20711
 ASSESSMENT – alleged under-declaration of output tax – did the business bank account include the takings of a separate business run by a separate legal entity – no – appeal dismissed

	
MANCHESTER TRIBUNAL CENTRE 			   

 
 	
	C.R.D ETTY-LEAL AND D.L. SIMS	Appellants
	T/A AGRISERVICES

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	LADY MITTING (Chairman)	
		MR R J GRICE (Member)

Sitting in public in Birmingham on 16 April 2008

Mr. C.R.D Etty-Leal for the Appellant

Joanna Vicary, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2008
DECISION
1.	Charles Robert Donald Etty-Leal and David Lloyd Sims trade in partnership as “Agriservices”.  The firm carries on the business of agricultural service engineers and repairers.  The partners appeal against an assessment to tax originally in the sum of £32,848 and dated 8 October 2001, but later amended by notice dated 12 February 2003 to £27,846 plus interest.  The assessment covers periods 10/98 to 04/01 inclusive and was raised to make good allegedly under-declared output tax.  It is the Appellants’ case that those entries in the business bank account which the Commissioners took to be undeclared takings in fact related to capital injections into the business and the proceeds of a quite separate business carried on by a separate trading entity.

2.	Mr. Etty-Leal represented the Appellants and gave oral evidence.  On behalf of the Commissioners we heard oral evidence from Mr. Stephen Bourne, the assessing officer, and Mrs. Carolynn Anderson, the reviewing officer.

3.	On 6 June 2001, Mr. Bourne visited the Appellants at their trading premises.  The business had been selected for a visit following the submission of a series of repayment returns, unusual in this nature of business.  Mr. Bourne had also identified beforehand that the returns consistently revealed a negative mark-up which indicated to him that either the business was in severe financial difficulty or was making incorrect declarations.  Mr. Bourne met both partners and he conducted comprehensive checks on the business records for the period 1 May 1998 to 30 April 2001.  Mr. Bourne discovered miscellaneous, obvious discrepancies such as petrol scale charges had not been applied during VAT periods ending 07/98 to 04/01 inclusive.  There was a missing purchase invoice in the sum of £4,119 in respect of period 10/00.  Additionally the Appellants had incorrectly treated wages as a purchase, thus claiming input tax on them.  Most importantly, Mr. Bourne checked the bank statements for the period against the VAT declarations and discovered that receipts into the bank account greatly exceeded declared sales in the corresponding returns.  An examination of the relationship between the purchase value of parts and declared sales indicated a negative mark-up value of –22%.  This is against a previous positive mark-up of 40% calculated during an earlier inspection in 1994.  Mr. Bourne discussed his findings with the partners during the visit and the only explanation which he was given was that receipts into the bank account included capital injections.  By letter dated 20 June 2001, Mr. Bourne set out the discrepancies which he had found and a proposed schedule of assessment based upon the difference between receipts into the bank account and declared sales.  Mr. Bourne also sought evidence of the capital injections.  Mr. Etty-Leal replied by letter dated 17 July 2001.  He accepted the fuel scale charges and also accepted that the missing VAT receipt in fact related to a payment to the Inland Revenue and as such was not liable to VAT.  Mr. Etty-Leal also, in this letter, set out (but did not include any evidence) certain cash injections which he and Mr. Sims had made and he also stated that as from October 1997, a separate van business had been operated which had generated the additional receipts into the bank account.  Mr. Etty-Leal maintained that the van sales business was totally separate and independent of Agriservices and was run in partnership with his brother, Mr. S.C. Choombala.

4.	On receipt of this letter, Mr. Bourne had a telephone discussion with Mr. Etty-Leal followed up with a letter dated 14 September 2001 in which he asked for the annual accounts for the van business’ whole period of trading, sight of the partnership agreement for the van business and cop y bank statements highlighting the introduction of capital for the whole period of trading.  In response, Mr. Etty-Leal supplied Mr. Bourne with a copy of an agreement in the following terms:

	“This agreement is drawn up this day, 31.10.97, between C.R.D Etty-Leal, of the above address and S.C. Choombala, of Bangkok, Thailand being in the form of a partnership regarding Agrivanservices.
Both partners agree to share any profits or finance any loss jointly.  All funds at this time to be banked through Agriservices a/c at Lloyds.

Signed:
C.R.D Etty-Leal				S.C. Choombala”

By letter dated 3 October 2001, Mr. Bourne wrote to the partners requesting a great deal of further information regarding the van business, explaining that his current view was that there was insufficient evidence to prove the existence of a separate business.  No response was received and Mr. Bourne therefore raised the first assessment, the assessment being based upon the comparison of receipts into the bank account and declared sales on the VAT returns.

