VALUE ADDED TAX — builders and constructors — assessment to VAT — input tax — "accruals" — whether assessment made to best judgment — section 73 VATA 1994 — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
NATIONWIDE JOINERY CONTRACTORS LIMITED Appellant
- and -
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Ian E Vellins (Chairman)
Sitting in public in Manchester on 25 May 2005
Richard Barlow of counsel for the Appellant
James Puzey of counsel instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2005
- In this appeal, the Appellant is Nationwide Joinery Contractors Limited of Wellington House, Wellington Street, Bury. The Appellant carries on business from those premises as builders in the construction industry and is registered for the purposes of VAT with effect from 13 March 1993. The disputed decision of the Respondents is the decision to assess the Appellant pursuant to section 73 of the Value Added Tax Act 1994 (VATA 1994) in the sum of £138,823 plus interest representing VAT arrears for the period 01.11.1998 to 31.01.2001. The Appellant notified the Respondents that the appeal only related to the assessment for the period 04/99 in the sum of £107,744. The Appellant appealed by notice of appeal dated 1 August 2003 against the decision of the Respondents dated 17 June 2003 reviewing a reconsideration of the assessment in which the Respondents maintained the assessment.
- At the hearing of this appeal at Manchester on 25 May 2005, the Appellant was represented by Mr Richard Barlow, counsel. The Respondents were represented by Mr James Puzey, counsel.
- At the hearing of the appeal, both the Respondents and the Appellant produced bundles of documents. Oral evidence was given on behalf of the Appellant by its accountant, Mr Graham Johnson and on behalf of the Respondents by two officers, Mrs Kay Akpinarliouglu and Mrs Heather Gibbs.
- We make the following findings of fact.
- Mrs Akpinarliouglu, the officer of the Respondents who gave evidence at the hearing of the appeal, initially visited the Appellant on 8 and 9 March 2001 and inspected the Appellant's records and accounts. From the information she obtained, it appeared to her that the VAT returns rendered by the Appellant were incomplete or incorrect. In particular, on the VAT return for 04/99, input tax of £107,744 had been claimed as an accrual without any documentary evidence to support the deduction. The Appellant was part of the Thomas Barnes Limited group of companies. The Appellant's accounts staff could not explain what the accruals related to. The accounts staff had not been working for the Appellant in 1999. The officer requested details and evidence of the accruals which were not forthcoming from the Appellant, and she notified the Appellant that an assessment would be made against them, which was duly made by the Respondents on 18 May 2001. The officer had been concerned about the high level of the accruals which the Appellant could not support by way of explanation or document.
- There then ensued correspondence between the Appellant's accountants, Levy Gee of Manchester and a review officer of the Respondents, Mrs Heather Gibbs, who gave evidence at the hearing of the appeal. Mrs Gibbs had noted that there was input tax claimed as an accrual in the period 04/99 of £107,744 and that that accrual was not reversed in the subsequent period and could not be substantiated by the Appellant. She asked for evidence to support the input tax claimed as an accrual claimed in the period 04/99, and to show that these amounts were not duplicated in subsequent periods.
- Mrs Gibbs telephoned Mr T Ashton, a tax manager at Levy Gee accountants, on 14 November 2001 and 27 November 2001. He told Mrs Gibbs that the accruals had probably to do with management charges and that the accruals related to inter-company charges within the group of companies and that these did not go through the purchase ledger system. In a letter dated 6 December 2001 from Mr Ashton to Mrs Gibbs, the accountants stated
"As I mentioned in our telephone conversation, these accruals had been in operation for some time and undoubtedly relate to management charges but have not been processed through the ledgers."
Mrs Gibbs' replied to Levy Gee accountants on 1 March 2002 stating
"It is apparent that no evidence is held to substantiate the claim for £107,744 made in period 04/99, that no corresponding output tax has been accounted for and that there is no evidence to show that a supply has been made. Furthermore, as input tax has been accrued in each period since the initial claim, it would be reasonable to expect that this final declaration would be a reversal only which was not the case."
