20837
INPUT TAX – no prime evidence in support of payment of certain invoices – entitlement of the Appellant to recovery – appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 	
					GLOBAL STAR PLC	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Chairman)
		John Lapthorne FCMA (Member)
					
Sitting in public in Birmingham on 5 March 2008 and 8 September 2008

Mr. T S Patara, Chartered Accountant, appeared for the Appellant

Mr. V Mandalia, Counsel, 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 a decision of the Commissioners to disallow a claim to input tax in the sum of £7,520 (plus interest) recovered by the Appellant on certain supplies which it received from Bawtry Beers.  This was but one element of a larger assessment initially raised on 15 February 2006 in the sum of £147,348 and later amended on 23 May 2006 to £56,696.  We were not directly concerned with any other aspect of the assessment.
2.	On behalf of the Appellant we heard oral evidence from Mr. Ian Davis and Mr. Kulvinder Singh Uppal.  For the Commissioners, evidence was given by Mr. Stephen Bourne and Mr. Andrew Wilkins.
3.	Global Star Plc (“the company”) trades as a wholesale supplier of alcoholic goods from premises in New Street, Smethwick.  The company acquired a nightclub called DV8 (“the club”) in 2003, which it operated until sold in August 2004.  The club’s income and expenditure records were maintained separately and it also kept a separate bank account but its income was treated for all purposes as that of the company and its takings, after payment of its outgoings, were paid over to the company.  Only one set of annual accounts was prepared encompassing the accounts of the club within those of the company.
4.	The company’s Senior Accountant and Credit Controller had been one Andrew Robinson until his employment was terminated in January 2005 after allegations against him of gross misconduct and fraud were upheld in an internal disciplinary hearing.  It came to light after he had left that he had been maintaining the club’s accounts on a separate Pegasus computer program, being distinct from the SAGE system used for the remainder of the company’s accounting.  On leaving, Mr. Robinson destroyed the Pegasus discs and some of the club’s paperwork leaving the company with an incomplete set of accounting records for the club.  As Senior Accountant, Mr. Robinson had been in charge of collecting monies from customers and releasing deliveries.  One of the customers with whom he dealt was Bawtry Beers (“Bawtry”).
5.	The company both sold goods to Bawtry and also purchased from them.  It maintained two sales ledger accounts for Bawtry and one purchase ledger.  A copy of the purchase ledger covering the period September 2003 to March 2005 was put before us.  This reflects a fairly low level of business until roughly June 2004, and also shows that until then payment for all goods was dealt with by contra-payments against monies owed by Bawtry to the company.  After June 2004, three purchase transactions were recorded in the company’s ledger as set out below, these being of substantially greater value:-
3 June 2004 - £16,459.75
15 July 2004 - £17,738.74
10 August 2004 - £16,294.31

The total indebtedness of the company to Bawtry for these three supplies totalled £50,492.80.  Payment was not made by contra-accounting and at the end of the financial year, on 28 February 2005, this balance was still shown as the closing balance and still outstanding to Bawtry.
6.	The history behind these three transactions was explained to us by Mr. Kulvinder Singh Uppal.  Mr. Uppal was General Manager and Chief Buyer for the company and as such was in very close contact with all the company’s customers, including Bawtry.  In mid 2004, Bawtry approached Mr. Uppal and told him they were experiencing cash flow problems.  Rather than continuing with contra-accounting on a four week credit basis which had been the practice, they asked if the company would pay cash on delivery.  In return they offered Mr. Uppal some exceptionally good deals.  Mr. Uppal obtained authority from the Directors and believing that commercially the deals being offered would be good for the company, he authorised the payment in cash for future deliveries on receipt or, at most, a couple of days before or after delivery.  This arrangement was described by Mr. Uppal as a special offline transaction with Bawtry.  The company paid its other wholesale suppliers by Direct Debit or cheque.  Mr. Uppal told us the goods were received and were invoiced to the company.  The company would have paid in cash but he did not know when or by whom the payment was made as this would have been the responsibility of the Accounts department.  He was quite certain that payment must have been made because otherwise Bawtry would have chased the company for payment and would also have ceased supplying them.  There would be no record of payment because it would of course have not gone through the bank account and he also believed that if there had been some receipts, they were amongst the paperwork destroyed by Mr. Robinson.  It had been Mr. Robinson’s practice to make as many payments as he could in cash because cash would come into the club and rather than incur bank charges by banking the cash and then paying out cheques, the cash itself could be used to make the payments.  Mr. Uppal believed that Mr. Robinson would have got receipts but destroyed them.  Mr. Mandalia put it to Mr. Uppal in cross-examination that Bawtry’s sales ledgers revealed that, as at 30 July 2004, Bawtry owed the company in excess of £107,000 so it was an economic nonsense to make cash payments to them.  Mr. Uppal’s response was that Bawtry were making some small payment (one £5,000 and one £10,000 were mentioned) to the company and the deals being offered in return by Bawtry were, he considered, commercially good.
