20858

VALUE ADDED TAX – Second-hand margin scheme for motor cars – art. 8 VAT (Cars) Order 1992 – condition for operating the scheme that the trader keeps records as the Commissioners may direct – Notice 718 directing the keeping of records – Appellant failed to keep records – whether his reconstructed records adequate to entitle him to operate the scheme – Tribunal’s jurisdiction in relation to a “prior decision” under s.84(10)VAT Act 1994 considered – Held appeal dismissed (a) because Appellant failed to keep records (prior decision) or alternatively (b) because the Commissioners reasonably refused to accept the Appellant’s reconstructed records as adequate (alternative prior decision)

LONDON TRIBUNAL CENTRE

	ALAN THORNHILL t/a MOTORMILL	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					SUNIL K. DAS

Sitting in public in London on 2 September 2008

The Appellant appeared in person

Mrs. P. Crinnion, Advocate, HM Revenue and Customs, appeared for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Alan Thornhill (“the Appellant”) appeals against assessments for the VAT periods 05/03, 08/03 and 11/03 to 11/05 inclusive, which were raised by the Respondents (“the Commissioners”) to recover output tax on supplies of second-hand cars.  The VAT assessed by the assessments totals £73,384.  At the hearing Mrs. Crinnion, for the Commissioners, accepted that the amount assessed ought to be reduced to £72,508.
2.	The Appellant has carried on a business of buying and selling second-hand cars under the trading name of Motormill.  We were told that by May 2007 he had closed this business.  By the assessments, the Commissioners seek to recover output VAT on the full selling prices of second-hand cars supplied by the Appellant.  He says that the Commissioners ought to allow him to benefit from a margin scheme, whereby VAT is due not on the value of the cars supplied (their VAT-exclusive selling price) but instead on the profit margins achieved on the supplies.
3.	The relevant scheme is established by article 8 of the Value Added Tax (Cars) Order 1992 (SI 1992/3122).  That article relevantly provides as follows:
“(1) Subject to complying with such conditions (including the keeping of such records and accounts) as the Commissioners may direct in a notice published by them for the purposes of this Order or may otherwise direct,  … where a person supplies a used motor car which he took possession of in any of the circumstances set out in paragraph (2) below, he may opt to account for the VAT chargeable on the supply on the profit margin on the supply instead of by reference to its value.
(2) The circumstances referred to in paragraph (1) above are that the taxable person took possession of the motor car pursuant to–
(a) a supply in respect of which no VAT was chargeable under the [VAT] Act or under Part I of the Manx [VAT] Act;
(b) a supply on which VAT was chargeable on the profit margin in accordance with paragraph (1) above, or a corresponding provision made under the Manx [VAT] Act or a corresponding provision of the law of another member State
… ”
4.	Paragraph (5) of the Order gives rules for determining the profit margin on which VAT is chargeable.  These are predictable and relevantly to this case provide that the profit margin is the difference between the price at which a motor car was obtained and the price at which it was sold, both prices being calculated in the same way as the consideration for the relevant supply would be calculated for normal VAT purposes.
5.	The relevant notice for the purposes of paragraph (1) of the Order is Notice 718 “Margin schemes for second-hand goods, works of art, antiques and collectors’ items”.  Section 2.3 of that Notice, under the heading “What are the conditions of the Scheme?” states: 
“You must meet the record keeping requirements of the scheme.  There are special rules about invoicing and stock records (see section 3) and unless you meet those conditions, VAT will be due on the full selling price of your sales.”
6.	The rules at section 3 of the Notice, under the heading “Records and accounts” begin with the emphasised sentence: “The detailed rules in this section have the force of law”.
7.	In summary these rules provide relevantly that over and above the normal requirements for record keeping set out in Notice 700 (The VAT Guide), which must be observed, a taxable person opting to use a margin scheme must also keep a stock book or similar record as described at section 3.3, purchase invoices as described at section 3.5 and copies of sales invoices as described at section 3.7.  (Section references are to Notice 718.)
8.	The stock book or similar record is required to include stated purchase details and sales details relating to each item of stock and, for that purpose, stock purchased must be numbered in numerical sequence. Purchase invoices and sales invoices are required (amongst other stated information) to include a reference to the stock book number of the item bought or sold. Sales invoices must include a declaration by the taxable person (the seller) as follows: “Input tax deduction has not been and will not be claimed by me in respect of the goods sold on this invoice”.  Where any goods are purchased from another VAT registered person, the relevant purchase invoice must contain an identical declaration by the seller.