On 13 March 2002, Levy Gee wrote to Mrs Gibbs indicating that while it was apparent that no evidence was held by the Appellant to substantiate the claim for £107,744 made in the period 04/99, the Appellant did indeed have sufficient documentary evidence to support the actual amount of input tax claimed on the VAT return for that period. The accountants stated that whilst no documentary evidence was available for the closing accrual of £107,744, then also no documentary evidence was available for the opening accrual of £110,089.
- In the period 2002 to 2003, the Appellant's accountants Levy Gee and the Appellant's later accountants Numerica Business Services Limited were still maintaining that the accrual of input tax stemmed from management charges incurred from associated Barnes' group companies. Mrs Gibbs was maintaining that a method of accruing input tax in this way had merit only if there was an initial input tax claimed in one period which was reversed in the following one.
- On 17 October 2003, Mrs Gibbs received a telephone call from Mrs Soor of Numerica in which Mrs Soor was of the opinion that it may be possible to show that a supply of management charges had taken place from accounts drawn up at the time.
- Correspondence took place between Numerica, and Mr David Webb, a review officer of the Respondents. In a letter from Numerica to the Respondents dated 16 September 2004, Numerica were stating
"As the staff responsible for the preparation of the 04/99 return, and indeed earlier returns that included other accruals are no longer with Nationwide Joinery Contractors, what these accruals represent cannot be readily ascertained".
- Then on 27 October 2004, Numerica wrote to Mr David Webb, the review officer, indicating that
"there had previously been an assumption by the Appellant however right or wrong that the accrual represented input tax in respect of unpaid, but agreed, inter-company management charges. However, as this has subsequently found to be incorrect we turn to what the accrual actually represents. It is Nationwide Joinery's position that this accrual represents a manual estimation of input tax on invoices for the period 04/99 which, for whatever reason, had not been input into their accounting systems. If the VAT accounts had been produced on the correct basis, whereby input tax is claimed in respect of invoices held with the appropriate tax points, there would have been no need for such an estimation. In reversing the accruals for the period 01/99 what we are effectively saying is that the figures produced in the period 04/99 from the accounting system, as distinct from accounting records, includes invoices with a tax point in an earlier period. In not reversing the accrual for period 04/99 in period 07/99, it is accepted that there is the possibility that there could be an element of double accounting in period 07/99. However, in compiling the input tax account for period 07/99 the figures have been derived from source records held and properly inputted into the accounting system. Therefore, as the accrual for period 04/99 was not reversed in period 07/99 the possibility of double accounting could exist but our reconstruction of the VAT accounts for periods 04/99 and 07/99 clearly show that this is not the case".
- Whilst Mr Ashton had told Mrs Gibbs in a telephone call on 18 December 2001 that the "accrual is not for late unprocessed invoices", Mr Graham Johnson who gave evidence as accountant for the Appellant at the hearing indicated that the accruals were relating to unprocessed invoices from subcontractors.
- Mr Graham Johnson's evidence at the hearing of the appeal was that he is the group accountant of Thomas Barnes Limited of which the Appellant is a part. He had two and a half years involvement with the Appellant, but had not been involved with the Appellant in 1999. He was involved in preparing documents in order to reconstruct the financial affairs of the Appellant of 1999. He had prepared for the hearing of this appeal a list of subcontractors' invoices for the period February to April 1999. This had been compiled by staff of Numerica who had gone through the lever arch files of the Appellant which contained subcontractors' invoices and which they had listed in date order. Although Mr Johnson had not been working for the Appellant in 1999, he had talked to staff who had been working for the Appellant at that time and had understood that in 1999, the Appellant had been running two systems in their accountancy department. One was the old Kalamazoo system and the other was a newer Job Master computer system. He said that in 1999 old jobs were being put in the Kalamazoo system and newer jobs were being started in the new Job Master computer system, so one system was being run down and the other computer system was ultimately to take its place. He said that in 1999, there were a number of unprocessed documents which had not been put onto any computer system. His evidence was that the accruals were made up of these documents. He said that the reason why he could not produce a contemporaneous list of these documents was because the staff of the Appellant at the time had merely used a hand calculator to reach the total sum of the documents, and a print out had not been kept. He stated that during the VAT quarter 04/99, which was for the period from 1 January 1999 to 31 March 1999, there would have been invoices from subcontractors received by the Appellant during that period which the Appellant had not had time to process by 31 March 1999. Such invoices would be regarded by the Appellant as an accrual, and although unprocessed, would form part of the calculations for the preparation of the VAT return for the period 04/99.