7.	The company’s financial year ended on 28 February 2005.  The end of year accounts were prepared by Mr. Patara’s firm, the work being carried out by Mr. Ian Davis, the Accounts Manager.  He received instructions in August / September 2005 to prepare the accounts to the end of February 2005.  He was given access to the company’s entire records and supporting paperwork and in relation to the club he was given what there was – bank statements, cheque books, purchase invoice printouts and invoices.  He was told that the club’s records were partially missing but was not alerted to any particular problem.  On examination of the records, he detected that the takings records were far from complete.  The club had traded for approximately one half of the year but the only information on takings was a summary of dates and amounts for a period of no more than ten weeks.  There were no prime records such as till rolls or Z readings.  Mr. Uppal stressed in his evidence that it was only the records of takings which were missing, not the takings themselves.  He did not believe there was any cash missing.  He accepted he could not state this with certainty but he had no reason to believe that there was missing cash.  From all that Mr. Davis had, he was able to reconstruct the takings record, and he calculated an understatement of takings of approximately £200,000 which he attributed to the missing club takings records.  He tested this against the ten week record which he did have and it seemed to be in line.
8.	In preparing the accounts, Mr. Davis carried out an analysis of the aged creditor’s list and he spotted that this showed Bawtry to be owed £50,492.80.  The Bawtry entries would have stood out as this was a large amount and had been outstanding by the year end over six months.  He mentioned this to Mr. Uppal who told him he thought that figure was incorrect; that payments had been made to Bawtry and the correct figure was nearer £10,000.  Mr. Davis accepted that and treated £41,000 of the outstanding amount as actually having been paid in cash.  Mr. Davis then prepared a reconciliation of the trade creditors’ account and the Bawtry account as follows:-
Reconciliation Of Trade Creditors At 28.2.05
Client’s Aged Creditors print-out			834,700.94 (see print out)
Less
Credit Note reserve					50,000
Cash payments to Bawtry Beers				41,000
(see copy of our accounts journals)
Trade Creditors per final accounts			£743,700.94

Bawtry Beers A/C
Balance per print-out					50,492.80
Cash payments						(41,000.00)
								£9,492.80
Disallow VAT		7/47 x £9492.80		£1,413.82
Mr. Davis left the reconciliation with the Directors for the adjustments to the accounts to be made before finalisation.  In fact the company did not carry out the reconciliation as prepared by Mr. Davis.  A printout of the Bawtry account as at 19 May 2006 reveals the following entries:-

31 July 2004 cash payment		16,459.75
31 August 2004 cash payment		10,000.00
14 September 2004 cash payment		7,738.71
30 September 2004 cash payment		8,000.00
14 October 2004 cash payment		8,294.31

9.	Mr. Davis expressed, in his evidence, surprise at both the manner of the reconciliation which had been made and the amount.  He told us he would have expected to have seen one single entry recording a cash payment of £41,000 rather than several individual payments totalling, as they did, the full amount of £50,492.80.  Mr. Davis had no knowledge of how the entries came to be made as they would have been done internally by the company.  Mr. Uppal claimed to have no knowledge either of who had made the entries, when they were made, on what basis they were made and what would have been the source of the information.  It would have been, he told us, done by the Accounts department.  There was no evidence from the Accounts department before us.