The facts
9.	We heard evidence from the Appellant and from Karen Tearle, a VAT assurance officer, and Linda Greene, a VAT Higher Officer, both based in Luton.  We had before us a substantial amount of documentary evidence.  From this evidence we make the following findings of fact.
10.	The Appellant carried on his business under the name of Motormill as well as other business activities and he was also, between 2003 and 2005, building his own house.  He had an extensive local network of contacts amongst car dealers.  The Motormill business was a sporadic activity in which the Appellant bought cars (and possible other motor vehicles, such as vans) for onward sale.
11.	He would often contract to buy and to sell cars when he had neither an invoice pad nor a cheque book to hand.  This did not give rise to problems in practice as he was dealing (both buying from and selling to) business contacts with whom he operated on a basis of trust.  Most dealers from whom he bought would trust him to take away the car, but they would retain the documents (log book and MOT certificate) until payment was received from the Appellant.  In the same way when the Appellant sold a car he would often deliver it with payment to follow (at which time the documents would be handed over to the buyer).
12.	Some of the dealers who purchased from the Appellant would, however, produce their own invoices, in order to keep their own records current.  So there were occasions when a sale by the Appellant would be recorded by the purchaser’s invoice even though the Appellant had himself produced no sales invoice.  Other dealers would delay producing purchase invoices until payment was made, when the documents would be transferred by the Appellant.
13.	Transactions were sufficiently few in number that the Appellant thought that he would be able to carry the details of them in his head.  But anyway he believed that the dealers with whom he carried out the transactions were themselves keeping records and so he was confident that he would be able to refer back to them as necessary.
14.	The Appellant had been the subject of an unconnected Revenue investigation in 2005.
15.	On 18 March 2006 the Appellant received a VAT visit from Officer Tearle.  The Appellant and his accountant, Mrs. Anstee FCCA, were present.  At the start of the visit Mrs. Annesty informed Officer Tearle that she had just finished a review of the Appellant’s books and wished to make a voluntary disclosure of errors found, totalling £3,400 VAT underpaid.  Officer Tearle noticed a dearth of sales invoices and took the Appellant’s records back to her office for examination and specialist advice. 
16.	Officer Tearle formed the view that the Appellant had not complied with the conditions regarding the keeping of records which applied to entitlement to use the VAT margin scheme and therefore indicated to the Appellant in a letter dated 22 march 2006 her intention to raise an assessment to recover VAT on the total consideration received from the Appellant’s sales over 3 years, which was £523.032, giving rise to a VAT liability of £77,901.50.
17.	So far as the figures are concerned, Officer Tearle broadly accepted the schedules of the Appellant’s sales which his accountant, Mrs. Anstee, had produced from the records available to her.
18.	Mrs. Anstee’s response to Officer Tearle’s proposal to assess the Appellant on the basis of total sales consideration (Mrs. Anstee’s letter to Officer Tearle dated 27 March 2006) was to point out that from the extensive work that she had done in reconstructing the Appellant’s accounts, she had been able in nearly all cases to match the purchase of a vehicle to its sale, verifying the purchase cost and sale price with relevant banking transactions by the Appellant.  She said that the main area where the Appellant’s records were deficient was the non-production by him of sales invoices.  
19.	She went on to point out that “as [the Appellant] is in the unique position that he deals mainly with other registered car dealers and not with the general public for the sale of vehicles, we have the information to produce these sales invoices retrospectively.  For the majority of cases there is a purchase invoice as evidence of purchase and as we are able to verify the sale as above we would like to be given the time and opportunity of reconstructing the records over the three year period, to include producing the missing sales invoices to define the true amount of VAT sue using the margin scheme.”
20.	She made reference to HMRC’s published practice that a trader should be given the opportunity to reconstruct the records and a period of up to three months should be allowed.  This practice is that in a case of non-compliance with the conditions for opting to use a margin scheme, the Commissioners will consider whether they regard the non-compliance as serious and, if not, they will normally “give the trader the opportunity to reconstruct the records and warn that failure to do so may result in VAT being assessed on the full selling price of the goods” (Paragraph 10.3 of Manual reference V1-23 Chapter 7).
