 29 November 2005.  Correspondence then ensued between Mr Suthi and Mr Thompson.  By letter dated 15 January 2006, Mr Thompson sent to Mr Suthi a four page summary split into periods setting out his calculation of purchases, sales and the VAT thereon.  The VAT summary matched the entries in the purchase day book which, as we have already said, did not match the VAT returns.  The amount of the discrepancies varied enormously.  In some periods there was only a small discrepancy, in others it was proportionately very large.  For example in period 09/02, input tax was reclaimed in the return totalling £444.61 as against the amount shown in the summary of £253.36.  In 12/02, £624.46 is reclaimed in the return as against £325.84 in the summary.  In 03/03, £876.39 is recorded in the summary as against £1,551.69 claimed on the return.
8.	Mr Suthi had seen nothing that enabled him to allow any further claim for input tax and to assist Mr Thompson, he wrote to him on 1 February 2006 listing the reasons why the remaining input tax had not been allowed.  These reasons were that certain of the invoices were for zero-rated supplies and had not contained a VAT element; VAT had been claimed on documents that were not VAT invoices; VAT had been claimed on goods and services bought for private use; certain invoices had been duplicated; certain documents were marked order / quote / proforma and did not therefore constitute VAT invoices and finally, as Mr Suthi had believed by agreement, input tax had been disallowed in relation to road fuel.
9.	Mr Thompson wrote in to Mr. Suthi on 12 March 2006.  In this letter he stated his disagreement to Mr. Suthi’s analysis and repeating his entitlement to claim.  He pointed out that Mr. Suthi had on his very first visit requested that Mr. Thompson should remove his records from his accountant whilst the accountant was in the process of preparing his accounts, and he also confirmed that Mr. Suthi had been aware at the outset of the disruption to his business caused by moving site.  He contended that he was finding the entire business very stressful; his business had been further disrupted by the actions of the Commissioners and his spirit had been weakened.  He held Mr. Suthi responsible for this alleging provocation and entrapment.
10.	Despite having gone through every individual item in the purchase daybook, establishing which could and could not be allowed, unfortunately Mr. Suthi had not kept a record of those and was unable either in correspondence or in evidence in chief before the tribunal to tell Mr. Thompson the various entries making up each category.  The hearing on 23 April 2007 was therefore adjourned to allow Mr. Suthi further access to the records to prepare a further analysis for the tribunal.  This he did and also had a further meeting with Mr. Thompson and when the resumed hearing took place on 6 May, an annotated copy of the purchase daybook was put before us in which Mr. Suthi had indicated in relation to every single item, those which he could allow and those which he could not with reasons, the reasons all falling into the categories which we have set out in paragraph 8.
11.	In cross examination, Mr. Thompson took Mr. Suthi through the course of the investigation trying to establish the exact state of his records at each stage of the enquiry.  It appeared to be Mr. Thompson’s case that the records were in good order at a considerably earlier period than stated by Mr. Suthi and that in fact nothing has really changed which would have enabled Mr. Suthi to make the amendments which he later did.  Mr. Suthi could not recall the exact state of the records but did say that they were not in proper order and were too disorganised for him to follow any audit trail until after the assessment.  By the time the records reached the tribunal, they were in well-maintained lever arch files in perfect date order.  Although Mr. Suthi could not remember and indeed it was never established when they were put into files, we do note from Mr Suthi’s interview record that he noted that on 15 April 2005 the invoices had been arranged into date order (although there were of course still no VAT accounts).
12.	In his oral evidence, Mr. Thompson took us at length through the chronology of the investigation and the correspondence between himself and Mr. Suthi.  He told us that at the time of the first interview, all his records had in fact been with Arundales, his accountants, who were preparing his accounts for him.  At the request of Mr. Suthi, he retrieved the records from Arundales and made them available to the Commissioners.  He told us that when Mr. Suthi first visited, the business was still developing and Mr. Thompson was in the process of moving premises and the records were in total disarray and were in effect all over the place.  All he had was a bag of receipts.  By the third visit, the books were retrieved from the accountant; everything was filed in lever arches in date order and he was able to give to Mr. Suthi a set of properly presented books in proper form.  Mr. Suthi had gone through the purchase daybook and had told Mr. Thompson to make certain amendments to it, these representing apparently entries which Mr. Suthi was not going to allow and Mr. Thompson at his request made those amendments.  In the course of moving premises, he had to borrow vehicles to carry such large items as panelling, flooring, machinery etc. and the fuel for which he has claimed repayment was all used in the course of his business.  Mr. Thompson accepted that there were certain purchases he had made for which he had not got VAT invoices but in respect of those he had contacted the suppliers who, whilst not able to provide him with invoices, had provided him with a copy of his order or a copy of the supply form proving the fact of the purchase.  By the time the enquiry had been concluded and Mr. Suthi no longer needed the records, Arundales would not take the books back and charged an enormous sum of money to Mr. Thompson.  He felt his spirit was completely broken and he had lost the will to carry on with his business.
13.	In cross examination, Mr. Haley sought some explanation for the discrepancy between the VAT returns and the VAT summaries.  Mr. Thompson could not provide any explanation but did say that the returns had been made at the time of the purchases and therefore would have been correct as the returns would have been compiled directly from the purchase receipts which would all have been available at the time, even though some may have got mislaid over the period of time.  Mr. Haley also put it to Mr. Thompson that a number of the entries in his purchase daybook related to quotations or pro-forma invoices and were not therefore deductible.  Mr. Thompson maintained that that might be so in relation to that particular document, but the purchase would have been made exactly as on the quote or pro-forma and he was therefore entitled to reclaim.  If there had been a pro-forma it must follow that there would have been an invoice albeit not available.