10.	In preparing the statutory accounts, Mr. Davis adopted, what we were told by Mr. Patara was, the standard method recommended by the Institute of Chartered Accountants.  He in effect reconstructed the purchase and takings records.  The trade creditors are listed at £743,701, reflecting the reconciliation carried out by Mr. Davis.  We were also shown a document headed “Petty cash account” which listed the journal entries which had been posted to back up the adjustments to the accounts.  This list included the £41,000 cash payment to Bawtry and listed in the reconciliation.
11.	By the time Mr. Davis came to prepare the accounts, Bawtry had ceased trading and had disappeared.  There was therefore no means available to him of verifying the Bawtry account and indeed there was no evidence of any description available to him which would have enabled him to check whether any of the payments had been made.
12.	Mr. Bourne’s first involvement with the Appellant was when he carried out an assurance visit on 7 July 2005.  Further visits and lengthy correspondence with Mr. Patara followed.  Mr. Bourne did not see an aged creditors’ statement for some considerable time but from the outset he was concerned about the takings declared in relation to DV8.  Mr. Bourne noted that in the 11/04 return a very large adjustment had been made in respect of the club’s output tax and input tax.  The adjustment covered the period from commencement in February 2003 to 28 February 2004.  No declaration had been made in respect of the remainder of the period of the club’s trading, ie from February to August 2004.  The explanation was given by Mr. Patara who told Mr. Bourne that the DV8 takings were only identifiable when the cash account was prepared for the year-end accounts.  It would therefore have been the intention of the company to make a further adjustment for the final six months of trading when Mr. Davis completed the accounts to February 2005.  Mr .Bourne took the view that an assessment had to be raised in respect of undeclared output tax for the club.  DV8 had been sold to an associated company called MYLeisure Ltd under which it appeared to fare rather better than it had done previously.  Mr. Bourne based his calculation of the output tax on the MYLeisure takings.  Mr. Patara objected to this method of calculation and produced an alternative calculation based on the club’s previous takings.  Mr. Patara refused to compromise on this point.  The different in the two calculations was not great and to avoid what Mr. Bourne saw as an unnecessary trip to the tribunal, Mr. Bourne accepted Mr. Patara’s calculation and agreement was thus reached between them on the outstanding output tax in relation to the club.
13.	After several requests, Mr. Bourne finally received from Mr. Patara in February 2006 the aged creditors’ report dated 28 February 2005.  As referred to in paragraph 5 above, this report showed that £50,492.80 was still outstanding to Bawtry and had been for in excess of nine months.  Mr. Bourne, referring to Part X1X of the VAT Regulations 1995, took the view that as it appeared that the purchase invoices had not been paid within six months of supply then the related input tax should have been repaid and an assessment would therefore have to be raised for recovery.  Mr. Patara had also let Mr. Bourne have a copy of Bawtry’s purchase ledger (B009) dated 1 February 2006 and this showed the five cash payments referred to in paragraph 8 above.  Mr. Bourne readily accepts that he initially missed the point of this document as it had been included with bad debt relief documents and he had not read it in conjunction with the aged creditors’ report.  Later Mr. Patara let Mr. Bourne have a copy of a further aged creditors’ report which was dated 31 May 2005, although the report also gives a run off date of 19 May 2006.  This report contained no reference to any indebtedness to Bawtry.  Mr. Bourne was concerned on a number of counts.  The purported payments set out in the B009 purchase ledger were listed at the foot of the document and out of sequence with other entries.  The apparent dates of payment pre-dated the aged creditors’ report dated 28 February 2005 and was clearly therefore in conflict with it.  The second aged creditors’ report dated 31 May 2005 omitted Bawtry as a creditor thus leading Mr. Bourne to believe that perhaps some payments had been made between February and May 2005 but that was not borne out by the dates on the purchase ledger.  Mr. Bourne asked Mr. Patara for proof of payment but when none was received pursued his previous decision to assess for recovery of the input tax on these transactions.