- Mr Johnson said that because the end of June 1999 was the year-end for accounting purposes for the Appellant, he understood that the Appellant's staff had to process all documents by that date to make sure that they were included in the Appellant's computerised accounts. He said that accordingly by that time, the Job Master computer had completely taken over from the previous Kalamazoo system. He said that when the VAT return for 07/99 was prepared, the new Job Master computer system would flag up those subcontractors' invoices that had already been included in the 04/99 VAT return as an accrual, and that these would not therefore be duplicated in the 07/99 VAT returns. Mr Johnson had therefore been informed that there had been no duplication of those subcontractors' invoices that had been included in the accruals for the 04/99 system. He also took the view that there would have been no need for the Appellant to reverse the accruals which had appeared in the 04/99 VAT calculations, when the 07/99 VAT return and calculations were prepared. He confirmed that there had been no reversal of the 04/99 accrual. He also took the view that if there had been any duplication in the input tax claim of £107,744 in the 04/99 VAT return and later returns, this would have been picked up by the Appellant's accountants Levy Gee when they came to do their audit. They had produced the company's accounts for the Appellant for the year ending 30 June 1999.
- Mr Johnson accepted that the only explanation he could think of for the accruals were that these related to the subcontractors' invoices which had not been processed by the end of the relevant VAT period. He was not able to produce any documents to indicate how the Appellant had calculated the initial accruals when accruals were first taken into account by the Appellant in compiling the Appellant's VAT returns. He could not produce any evidence to show how the Appellant had calculated the accruals on their various VAT returns prior to 1999. Furthermore, he could not produce any documentary evidence as to how any member of the accounting staff of the Appellant had worked out the figure shown as accruals for the preparation of the VAT return for 04/99. His evidence was that he understood that the member of staff of the Appellant at the material time had merely calculated the figures on a hand calculator, and the Appellant's staff had not kept a print out of such calculation. He indicated that the Appellant's accountants with his assistance had prepared reconciliation calculations, but that no attempt had been made by the Appellant to obtain the information, documents and calculations from their lever arch files relating to subcontractors, to provide evidence of how the accruals had been calculated prior to the VAT period of 04/99, in order to ascertain the basis of the previous accrual calculations.
- Mr Johnson also took the view that the accruals calculation for the period 04/99 could have included invoices going back to the previous six months if they had not been processed, i.e. that the unprocessed invoices could have covered a period of some nine months.
- Mr Johnson confirmed in his evidence that the accrual figures had nothing to do with inter-company charges and he could not explain why the Appellant's accountants had been previously maintaining to the Respondents by telephone and by letter that the accruals related to inter-company charges within the Appellant's group of companies. He further stated that the telephone conversation between the Appellant's accountants and the Respondents' review officer on 18 December 2001 in which the Appellant was maintaining that the accruals were not for late unprocessed invoices was based on a misunderstanding of the position at that time by the accountants. Mr Johnson had been working for the Appellant when they were still maintaining, in October 2003, that the accruals related to management charges or inter-company charges. He agreed that the Appellant had no documentation that set out what the accruals were step by step over the various VAT periods. Mr Johnson agreed that the explanation that he had given at the hearing as to the accruals was nothing like the explanation previously advanced on behalf of the Appellant. He confirmed that he did not have a single document to support the figure of £107,744 for accruals.