5.	By fax dated 12 June 2002, Mr. Etty-Leal responded to Mr. Bourne’s letter of 3 October 2001.  This was treated as a request for a reconsideration and the case was put before Mrs. Carolynn Anderson.  Mrs. Anderson was told by Mr. Etty-Leal that Agrivan Services operated separately to Agriservices and operated entirely from a van, using the premises of Agriservices only for storage of bulky items and as a small office.  Agrivan Services was run by a partnership of Mr. Etty-Leal, Mr. Sims and Mr. Choombala.  There was no separate agreement in place to reflect any payment of rent by Agrivan Services to Agriservices.  Agrivan did not account separately to the Inland Revenue and was not taxed separately, but the income from Agrivan was treated for tax purposes with that of Agriservices.  Agrivan did not maintain its own separate bank account but for all purposes used that of Agriservices, to which account Mr. Choombala did not have access.  Mr. Etty-Leal believed that the van driver was self-employed but no evidence of this was ever produced to Mrs. Anderson.  

6.	Mrs. Anderson arranged a meeting with Mr. Etty-Leal which took place on 29 November 2002.  In the course of this meeting, Mr. Etty-Leal confirmed that the takings of Agrivan were declared to the Inland Revenue through the partnership declarations for Agriservices; that Mr. Choombala had left the partnership; that no separate records were kept for Agrivan and that most of its purchases and expenses were put through Agriservices’ records.  Mr. Etty-Leal also produced some bank statements in support of the introduction of capital from his own personal funds into the business.  From these bank statements, Mrs. Anderson was able to cross-refer to the business account and was able to accept that some of the discrepancy, although far from all of it, was explained by evidenced capital injections.  This enabled her to amend the original assessment.  She could not however accept that Agrivan was a separate business.  She saw this business as merely an extension of Agriservices.  The two businesses were indistinguishable.  She was not therefore able to make any further reduction in the assessment other than that which reflected the capital injection for which she had seen evidence.

7.	In March 2003, Mr. Etty-Leal contacted Mrs. Anderson again following debt management action and in June he let Mrs. Anderson have some further personal bank statements.  These however were not annotated or cross-referred in any way to the business account and Mrs. Anderson was unable to accept the statements alone as representing evidence of further capital injections.  She advised Mr. Etty-Leal of this, requesting further information, none of which was forthcoming despite several letters from her to Mr. Etty-Leal explaining what was needed.

8.	Mr. Etty-Leal told us that he went into partnership with Mr. Sims in 1990.  Prior to that Mr. Sims had worked as an engineer and Mr. Etty-Leal as a farmer.  The arrangement was that Mr. Sims would stick to the engineering side of the business with Mr. Etty-Leal attending to the stores and book keeping.  In 1997, the two partners discussed putting a van onto the road which would travel from farm to farm carrying out small running repairs and selling.  They did not however have the capital to do this and Mr. Etty-Leal approached his brother, Mr. Choombala, who agreed to inject capital into the business but had no other involvement.  Mr. Etty-Leal described his brother as akin to a sleeping partner who took no drawings from the business and had no access to its bank account but who would, in the event of there being some profit, take a dividend.  Mr. Choombala made his payments by cheque, which were banked into the Agriservices account and the van was financed from this same account.  The van was registered in Mr. Etty-Leal’s name and was also insured in his name.  The driver was self-employed and was paid weekly.  The stock for the van was purchased either through Agriservices or direct by the driver out of cash held by him.  Input tax was not reclaimed on purchases made by the driver but was reclaimed by Agriservices on stock which it had purchased.  The driver carried a standard blank invoice book and for each sale, he would hand write in duplicate an invoice inserting Agrivan’s name.  Customers paying by cheque would make cheques payable to Agriservices.  Cash payments were used by the driver for the purchase of stock and running expenses on the van.  Weekly, the driver would give Mr. Etty-Leal a bundle of the duplicate invoices, cheques received and the balance of cash received.  The cheques and cash were banked along with Agriservices’ takings into the Agriservices bank account.  The invoices were never scheduled or recorded by either Mr. Etty-Leal or the driver but would be filed away separately until the year end when they would be totted up and the sum total incorporated into the Agriservices tax return.  No other accounting records were kept in relation to Agrivan.  This was unlike Agriservices for which purchase and sales day books were maintained.  Mr. Etty-Leal maintained that he could distinguish income from Agrivan in the bank statements by a process of elimination because the proceeds from Agriservices were documented and therefore capable of calculation, and anything over and above had therefore to be either a capital injection or from Agrivan.  Mr. Etty-Leal maintained that the negative mark-up detected by the Commissioners was explained by a persistent delay in billing.  Mr. Etty-Leal accepted that he had at no time shown the Commissioners the duplicate Agrivan invoices but could give no explanation as to why not.

