[2011] UKFTT 10 (TC)

TC00887	
Appeal number:  MAN/2009/0127

VAT – input tax – disallowance – whether there had actually been any supply of services to which the relevant VAT invoices related – held in part no, and to that extent the input VAT should be disallowed – whether the remaining input VAT should be disallowed for failure to provide other evidence of the charge to input VAT subsequently required by HMRC under the proviso to Regulation 29(2) VAT Regulations 1995 – held the enquiries raised by HMRC did not amount to a “direction” under that proviso but in any event no such direction could be made after the right to deduct had arisen – principle of legal certainty would be infringed – appeal allowed in part	

FIRST-TIER TRIBUNAL
TAX

	MALIHA GROUP LIMITED	Appellant	

-and-

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (VAT)	Respondents	

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
JOHN LAPTHORNE	

Sitting in public in Birmingham on 29 September 2010
Miss Narzia Perven, lay representative, for the Appellant
Richard Mansell, Advocate, for the Respondents

© CROWN COPYRIGHT 2010

DECISION
Introduction
1.	This appeal is against a decision of HMRC to disallow input tax claimed by the Appellant in relation to its first VAT accounting period from 1 May to 30 September 2007, with a consequential amendment of the Appellant’s VAT return and an associated assessment for VAT.  The grounds for this decision are stated in their statement of case as follows:
“The Commissioners contend that:
a)	Section 24(1) of the VAT Act 1994 defines input tax.
b)	Section 25(6) of the VAT Act 1994 applies to the claim of VAT credit.
c)	Regulation 29(2) of the VAT Regulations 1994 applies with respect to the appealed decision to deny the input tax claim made by the Appellant.
d)	They are not satisfied that the Appellant has been in receipt of supplies for which purchase invoices are held.
e)	The suppliers do not appear to have been trading at the time of the alleged supplies or not trading from the address declared.
f)	The suppliers have not rendered VAT returns in respect of the alleged supplies.
g)	The Respondents have required the Appellant to provide additional evidence in respect of the supplies received in accordance with regulation 29(2) of the VAT Regulations 1995.
h)	The Appellant has not provided the necessary alternative evidence requested by the Respondents to substantiate the supplies have been made by taxable persons.
i)	They have reasonably amended the VAT return for the period 09/07.”
2.	It appears from the above (and from the way their case was put at the hearing) that HMRC are effectively arguing on two independent grounds:
(1)	The alleged supplies to the Appellant in respect of which it is claiming input VAT never actually took place ((d), (e) & (f) above); and
(2)	HMRC directed the Appellant, pursuant to Regulation 29(2) of the VAT Regulations 1995, to provide “other evidence” of the charge to VAT suffered by it as input VAT and it has failed to do so, with the result that its claim to treat such VAT as input VAT is lost ((c), (g) & (h) above).
3.	The VAT return in question (as delivered) showed output VAT on taxable supplies of £7,297.87 (on supplies to a total value, excluding VAT, of £41,702); and it claimed input VAT of £18,703.44 (on purchases to a total value, excluding VAT, of £106,885).  The overall net VAT repayment claim was therefore £11,405.57. 
4.	The Appellant has accepted one amendment made by HMRC, to adjust the output VAT figure upward from £7,297.87 to £7,635.95.  The effect of this is to reduce its repayment claim by £338.08 to £11,067.49.
5.	HMRC’s account of the disallowance they wish to apply to the Appellant’s input VAT has been confused.  They appear to have issued two decision letters dated 4 July 2008.  In the first of them, they adjusted the Appellant’s input tax claim from £18,703.44 to £7,635.95 – i.e. exactly the same amount as the adjusted output VAT figure.  Then a second letter appears to have been issued on the same date, in which they adjusted the input tax down to £1,181.88.  Based on their later arguments, the appropriate adjustment would have been to reduce the input tax claim to £768.22, but they have acknowledged the error and have stated that as it is in favour of the Appellant, they do not seek to disallow input tax below the £1,181.88 level which was set out in their revised decision letter dated 4 July 2008.
6.	The result of the adjustment made by HMRC is that instead of a VAT repayment of £11,067.49 being due to the Appellant, it would be liable to pay net VAT of £6,454.07.
7.	The input VAT which HMRC seek to disallow relates entirely to supplies made (or supposedly made) by three suppliers to the Appellant:
(1)	BKW Group (“BKW”), a supplier of kitchen unit carcasses.  Input VAT claimed on supplies from BKW totalled £13,755.50.
(2)	Soundmania Limited (“Soundmania”), a supplier of kitchen appliances.  Input VAT claimed on supplies from Soundmania totalled £2,167.25.
(3)	RTV Productions Limited (“RTV”), a television company which supplied advertisement space on a channel on Sky TV.  Input VAT claimed on supplies from RTV totalled £2,012.50.
8.	It can be seen that the total input VAT claimed by the Appellant in respect of supplies from these three suppliers totalled £17,935.25, but in total HMRC seek to deny input VAT of only £17,521.56.  The difference of £413.69 substantially represents the error mentioned at [5].
Background and history