- It was argued on behalf of the Appellant that the Respondents' assessment could not be substantiated according to the calculations of the Appellant and that the Appellant was indeed due a refund. Although the Respondents had assessed the sum of the assessment on the grounds that an accrual of input tax had not been supported by documentation and had not been reversed in the following tax period, the Appellant claimed that the Appellant had adopted the practice of claiming accruals of input tax in respect of periods from 01/97 to 04/99 inclusive. The Appellant was arguing that accruals of input tax were made of tax included in amounts claimed by creditors for payments from the Appellant after the end of the VAT period in question by the time the return was completed but not by that date paid by the Appellant to the creditors. The Appellant argued that in order to allow for the fact that all of those amounts would then be paid to the creditors during the next or later tax periods, the amount of the accruals would be deducted from the amounts due in the next VAT period so that it would not be recovered twice. The Appellant claimed that by the end of the 04/99 period, an accrual of £107,744.36 was claimed (the accrual from the previous period having been reversed in the usual way). The Appellant argued that in order for the assessment to be correct, it would be necessary for there to have been some duplication of the claim in respect of the £107,744.36 or part of it. The Appellant claimed however that it had reconstructed the figures upon which the VAT returns for 04/99 and 07/99 would have been calculated and the Appellant contended that no such duplication occurred, in other words the £107,744.36 was not claimed again in the period ending 31 July 1999, and the Appellant claimed that a reversal of the accrual was not necessary as this would have led to an under-claim of input tax. The Appellant argued that it may be that the use of accruals in accounting methods resulted in some input tax being claimed earlier than would otherwise be the case but the Appellant contended that it had not resulted in any input tax being claimed that would not otherwise be claimable. The Appellant understood that the Respondents accepted that the accruals method could be used in principle. The Appellant was accordingly denying that any tax was due in respect of the assessment of £107,744.36 for the period ending April 1999.
- Mr Barlow, on behalf of the Appellant, argued that what the Appellant had done was instead of simply reversing the accrual figure in the 04/99 VAT return, the Appellant ensured that the invoices were not included in the 07/99 accounting documents and the VAT return for that period. He conceded that unfortunately the Appellant had not kept a separate schedule or list of the £107,744.36 accrual but he argued that the Appellant's evidence was that there had not been a second claim for this sum by the non-reversal of it. He submitted that the Appellant's reconstruction of the figures showed that there had not been a duplication of the sum.
- Mr Barlow conceded on behalf of the Appellant that the assessment had been made by the Respondents to the best of the Respondents' judgment, but Mr Barlow submitted that the duty of the tribunal was to decide whether there was any tax due by the Appellant in respect of the relevant period. He submitted that the tribunal, if it decided that there had not been a double claim, could allow the appeal and find that the assessment figure was not in fact due from the Appellant.
- Mr Barlow argued that although the Appellant could not say what invoices had been inserted onto the computer, it was not necessary for the Appellant to do this as the logic of the figures produced by the Appellant on its reconstruction showed that the figure had not been claimed twice. Mr Barlow suggested that the word "accrual" was probably a misnomer, and should properly be described as an "adjustment". Mr Barlow accepted that the Appellant had not kept a separate list of how the accruals had been calculated for the period 01/99 and before but submitted that the Respondents had accepted the accruals figures in the earlier returns. Mr Barlow submitted that the accuracy of the Appellant's reconstruction figures was supported in several ways. He submitted that the input tax claimed in the two periods 04/99 and 07/99 were broadly in line with each other and that if the £107,744 had been over-claimed, this should have been reflected in the next period. He submitted that the annual accounts for the Appellant had been audited by their chartered accountants who had not suggested that the £107,744 had been over-claimed as input tax. He submitted that the figure was so large that one would have expected it to have been picked up by an auditor if there had been a duplication of the claim. He also submitted that if the accruals for the pre-April 1999 period had been duplicated in July 1999, there would have been a large number of invoices inputted on to the computer in the next period, which had not happened. Mr Barlow submitted that the Respondents had approached the case in the wrong way by requiring a precise audit trail, and he submitted that the Respondents was ignoring the evidence provided by the Appellant that substantiated the Appellant's claim.