Submissions

9.	Mr. Etty-Leal submitted that the discrepancy between the VAT returns and the receipts recorded in the bank accounts was made up of on the one hand cash injections by himself and his brother, and on the other hand by the trading proceeds of Agrivan.  It was his submission that Agrivan was an entirely independent and separate business, operated not by the partnership of himself and Mr. Sims but by a three-way partnership of himself, Mr. Sims and his brother.  He accepted, with the benefit of hindsight, in relation to Agrivan, he had not accounted correctly either for tax purposes or in relation to accounting records maintained.  This was not dishonestly on his part but lack of knowledge.

10.	Miss Vicary pointed out that in relation to capital injections, the Commissioners had given credit for such injections as had been evidenced.  In relation to Agrivan, it was the Commissioners’ case that there were not two separate businesses but just the one and equally there was no real evidence of the existence of a separate partnership of Mr. Sims, Mr. Etty-Leal and Mr. Choombala.

Conclusions

11.	The Commissioners’ assessment is based upon the discrepancy which they found between declared sales in the VAT returns and receipts into the business bank account.  This discrepancy is explained by Mr. Etty-Leal in two ways.  First he and his brother made cash injections into the business.  Secondly, a quite separate business, Agrivan Services, was being operated by a separate three-way partnership of himself, Mr. Sims and his brother Mr. Choombala and that the receipts of this independent business had been paid into the Agriservices bank account.  The Appellants had not attempted any calculation of how much of the discrepancy related to each of these two elements and we therefore deal with them in principle rather than by reference to quantum.  Dealing with the second element first, to succeed, the Appellants have to show not only the existence of the separate business, but that that business was being operated by a legal entity other than themselves, ie they have to prove the existence of the separate three-way partnership and that this separate partnership operated a separate business.

12.	The only evidence in support of there being a separate partnership is the agreement signed by Mr. Etty-Leal and Mr. Choombala.  The agreement is undated and unwitnessed but perhaps most importantly it doesn’t evidence the existence of a three-way partnership.  If it evidences anything at all, it is a partnership between Mr. Etty-Leal and his brother, but that is not what Mr. Etty-Leal maintains was the case.  There was no evidence before us that Mr. Choombala had made any capital contribution into the Appellants’ business but even if he had, that alone would not be sufficient to render him a partner and to create a separate trading entity.  In the absence of any further evidence before us, Mr. Etty-Leal has not been able to establish the existence of a separate partnership.  This alone would mean that the Appellants cannot succeed in this appeal but for the sake of completeness we have also looked at whether or not a separate business was being operated.  No evidence whatsoever has been produced to show this.  We were told that there would have been evidence in the form of the duplicate invoices which would apparently all bear the name of Agrivan but for some reason these were never shown, either to the Commissioners or to the tribunal.  We have no reason to doubt the existence of the van and that it operated in much the way described by Mr. Etty-Leal but this is far from showing that it operated as a separate business.  In fact, everything about its operation seems to point to it being part of the Agriservices business.  All proceeds from Agrivan Services were paid into the Appellants’ bank account.  Purchases for Agrivan were made through Agriservices and indeed input tax was reclaimed on them.  Cheques for Agrivan were written on the Appellants’ bank account.  Just as importantly, for tax purposes, the two businesses were treated as one.  Everything about the operation of Agrivan Services points to it being operated as a part of Agriservices.  In summary therefore, the Appellants have failed to show the existence of a separate and independent three-way partnership operating a separate and independent business and the appeal must therefore fail in respect of such element of the assessment as Mr. Etty-Leal maintains comes from Agrivan.  On the basis of the evidence before us, that income quite simply belongs to the Appellants and therefore falls to be assessed against this registration.

13.	With regard to the injections of capital into the business, the Commissioners have already given credit for such as has been evidenced.  However it remained Mr. Etty-Leal’s contention that there were further capital injections for which credit had not been given; quite rightly because no evidence has been produced.  It is certainly the case that the Appellants have been given abundant opportunity and time to produce any such evidence.  However, the Commissioners were willing to give the Appellants one further and final opportunity to produce conclusive evidence that there were further cash injections for which credit could be given.  With the consent of Miss Vicary and Mr. Etty-Leal, we therefore make the following directions:

1.	The Appellants may, within 28 days of the date of release of this decision, provide to the Commissioners full documentary evidence of further cash injections
2.	If they do not, the appeal is dismissed in relation to this element of the assessment
3.	If further evidence is produced within the time limit given, the Commissioners will consider it, liaising further with the Appellants if necessary, and will issue a ruling.  Within 14 days of receipt of such ruling, the Appellants can apply to the tribunal to appeal the ruling, such appeal to be heard by this tribunal
4.	If no such appeal is lodged, the Appellants’ appeal of this element of the assessment shall also stand dismissed, except insofar as the Commissioners accept further evidence from the Appellants and are willing to give credit for further injections

14.	No application was made by the Commissioners for costs, and no order is given

MAN/2006/0468

Lady Mitting
CHAIRMAN
Release Date: 6 June 2008