14.	Mr. Patara requested a reconsideration of Mr. Bourne’s decision to assess and this reconsideration was carried out by Mr. Wilkins.  He had in front of him all the correspondence which had passed between Mr. Patara and Mr. Bourne and he also had copies of the Bawtry purchase ledger and the two aged creditors’ reports.  Mr. Wilkins read the purchase ledger as indicating that historic and omitted data had been added to the company’s records.  Comparing the two aged creditors’ reports, he believed that someone had input data relating to the cash payments between the two report dates.  He was also surprised that any payments should have been made to Bawtry at a time when Bawtry was so indebted to the company.  He wrote to Mr. Patara requesting further information but receiving none, he upheld the assessment by letter dated 5 December 2006.  There followed further correspondence with Mr. Patara who wrote to Mr. Wilkins setting out a full history of the problems which the company had had with Mr. Robinson and the impossibility of obtaining any assistance or evidence from him.  Nothing provided by Mr. Patara could answer Mr. Wilkins’ earlier queries.  He still remained unconvinced that there was any evidence of payment and again he upheld his original view.
Submissions
15.	Mr. Mandalia stressed the lack of any real evidence and the apparent conflict between such documents as were before the tribunal.  He described the records as having been contrived to support an account otherwise without evidence.  His view was that anything could have accounted for the cash differences as there was no real control over income or outgoings.  There was no reliable evidence before the tribunal to establish that the payments had been made and the appeal should therefore fail.
16.	Mr. Patara set out the problems which the company had had with Mr. Robinson, who had defrauded the company and destroyed accounting records.  In accordance with recommended good practice, his firm had used a cash accounting method to reconstruct the accounts.  The directors had acted reasonably and prudently and had made what they considered to be sound judgments in the preparation of the year-end accounts.  Mr. Davis had recommend adjustments be made to the records and these adjustments had been passed across to the company’s accounts department who had made certain entries in the records to the best of their judgment.  Mr. Patara went on to make two submissions which technically should have been backed up by some form of evidence but upon which no evidence had been produced.  First he addressed us on the dates of the aged creditors’ reports.  The first report bore the wording “report date” 28/02/2005 and the second one had borne a similar “report date” 31/05/2005.  The earlier report had been run off on 9 June 2005 and the later one on 19 May 2006.  It was Mr. Patara’s contention that the entries were automatically updated in the reports on the computer when any subsequent entry was input.  In other words, it was an incorrect assumption that the payments or changes had been made between February and May 2005 merely because the report dated 31 May 2005 omitted the Bawtry entries.  The changes had been made sometime before 19 May 2006 when the latter report was run off.  It was not known when or in what manner the changes had been made but his suggestion was that they would have been made post September 2005 on the recommendation of Mr. Davis when he was preparing the end of year accounts.  This submission related to entries put into the accounting records.  His second submission related to the veracity of the entries which had actually been input.  He accepted that it was Mr. Davis’s instruction that an adjustment of £41,000 should be made but the SAGE system did not allow such an adjustment to be made.  On the system, payments could only be input and recorded if there was an exact match of amount.  Therefore in order to cancel out the Bawtry indebtedness, the company could not input an adjustment of £41,000 but had to input adjustments totalling £50,492.80.  It did not matter how the total was made up and equally the dates allotted to the purported payments were immaterial.  There had to be some date put in and some figures which totalled the requisite amount.  The Appellant’s case therefore was that the entries on the Bawtry purchase ledger showing the five payments on the stated dates were in reality false entries, but were the best that the Appellant could do to record what they believed to have been a payment to Bawtry of which they could find no actual record.  It was his submission that the Appellant had acted throughout in good faith.  The company was quite certain that Bawtry had been paid off but as Mr. Robinson had destroyed the records no evidence could be produced in support of this.  Mr. Patara’s final submission was that the basis of the reconstructed accounts was that a balance had been achieved.  The Commissioners had agreed the cash method as a suitable tool of reconstruction and they had also agreed the output tax side.  By implication therefore they had accepted the input tax otherwise the balance would not be achieved.  The Commissioners were on the one hand agreeing a takings figure but were then going on to say that some of the payments made in the calculation of the figures had never been made.  They were in effect having their cake and eating it.  If the Commissioners were to say that some outgoings never happened then for the equation to balance one would have to reduce the income which had already been agreed.
