Archive for month: January, 2025

Introduction

 

In FS Commercial Ltd, UT/2023/00099, on 6 February 2019 HMRC issued decisions to the Appellant (preferred and alternative assessments) to assess it under s.73 Value Added Tax Act 1994 (“VATA”) for £19,064,622 for periods 05/16 – 11/18 inclusive (alternative assessment for £15,036,031 for periods 11/16 – 11/18 inclusive, on the basis of inadequate evidence of payment of consideration).

 

In the course of preparing for the substantive hearing of the Appellant’s appeal before the First-tier Tribunal (“FTT”) against the preferred assessment, the Appellant sought to include tens of thousands of invoices in its List of Documents. HMRC objected on the basis that the FTT’s jurisdiction was supervisory, and that as those documents had not been before the HMRC decision maker, they were irrelevant to the substantive issue the FTT had to decide.

 

On 12 July 2023 the FTT issued a decision (“the FTT Decision”) by which it determined both issues in HMRC’s favour, holding that:

(1) its jurisdiction as regards the input tax appeal was supervisory; and

(2) the Appellant could not rely on invoices not provided to the HMRC decision-maker.

 

The Appellant was granted permission to appeal by the FTT

 

The facts

 

On 21 September 2018 the Appellant submitted its 08/18 VAT return. HMRC’s Officer Mills then requested records from the Appellant in order to clear the repayment claimed by it for that VAT period, including any purchase invoices with over £1,000 input tax.

 

On 8 October 2018, Mr Clarke, director of the Appellant, replied by sending Officer Mills bank statements, a “VAT report (detailed)”; a supplier/ customer list  and eight supplier invoices, including one from Aspire Partnership Limited (“Aspire”), the Appellant’s representative at the time. The bank statements showed numerous large transfers to an account “Ref: Verity”, for example: £560,000 on 2 August 2018. Verity Ltd appeared as a supplier on the supplier list but no invoices had been produced from Verity Ltd. On 10 October 2018 Officer Mills asked the Appellant for these invoices.  The Appellant replied on 11 October 2018, saying that there were no invoices from Verity Ltd; these amounts related to a consolidated amount of invoices/VAT charged by its supplier, and there could be “between 800 and 1000 invoices from different suppliers” in relation to each of the Verity amounts.

 

On 18 October 2018, Officer Mills emailed the Appellant saying that he needed to see the invoices making up the Verity supplies and asking for them to be provided.  He then wrote to the Appellant again on 7 January 2019.  The letter stated:

 

“… Although I have requested information regarding your records, as yet I hold insufficient information to evidence the input tax deducted or payments made against those purchases.

…

At this stage I do not hold the basic records for FS Commercial since commencement. The bank statements provided only related to the one period and do not represent the full bank statements for the business. I will require the full business records and bank statements since commencement. With regard to those statements, although payment is shown as made to Verity, this cannot represent the actual evidence of payment. Verity you have clarified is a number of companies. A single payment therefore cannot represent payment to the individual companies that make up Verity.

…

At present in the absence of records to substantiate the input tax claimed I will have to disallow all input tax claimed since the commencement of the business

…

If you would like to comment or give me any more information, please contact me by 29 January 2019 …If I do not hear from you by then, I will take this to mean that you agree with my calculations. I will then make assessments of the amount due and send you notice of those assessments…”

 

Subsequent correspondence between the parties failed to resolve the issue and Officer Mills issued assessments accordingly.

 

The grounds of appeal to the FTT

 

The Appellant’s Notice of Appeal to the FTT, dated 24 June 2019, said that the “desired outcome” was that “we would like the Tribunal to vacate the assessment”. The FTT Grounds were attached and read as follows (underlining reflects our emphasis).

“1. These are the grounds on which the Appellant notifies its appeal to the Tribunal against the decision made by the Respondent on 7th January 2019.

2. By that decision, the Respondent disallowed the Appellant’s input tax claimed since commencement of the business. The decision did not reference the legislative basis on which it was made.
3. The Appellant appeals to the Tribunal on the grounds that the claim for input tax is valid and correctly due.
4. The Respondent’s decision was issued on 7th January 2019 based on the Investigating Officer’s view that he had not been supplied with enough evidence of the input tax deducted for the entire trading history of the Appellant.
5. The Assessment relevant to this decision is dated 6th February 2019 which related to periods 05/16 to 11/18.
6. The Respondent has been invited to inspect the business records at the Principal Place of Business. This invitation was declined on the same day that the assessment for £34,185,989 was received in the post by the Appellant and again on 14th February 2019.
7. It is the Appellant’s stated position that the Respondent’s decision to deny a VAT input tax claim is incorrect because there is evidence to demonstrate that:
8. The Appellant correctly charges VAT on its supply made to customers. This charge meets the definition of output tax at Section 25 of the VAT Act 1994.
9. The supply included VAT which meets the definition of input tax at Section 24 of the VAT Act 1994 and, therefore, the claim for a deduction should be allowed in full.
10. The Appellant holds evidence to demonstrate that it receives payment for the supply that it makes to customers in the form of a bank account into which payments are deposited and has made this evidence available to the Respondent.
11. The Appellant holds evidence that its supply chain is valid and has correctly been charged VAT relevant to the supply of labour services and has made this evidence available to the Respondent.
12. The Appellant holds evidence that it received a supply of taxable services for which it made payment which included an element associated with VAT and has made this evidence available to the Respondent.
13. The Respondent incorrectly states that “no evidence” has been provided which is absolutely not the case. The Appellant cooperated with providing information, however due to an unreasonable amount of records being requested the Appellant requested that evidence be reviewed at the Principle [sic] Place of Business.
14. Having regard to these facts there are no valid grounds for the Respondent to deny the reclaim of VAT input tax.
15. The Appellant requests the Tribunal to quash the Respondents’ decision for the reasons set out in these grounds of appeal.”