21.	On 3 April 2006 Officer Tearle wrote to the Appellant stating that she would be returning the Appellant’s records to Mrs. Anstee “in order for reconstruction” (sic).  She set a time limit requiring the reconstruction to be carried out and the results reported to her by 22 May 2006 and went on: “any information received by [that date] will be examined and considered.  If no information has been received or it is not of satisfactory standard and assessment on the full amount will be raised, as per my letter dated 22/3/06.  Once you receive the assessment you have a further month to appeal.”
22.	Following this, the Appellant gave the matter of reconstruction of his records his full attention and contacted the dealers he had dealt with, informing them of the situation.  He asked if he could inspect their stock books and note all transactions to which he was a party and take photocopies of invoices which they held. The Tribunal was shown a statement by Tony Glynn, Sales Manager of John R. Ford & Sons, a dealer with whom the Appellant did business, and a similar statement from a Mr. David W. Dance of Bridge Garage, Little Wymondley, both confirming that at the relevant time the Appellant had been given access to their respective records and permitted to take photocopies as necessary.
23.	As a result, Mrs. Anstee created for the Appellant a new stock book recording details of purchase and sale of vehicles by the Appellant between 13 March 2003 and 22 September 2005. Sales invoices were produced by the Appellant for the transactions for which they were missing by reference to the reconstructed records. The invoices were delivered to the Appellant’s customers. Mrs. Anstee’s reconstruction of the Appellant’s records produced a result that (on the basis that the margin scheme applied) additional VAT of £3,432.12 was owed by the Appellant.
24.	Officer Tearle embarked on an examination of these documents, but a protective assessment for the period 05/03 was raised in June 2006.  Officer Tearle went on maternity leave later that summer and passed responsibility for the case to Officer France.  Officer Greene (in Officer France’s absence) raised a protective assessment for the period 08/03 on 30 August 2006.  Officer France made further protective assessments for periods 11/03 to 11/05 inclusive in November 2006.  During all this time the Commissioners were continuing their work on the records produced by Mrs. Anstee.
25.	That work was eventually completed in early 2007 and on 8 May 2007 Officer Tearle wrote again to the Appellant to inform him that the Commissioners had reached the conclusion that they were not satisfied that the records supplied complied with the margin scheme record keeping conditions and that they were therefore intending to enforce the assessments. 
26.	Mrs. Anstee wrote again to the Commissioners on 22 May 2007 asking for an independent reconsideration of the assessments. A review officer, David Webb, replied on 31 August 2007 stating that the documents produced by Mrs. Anstee did not amount to reconstruction of the Appellant’s records as that term was understood by the Commissioners for the purposes of their practice.  Mr. Webb stated that: “Reconstruction of the records is considered to involve going back to the original customers from whom purchases have been made or to whom sales have been made and obtaining copies of the original sales and purchase documents.  Because your [i.e. Mrs. Anstee’s] letter of 27 March 2006 referred to [the Appellant’s] “unique position” it was expected that this is what he was able to do.  However [the Appellant] appears to have issued new sales invoices and new purchase invoices.  To use stock book information to produce further invoices does not provide evidence of correct use of the scheme.”  Mrs. Anstee replied on 14 September 2007 making the point that she had made it quite clear (as she had in her letter dated 27 March 2006) when asking to be given the time and the opportunity of reconstructing the records that it was intended to produce sales invoices retrospectively. She said that she could not see how this could have been or assumed to have been taken to mean that copy sales invoices would be requested from traders.  The Commissioners’ delay in dealing with the matter and the absence of any indication before that reconstructed sales invoices were not going to be acceptable was also complained about.
27.	Mr. Webb replied to Mrs. Anstee on 26 September 2007 making the point that nothing would be achieved by going back to the reconstructed stock record and rewriting sales and purchase invoices, since that would not prove that the margin scheme had been operated correctly.  He reiterated that it was a legal requirement, if there is to be entitlement to use the margin scheme that original records should be kept.
28.	We find that the reconstruction of invoice records which the Commissioners could accept was the assembly of copies of original documents which would show that the margin scheme had been operated correctly.
29.	There were produced to the Tribunal extensive analyses carried out by Officer Tearle of the sales and purchases records prepared by Mrs. Anstee.  Officer Tearle has marked against each sale and purchase invoice whether she has accepted it (she did in a few cases) and, where she has not accepted it, the reason for non-acceptance.
30.	The Appellant did not always raise sales invoices when he sold vehicles in the periods in question.  He said in cross-examination that he “possibly would not raise a sales invoice if a purchaser raised a purchase invoice”.  We find that he did not do so in some, maybe all, cases where his purchaser raised a purchase invoice.