14.	One point arose during cross examination which had not been picked up by either party and this concerned certain entries in the purchase daybook.  There were a number of round sum entries of either £5 or £10 to Karim supermarket.  A search through the lever arch files at the tribunal revealed that these entries related to the purchase of NPower fuel tokens.  The receipt which Mr. Thompson received with the purchase of each token merely recorded the date and the amount of the purchase.  It did not show any VAT element.  We were able to establish from Mr. Thompson that all the tokens were used to feed a meter at his premises in 29 Johnstone Street which doubled as home and office.  Mr. Haley accepted that insofar as the fuel tokens were used in relation to the business, Mr. Thompson was entitled to repayment of the tax, albeit at the reduced business rate.  There was no means of calculating the split between domestic and business use.  Mr. Haley suggested a 50/50 split which was accepted by Mr. Thompson.  We therefore formally record that the parties agreed that Mr. Thompson would be entitled to recover the input tax, at the reduced business rate, on 50% of the purchase of his fuel tokens.
15.	Mr. Haley also asked Mr. Thompson about the fuel scale charges.  Mr. Thompson maintained that approximately 95% of the time he spent working and travelling and that the vast majority of the fuel which he purchased was therefore for business use.  His own car would not have been big enough for the large items which he transported and he therefore borrowed larger vehicles from friends and family.  Mr. Thompson accepted that fuel scale charges had been discussed with Mr. Suthi but he had been undecided and indeed still was as to what course of action he should take.
Submissions
16.	Mr. Haley submitted that Mr. Suthi had had a difficult task.  There was no sufficient evidence to provide any audit trail and the returns which were submitted had not been capable of substantiation.
17.	Mr. Thompson contended that part of his role as running his own business was the management of his accounts.  This was his weakest attribute and the only way it could be done was to appoint accountants which he did.  However through the actions of Mr. Suthi, he had to remove his records from the accountant and the Commissioners kept them for so long that he was, in effect deprived of his right to have an accountant managing his affairs.  Had he been able to retain the services of his accountant, the matter could have been resolved.  He believes that he was entrapped by the Commissioners and that whilst some of the assessment may be correct and owed the Commissioners took away his liberty to prove his case.  He accepted there were discrepancies but that those discrepancies did not mean that the purchases had not taken place and he was entitled to repayment.
Conclusions
18.	Much of what Mr. Thompson tells us we are perfectly able to accept as it is backed up by his correspondence to Mr. Suthi and indeed by Mr. Suthi’s own notes of the interviews.  We accept that Mr. Thompson’s records were in disarray on the first visit, and we also accept that his records had been with his accountants.  Equally we accept that he retrieved those records from his accountants for the purposes of Mr. Suthi’s investigation.  We also accept that Mr. Thompson himself must have spent some considerable time putting the records into order and that they were at the very least in date order, if not in lever arch files, by the time of Mr. Suthi’s third visit and certainly pre-assessment.  The Commissioners are well used to working with accountants and, indeed in certain cases it is probably easier for them to do so.  However it does not appear that Mr. Thompson ever asked Mr. Suthi to liaise with Arundales or that he was ever put in touch with them.  We reject totally the suggestion that Mr. Suthi deliberately entrapped Mr. Thompson into removing his records from the accountants and into depriving him of his ability to seek professional help in contesting the assessment.  Mr. Suthi actually had physical custody of the records from 25 October 2005 to 3 November, a matter of some ten days, and again for approximately one month immediately prior to the resumed hearing.  Apart from that time, the records were constantly with Mr. Thompson and even though he may have been working on them, it would have been open to him at any stage to take them to an accountant and ask the accountants to liaise with the Commissioners.  Indeed this would appear to be precisely what happened in April 2006 when a firm of accountants called Alhambra approached the Commissioners with a form of authority from Mr. Thompson.  Mr. Suthi sent Alhambra everything which they required and offered whatever help they needed.  They lodged the appeal with the tribunal but by the end of June 2006 they merely wrote to the Commissioners advising that they no longer acted for Mr. Thompson.
19.	We can also accept Mr. Thompson’s assertion that the ongoing investigation has caused him much stress and strain but again we reject that this was a deliberate ploy by Mr. Suthi.  It appears to us that at all times Mr. Suthi has acted quite properly.  The onus is on a trader to substantiate and support his claim for repayment of input tax.  Strict legal requirements are set out as to the documentation which the Commissioners need to see before a claim can be allowed.  Mr. Thompson’s records, by the time they reached the tribunal, were in meticulous order.  It appeared that he had kept every single receipt he had ever received for any purchase, however small and this enabled Mr. Suthi to reduce his assessment and allow part of the claim. However it was never clear how the VAT returns had been made up.  They could not have been made up from the entries in the purchase daybook which matched the records in the lever arch files because the VAT returns claimed substantially more than was recorded in the daybook.  What Mr. Suthi did was, in relation to each period, he went through the purchase daybook and allowed every single item which he could and for which he saw sufficient documentary evidence.  This left, in relation to each period, an unsubstantiated balance of reclaimed input tax.  This just could not be allowed as there was nothing to support it. As a separate exercise, Mr. Suthi, twice, went through the receipts and the purchase daybook to make sure that there were no further items which he could allow.  He carefully annotated every single item into the varying categories which we have noted above, thus fully supporting his refusal to meet the claim.  We do not think there is anything more which the Commissioners could do.
20.	We have already recorded that the Commissioners are willing to meet the claim, on a 50/50 basis, in respect of the fuel tokens from Karim supermarket.  No calculation was carried out before us and we leave it to the parties to work out the figures.  Subject only to this, the appeal is dismissed.  The Commissioners made no claim for costs and we make no direction.
MAN/06/0423

LADY MITTING
CHAIRMAN
Release Date: 6 June 2008