 

The FTT’s decision

 

As summarised by the Upper Tribunal, the decision was as follows:

 

“The FTT Decision included the following findings:

(1) The FTT Grounds did not state that valid invoices were held by the Appellant at the time of submitting the relevant VAT return; they were instead “entirely predicated on the absence of such invoice”. Reliance on invoices as a ground of appeal was first raised in a letter dated 13 December 2020, after the Appellant had changed its advisers from Aspire to Duncan Lewis Solicitors.

(2) The decision made by Officer Mills refusing the right to deduct VAT was made on the basis that the Appellant had not provided VAT invoices. In the absence of valid VAT invoices, Officer Mills exercised the discretion conferred on him by Reg.29 VATR and did not accept that the Appellant had provided HMRC with sufficient alternative evidence ([45]).

(3) The correct approach to be followed was that in Scandico Ltd v HMRC [2017] UKUT 0467 (TCC) (“Scandico”), which was binding on the FTT, not the two-stage test in London Wiper Limited v HMRC [2011] UKFTT 445 TC.

(4)The Tribunal should only address the HMRC decision that was before it, viz. the decision that, in the absence of VAT invoices, HMRC were not prepared to exercise their discretion to accept the alternative evidence provided by the taxpayer, and the test the FTT applies in reviewing that decision is that set out in Kohanzad v Customs & Excise Commissioners [1994] STC 967 (“Kohanzad”), namely whether the officer in question had acted as no reasonable officer could have acted. The FTT’s jurisdiction in the appeal was therefore supervisory ([48]).

(5)The Appellant had accepted that if this was the position, it could only rely on evidence that was before Officer Mills when he made his decision. In consequence, the Appellant could not rely on the Verity invoices as these were not provided to Officer Mills before he issued the assessment ([49]).

Both preliminary issues were therefore determined in HMRC’s favour.”

 

The Upper Tribunal’s decision

 

The UT agreed with the decision of the FTT.  The UT summarised the basic principles. The effect of Reg. 29(2) VATR is that HMRC has a discretion to allow a credit for input tax notwithstanding that the taxable person does not have a valid VAT invoice.  In this case, HMRC were being asked to make an exception to the general rule that the right to deduct cannot be exercised without a valid VAT invoice.  Hence the taxable person must demonstrate why such an exception should be made. The exercise of HMRC’s discretions under Reg.29(2) VATR can only be challenged by the taxpayer on the ground that it was a decision that no reasonable body of Commissioners could have reached. The burden lies on the taxpayer to demonstrate this, based on facts and matters available to HMRC at the time the decision was taken. The jurisdiction is, therefore, strictly supervisory only.

 

In terms of Grounds of Appeal, these should:

1. identify the issues of fact and law on which an appellant challenges the HMRC decision (which an appellant is required to provide by virtue of Rule 20(3)); and
2. must be comprehensible either as a self-standing document, or by making explicit reference to HMRC’s decision.

 

On the first ground of appeal the UT decided against the taxpayer, stating:

 

‘The issue before us is whether the FTT Grounds included the ground that Appellant held valid VAT invoices….. Had the Appellant been appealing on the basis that it held the VAT invoices to support its returns, this would have been explicitly stated, and this was not the position. It is beyond dispute that the FTT Grounds made no explicit reference to the Appellant holding valid, or otherwise, VAT invoices….. the FTT Grounds did not make it sufficiently clear or reasonably apparent that the Appellant relied on holding valid VAT invoices such that the Tribunal and HMRC would understand this to be in issue in the appeal.’

 

In similar vein, the UT ruled against the Taxpayer on the second ground of appeal.

 

The UT said:

 

‘It is clear from Boyce (HMRC v Boyce [2017] UKUT 177 (TCC)) that the FTT’s jurisdiction when hearing an appeal against a Regulation 29(2) decision is supervisory: Arnold J said “[t]he exercise of such a discretion can only be challenged by the taxpayer on the ground that it was a decision that no reasonable body of Commissioners could have reached.” The same point is made in Scandico at [43] by reference to Kohanzad…..

The FTT’s jurisdiction when hearing the substantive appeal is supervisory, so the FTT can only consider whether Officer Mills’ decision was reasonable. In exercising that jurisdiction, the only facts which can be considered by the FTT are those which were before Officer Mills at that time he made the decision. Since the invoices were not provided to Officer Mills, the FTT cannot make findings of fact about them, and they therefore cannot form part of the evidence at the substantive hearing. The Appellant can only rely on evidence that was before Officer Mills when he made his decision…..

…..the operation of the VAT system is not a game to be played by taxpayers. When HMRC requests or requires that a taxpayer produces a valid VAT invoice in support of its claim to input tax deduction, it is doing nothing more than enforcing the European and domestic law that requires that such an invoice be held at the time of the exercise of the right to deduct. Where the taxpayer refuses a lawful and reasonable request, it puts itself in a position whereby the claim to input tax deduction is then a matter for the discretion of HMRC. If HMRC exercises that discretion against the taxpayer, the taxpayer cannot then, on appeal to the FTT, produce the invoice, as a surprise or ambush, even if it truly held the invoice all along, and so side-step the exercise of HMRC’s discretion.’

 

Conclusion

 

Given the offer of a review at the taxpayer’s premises, the decision in FS Commercial Ltd may seem harsh.  It sends, however, a clear message to taxpayers to ensure:

1. That all necessary documentation is before the deciding officer;
2. That any grounds of appeal are fully particularised and sufficient to cover any arguments to be made on the taxpayer’s behalf to the FTT; and
3. That the UT will not lightly disturb HMRC’s discretion should there be deficiencies in 1 and 2 above.

Taxpayers are duly warned.