31.	The Appellant did not know how Mrs. Anstee had prepared his sales figures.  We find that at any rate to some extent she worked from an analysis of payments made into the Appellant’s bank accounts.  The Appellant did not know how many bank accounts he had disclosed, but he said he had disclosed them all to Mrs. Anstee.  He had three bank accounts, one for Motormill, one for his property business and one for his housebuilding project, besides one or two personal accounts.  He accepted in cross-examination that sometimes he put receipts from sales of vehicles into his personal account rather than the Motormill account.  He said that if he purchased a vehicle with money drawn from a personal account, he would pay the proceeds of sale of that vehicle into the personal account.
32.	In answer to a question from the Chairman of the Tribunal, the Appellant said that it was not completely unheard of for him to deal with a member of the general public (rather than one of his contacts in the motor trade).  He said however that generally he knew who the people he dealt with were and was able to go back to them if necessary.
33.	Officer Tearle noticed that there were sales invoices missing from the Appellant’s records at the time of her visit on 16 March 2006.  Indeed she was on that visit only able to identify 5 sales invoices, and, of those, one (a sale to Hamiltons of Shefford Ltd of a VW Golf Cabrio in March 2003 for £6,200) was not included in the Appellant’s stock record. One transaction examined at that visit, a purchase and on-sale of a BMW 330 Convertible, registration Y894 HNH, showed, per the invoices, a purchase by the Appellant at £15,000 and a sale at £19,250.  These figures did not agree with the manual stock book maintained by the Appellant, which Officer Tearle saw.  That manual stock book showed a sale on at £17,500. 
34.	Officer Tearle said that she had used Mrs. Anstee’s figures to work out the sales proceeds by reference to which she had raised assessments to VAT.  We find, therefore, that there is no issue as to the correct amount of the Appellant’s sales and, assuming the Commissioners correctly assessed by reference to the full sales proceeds rather than the profit margin, that the assessments were made to the best of their judgment.
35.	Officer Tearle’s main concern as to the accuracy of Mrs. Anstee’s reconstructed records was that they contained, in her view, no confirmation of the figures by third parties.  She could only accept a transaction as properly taxable on the margin basis if she could see both a purchase and a sales invoice which had been validated by the respective third parties.  She criticised Mrs. Anstee’s reconstructed records because in many cases although there was a genuine invoice in respect of one side of the transaction, a genuine invoice was lacking in respect of the other side of the transaction, and therefore the operation of the margin scheme was not adequately proved in relation to the transaction in question.  She also objected that the stock numbers in the reconstructed records were new (that is, there was effectively a new stock book) and did not exist on the original invoices or in the original stock book.
The Tribunal’s jurisdiction
36.	The Tribunal’s jurisdiction in this appeal is under section 83(b) and (p) of the VAT Act 1994 (“VATA”), that is, we have jurisdiction to consider the VAT chargeable on the supplies of vehicles made by the Appellant and whether the assessments are correctly made, and the amount(s) of the assessments.  In deciding this appeal we must therefore have regard to the relevant law, including that which we have set out at paragraphs 3 to 8 above.  
37.	A decision of the Commissioners to refuse to accept reconstructed records for the purpose of allowing a taxable person to opt to use a margin scheme is not itself a decision which we have jurisdiction under section 83 VATA to consider. However our jurisdiction is extended by section 84(10) VATA as follows:
“Where an appeal is against a decision of the Commissioners which depended upon a prior decision taken by them in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision.”
38.	Mrs. Crinnion, on behalf of the Commissioners, expressly accepted in answer to a question from the Chairman of the Tribunal that we could consider the question of whether the Commissioners have reasonably refused to accept the Appellant’s reconstructed records as being adequate for the purposes of the margin scheme.
39.	The prior decision in this case, in the terms of section 84(10) VATA is the decision by the Commissioners that the Appellant was not entitled to opt to account for the VAT chargeable on supplies of motor vehicles on the profit margins of the supplies rather than by reference to their values (cf. article 8, VAT (Cars) Order 1992, SI 1992 No. 3122).
40.	That decision incorporated the decision that the Appellant had not kept the records directed to be kept by Notice 718.  