- Mr Barlow submitted that the Appellant's case was simple, namely that the evidence showed that the correct amount of tax was claimed as input tax despite the fact that there was no list surviving as to which invoices actually made up the £107,744 accrual figure. He explained the shifting of the Appellant's explanations over the years by submitting that there was now a better understanding of the facts by the Appellant after their reconstruction than beforehand. Mr Barlow submitted that it would be difficult for the Appellant to reconstruct a list of the accruals invoices because the Appellant had not kept the list that had originally been calculated on a hand calculator. He submitted that the Appellant's task as required by the Respondents was a mammoth task and not cost effective and had therefore not been done by the Appellant. Mr Barlow asked the tribunal to accept the evidence of Mr Johnson that it was not necessary to show which invoices were claimed in the 04/99 return as they would have been flagged on the computer as having been claimed. Mr Barlow submitted that the accruals had been crystallised by not being reversed and as long as the accruals were not claimed again in the July period, the crystallisation would lead to the correct figures having been provided by the Appellant. He claimed accordingly that there had been an adjustment by the Appellant, even though the Appellant had not reversed the accruals.
- Mr Puzey submitted on behalf of the Respondents that there had been a substantial shift over the years in the Appellant's case. It started with nobody on behalf of the Appellant being able to tell the visiting officer what the accruals represented. Then in November 2001, Mr Ashton of the Appellant's accountants Levy Gee put forward to Mrs Gibbs an explanation that the accrual of £107,744 had resulted from inter-company charges. On 6 December 2001, Mr Ashton's letter to Mrs Gibbs stated that the accruals undoubtedly related to management charges which had not been processed through the ledgers and that these accruals had been in operation for some time. Mr Ashton, in a telephone conversation on 18 December 2001, had told Mrs Gibbs that the input tax did not relate to late unprocessed invoices, although Mr Johnson at the hearing was saying that this was precisely what the accruals related to. Then Mrs Soor of Numerica, on behalf of the Appellant, in October 2003 was still of the opinion that the accruals related to management charges. When Mr Marsden of Numerica came into the picture, he was arguing on behalf of the Appellant in September 2004 that the accruals related to invoices in respect of the period 04/99. Now Mr Johnson at the hearing was arguing that the accruals figure not only consisted of invoices in the period of 04/99 but some invoices that could have been issued in the six month period before the period of 04/99.
- Mr Puzey submitted that there was no way that Mr Johnson's claims could be verified. The Appellant had not kept records which could verify how the accrual figure had been calculated. Mr Puzey questioned why the Appellant had not provided the documentation and figures that supported the Appellant's accrual figures when the Appellant did have ring binders of invoices and documents. Mr Puzey submitted that Mr Johnson's evidence was deeply unsatisfactory. He submitted that the Appellant's input tax claim could not be substantiated. The Appellant had not produced the relevant evidence, and the Appellant had changed its explanation year by year.
- We have considered all the evidence in this appeal and the principles of law involved.
- Section 24(1) of VATA 1994 defines input tax as:
"'input tax', in relation to a taxable person means the following tax, that is to say –
(a) VAT on the supply to him of any goods or services; … being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him".
- Sections 24(6) and Regulation 29 of the VAT Regulations 1995 refer to the evidence required to support a deduction of input tax.
- Section 73 VATA 1994 provides that:–
"Where a person has failed to make any returns … or to keep any documents … or where it appears to the Commissioners that such returns or incomplete or incorrect they may assess the amount of VAT due from him to the best of their judgment and notify to him".
- The duty of the Respondents and the way in which a tribunal should approach a best judgment case were considered by the courts in the cases of Van Boeckel v Commissioners of Customs and Excise  STC 290, Rahman v Commissioners of Customs and Excise  STC 826, Rahman (2) v Commissioners of Customs and Excise  STC 150 and Pegasus Birds Limited v Commissioners of Customs and Excise  EWCA Civ 1015.
- Mr Barlow on behalf of the Appellant has conceded in this appeal that the assessment by the Respondents was made to best judgment. The task of the tribunal is to find the correct amount of tax so far as possible on the material properly available to the tribunal, the burden resting on the taxpayer.