Conclusions
17.	Mr. Patara placed great emphasis on the fact that the reconstruction of the club accounts, referred to as cash accounting, was carried out in the manner recommended by the Institute of Chartered Accountants in England and Wales, (ICAEW).  We have no arguments with the validity of his approach.  Mr. Patara further stressed that cash accounts produce in this manner created a position under which any adjustments to inputs (purchases) or outputs (sales) must automatically have a corresponding and equal impact on sales and purchases.  This point was made, we believe, to support a contention that an adjustment to a level of input VAT would be offset by a corresponding adjustment to output VAT, leaving the net VAT liability unchanged.  This is correct, but in the reconstructed accounts the sales (takings) figure was estimated and we were shown no evidence, such a bank statements, to support the cash position which formed the basis of the accounts.  Therefore in terms of assisting the tribunal the accounts were of limited value.
18.	Mr. Davis was faced with no records on which he could rely as to income, outgoings or cash.  All had to be calculated on the basis of grossly inadequate information.  What he did appears to have been quite properly done on the basis of what he was told and the records which he did have.  He spotted the apparent indebtedness to Bawtry on the February 2005 aged creditors’ report but was told by Mr. Uppal that in fact some payment had been made and the indebtedness was therefore in a lower figure.  Mr. Davis carried out a reconciliation which he passed to the company for the requisite adjusting entries to be made to the records and for his part he carried through the adjusted, reconciled figures into the statutory accounts.  Nothing in this however goes any way towards proving the payments to Bawtry were actually made.  The documentation produced in the form of two aged creditors’ reports and the Bawtry purchase ledger, we were told, should not be read as evidencing the entries contained in them.  The entries were admitted to be incorrect and were not evidence that payment had been made either in the manner entered or on the dates entered.  Equally, the documents do not reflect the accounting treatment recommended by Mr. Davis and implemented in the statutory accounts and are consequently at obvious odds with the accounts.
19.	To be entitled to recover its input tax, the company has to be able to satisfy the Commissioners that payment to Bawtry was made.  This would normally be by production of a receipted invoice or a bank statement or some other conclusive record.  Bank statements would not assist here because the payments were in cash and apparently Mr. Robinson destroyed all the records so there is absolutely no documentary evidence available of payment.  In the absence of any documentary evidence one turns to look at the oral evidence which we heard.  Evidence was given by Mr. Uppal that he thought payment had been made.  He had authorised Mr. Robinson to make payments but he didn’t know the amount of the payments or when or how they were made.  Equally he had no idea how the entries in the records came to be made as these would have been made in the accounts department and there was no evidence from the accounts department before us.  Mr. Uppal therefore could not provide any firsthand evidence of payment.  Neither, of course, could Mr. Davis and there is no reason why he should have been able to.  The payments would have been made internally within the company and he would not have known of them.  Equally he would have no knowledge of how the entries in the records came to be made.  All he found out at a later date was the figures that he had put forward in the reconciliation had not been incorporated in that form.  For whatever reason and however it might have happened, the fact remains that the Appellant has produced no documentary or oral evidence to verify the payment to Bawtry.  Whatever the alleged shortcomings in the Global Star accounting system we have difficulty in accepting that the system did not provide even a basic audit trail to identify the date that entries were made and the identity of individuals making the entries.  There was nothing before the Commissioners and there was nothing before the tribunal to evidence payment of these invoices and we have to find that the Appellant has not proved its entitlement to recovery of input tax.  The appeal must therefore fail and is dismissed.
20.	The Commissioners made no application for costs and no order is made.
MAN/07/0468

LADY MITTING
CHAIRMAN
Release Date: 21 October 2008