41.	The decision not to accept the reconstructed records as equivalent to the records directed to be kept by Notice 718 – which is in truth the decision to which the Appellant objects, as he must, given that he accepts that he did not in all cases actually keep the records directed to be kept by Notice 718 – is neither a decision within section 83 VATA nor a “prior decision” within section 84(10) VATA.  In the Tribunal’s judgment, therefore, we have, strictly, no jurisdiction to adjudicate on the matter which is the Appellant’s real grievance in this case.  
The Tribunal’s reasoning and conclusions
42.	The Appellant accepts that he did not in all cases keep the records directed to be kept by Notice 718 and the keeping of those records is, as a matter of law, a condition precedent to being entitled to opt to account for VAT using the margin scheme. For these reasons we conclude that we must dismiss this appeal on those grounds in relation to all transactions where the Appellant did not actually keep the records directed to be kept by Notice 718.  The appeal is therefore dismissed subject to our direction that the amount assessed be reduced to £72,508 – see paragraph 1 above.
43.	In case we are wrong in the above analysis of our jurisdiction and in case the true position is that we can consider the reasonableness of the Commissioners’ refusal to accept the Appellant’s reconstructed records as being adequate for the purposes of the margin scheme, and because we heard argument and evidence directed to the point, we go on, briefly, to give our conclusions on the point.  We recognise that on a broad view of section 84(10) it could be said that the prior decision on which the appealed decision depends is the decision not to accept the adequacy of the Appellant’s reconstructed records, and so it may be right that we have jurisdiction to consider that decision on that basis.
44.	The requirement to keep records as a condition for operating a margin scheme is clearly imposed in order to prevent abuse, and to facilitate auditing of the operation of the scheme by the Commissioners.  What Mrs. Anstee’s records have achieved is a reconstruction in the sense that she has investigated from the evidence available to her what she thought was the likely profile of the Appellant’s trade in second-hand vehicles.  Part of that evidence consisted of copy invoices retained by the Appellant, part of it consisted of copy invoices obtained from dealers with whom the Appellant traded and part consisted of the Appellant’s banking records.  The reconstructed records presented to the Commissioners for their approval were in some (many) cases new documents produced by the Appellant to show what the original records would have been (a) if they had been kept, and (b) if Mrs. Anstee’s reconstruction gave in fact an accurate picture of the Appellant’s trade in second-hand vehicles. They included a new stock book, in the sense that the transactions were given entirely new stock numbers.
45.	We have no reason to think that Mrs. Anstee’s reconstruction was not the best reconstruction which any accountant could have made from the information and evidence available to her.  But a reconstruction in that sense is all that it was.  It was not in any sense a creation or re-creation of the records which the Appellant should have kept of all his transactions in second-hand vehicles if was to be entitled to opt to operate the VAT margin scheme.  Mrs. Anstee’s reconstruction did not have the probative value which such a creation or re-creation (or reconstruction) of the Appellant’s records would have had.
46.	Furthermore, there is reason to doubt that the Appellant’s original records (such as they were) were adequate even on their own terms.  We bear in mind the errors identified by Officer Tearle at the time of her visit on 16 March 2006 (see: paragraph 33 above).  We also bear in mind that (as he admitted) the Appellant dealt with members of the public as well as his contacts in the motor trade and that Mrs. Anstee had been careful to say that she had been able to match purchases to sales and verify the cost and sale price in nearly all cases, rather than in absolutely all cases.  Thus Mrs. Anstee’s schedules involved a degree of guess work and cannot be regarded as 100% accurate.  The Commissioners therefore cannot in our view be criticised for refusing to accept her schedules and the reconstructed records based on them as records sufficiently probative of the Appellant’s correct operation of the second-hand margin scheme so as to entitle him to opt to charge VAT on the basis of it.
47.	An appeal against the Commissioners’ decision to refuse to accept the Appellant’s reconstructed records as being adequate for the purposes of the margin scheme could only have succeeded if the Appellant had been able to show that such refusal was unreasonable in the sense that no reasonable body of Commissioners would have made that decision.
48.	In our judgment the Appellant has failed to show that the Commissioners’ decision to refuse to accept the Appellant’s reconstructed records as being adequate for the purposes of the margin scheme was unreasonable.
49.	Therefore, if (contrary to our view expressed at paragraph 41 above) we have jurisdiction (under section 84(10) VATA or otherwise) to entertain an appeal against that decision or against a decision or assessment which depended on that decision, we dismiss that appeal (subject to the direction stated in paragraph 42 above) for the reasons given above.

JOHN WALTERS QC
Chairman
Released 7 November 2008

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