- We find that the assessment made by the Respondents was to the best of the Respondents' judgment. We find that the Respondents considered fairly all the material placed before the Respondents and on it came to a reasonable decision as to the amount of tax due. We find that there was material before the Respondents on which the Respondents based its judgment. We find that the officers of the Respondents acted honestly and in good faith and that the assessment was wholly reasonable. The officers did not act dishonestly or vindictively or capriciously. We find that the Respondents made an honest and genuine attempt to reach a fair assessment. We find that the amount of the assessment is sustained in the light of the material available. We find that the amount of the assessment is fair taking into account the whole of the evidence. We can find no grounds to reduce the assessment.
- We find that the Appellant has not satisfied the burden upon it to satisfy us that the correct amount of tax is different to the amount assessed.
- We find that the Appellant has failed to satisfy us that the deduction it made as an accrual of input tax was in fact input tax.
- We agree with Mr Puzey's submissions that the explanation given by the Appellant for the accruals of input tax in its VAT returns has shifted and varied throughout the years. For the period from 2001 to 2004, the explanation of the Appellant, and its accountants has shifted and varied. When the Respondents' visiting officer originally visited the Appellant's premises, the Appellant was not able to give any explanation at all of what the accruals amounted to and how they were calculated. The accountant of the Appellant maintained during the period from 2001 to 2004 that the disputed accruals related to management charges that had not been processed through the ledgers, the management charges being inter-company charges between companies in the group to which the Appellant belonged. It was only after some three years after the assessment was made that the Appellant came up with an explanation that the accruals were accruals of input tax made up of tax included in amounts claimed by creditors for payment by the Appellant after the end of the VAT period in question by the time the return was completed, but not by that date paid by the Appellant to the creditors. We find that the Appellant has failed to satisfy us that the Appellant has properly dealt with accruals in such a way that these sums represented input tax that was in fact input tax. The Appellant did not keep a proper record or indeed any list as evidence of how it calculated the accruals and its claims for input tax. Mr Johnson, the witness for the Appellant, admitted that the Appellant did not maintain such a record. He was not an accountant or employee of the Appellant in 1999. However, his understanding of what had occurred was that a member of the staff of the Appellant had used a hand calculator to make calculations of the accruals and input tax and had not maintained a print out of such calculations. When the Appellant decided to attempt to reconstruct schedules, based upon invoices and documentation in ring binders, the Appellant decided not to embark on the task of ascertaining from the records of the Appellant how the accruals had been calculated from year to year by the Appellant. The Appellant had concluded that this would have been a mammoth task and would not be cost effective. By taking this approach, the Appellant has failed to produce any sufficient evidence upon which this tribunal can conclude that the accruals of input tax were in fact input tax. The Appellant has failed to provide material to us as to how precisely the Appellant calculated the various accrual figures appearing in its returns.
- The Appellant did not reverse the accrual figure in the July 1999 return. It has been argued on behalf of the Appellant that the effect of the processing of its invoices on to its computer would have resulted in the computer flagging up the payment or otherwise of the invoices. The Appellant further maintains that there cannot have been a double claim for input tax as otherwise its accountants and auditors would have picked this up when preparing the accounts of the Appellant. We do not accept these submissions. We cannot conclude on the evidence before us that the Appellant has properly dealt with all financial matters through its computer and through its calculations. Furthermore, the accountants of the Appellant, who were the same accountants who prepared the accounts of the Appellant, were still maintaining for many years that the accruals related to management charges.
- We accept the submissions of the Respondents' representative and reject the submissions of the Appellant's representative. We find accordingly that the Appellant has not provided material to enable either the Respondents or the tribunal to conclude that the assessment should not be sustained or should be reduced.
- Accordingly, we dismiss the Appellant's appeal. The Respondents have indicated that they do not seek an order for costs against the Appellant and we make no order as to costs.
- The Appellant's appeal is therefore dismissed.
Release Date: 14 June 2005