9.	The Appellant was incorporated on 7 August 2006.  It was (and remains) owned and controlled by Mohammed Pervez.  Mr Pervez had worked for some time selling kitchens on commission on behalf of Moben.  He also has some IT background.  He decided to set up his own business designing and supplying kitchens, which he did through the Appellant.  The Appellant did not install the kitchens it supplied, if requested they gave recommendations of possible installers.  In addition, they generally advised customers that it would be cheaper to source their own appliances and in all the kitchens they supplied during the period under appeal, they did not supply any appliances.
10.	Mr Pervez found carcass suppliers through his previous knowledge of the industry and his own research.  He said he had selected BKW as his supplier of kitchen carcasses because it was the only supplier he could find who actually manufactured locally in Birmingham.  It was important to him to be able to go round to the factory to discuss details, arrange non-standard items, etc.
11.	The Appellant operated on what Mr Pervez called a “cash basis”.  He found customers who wanted to install a new kitchen.  He would discuss their requirements, measure up and prepare a design, for which he would charge a fee of £100 once the customer was happy with it.  He would go back to his supplier (BKW) to negotiate a price and delivery date for the carcasses and he would then negotiate a fixed price with the customer.  On average, he made a profit of about 18% to 19% on each order, though this was not rigid.  
12.	When the customer had agreed the price, he would take a 25% deposit from the customer and confirm the order to his supplier, passing on all the deposit he had received from his customer.  The supplier invoiced him in full for the whole contract price straight away but was happy to allow him to pay the balance of the price when he received payment from his own customer.  
13.	When the carcasses had been manufactured and were delivered to the householder (usually between 4 and 8 weeks after the order was placed), Mr Pervez would make sure he obtained payment from the customer as soon as the units were delivered and he would pay his own supplier the same day – either going to their factory himself or being visited at his premises by the director of the supplier.
14.	The vast majority of the Appellant’s transactions were in cash.  It had no debit or credit card facility – Mr Pervez said a bank required a year’s trading record before it would consider providing that service to a business.  He was willing to accept cheques, but they would take a week to clear so that would hold things up as he was not prepared to place a firm order with the factory until he held cleared funds.  The same delay would be caused if he tried to pay his suppliers by cheque.  He also said he did not wish to incur bank charges in clearing cheques.  
15.	He kept track of the payments he made and received in relation to each customer order on a simple spreadsheet which he kept on his computer.  A copy of that spreadsheet covering the period under appeal had been provided to HMRC in the course of their enquiries, but due to the retirement of the officer concerned it seemed that the copy he had provided had gone astray.  He did not have a copy of the spreadsheet at the hearing.  He said he was given receipts for the cash payments made to his supplier, but he had not kept them very long as they were just handwritten pages out of an invoice book and were not on official company stationery.  He wrote cash receipts for customers on their copies of his one page contract which was signed when the order was first placed.
16.	Crucially, there was no way of tracking payments and receipts by reference to specific orders through the records he kept.  Copies were provided of statements received from BKW but these did not provide enough detail to provide an audit trail, and as the Appellant’s business started to grow, any ability to trace payments back to specific orders rapidly disappeared.
17.	During the period under appeal, the Appellant claimed to have spent something over £11,000 (plus VAT) on kitchen appliances from a company called Soundmania.  Mr Pervez said he had found the company on the internet, as it was the cheapest supplier nearby for the appliances he was looking for.  Again, he said he paid cash.  None of the appliances had been used in kitchens installed during the period from May to September 2007.  Mr Pervez said he had bought the appliances because he knew he would be able to sell them at a profit at some stage in the future and indeed he claimed to have sold some of them in the period after September 2007.  He said he stored the appliances in a lock-up container under the M6 pending sale.
18.	During the period under appeal, the Appellant also claimed to have spent £11,500 plus VAT of £2,012.50 on TV advertising on a channel on Sky TV.  It produced two VAT invoices from RTV.  Mr Pervez gave no detail of his dealings with this company and said that so long after the event he had no recording of the advertisements which had been broadcast.
19.	At first sight, it appears somewhat unexpected that the Appellant was trading profitably, making wholly taxable supplies and yet reclaiming over £11,000 of VAT in respect of its first five months of trading.  The explanation for this was to be found in the fact that the Appellant was taking credit for its input tax liabilities in full upon receipt of the invoices from BKW but was only accounting for output tax on the supplies it made when (and to the extent that) it received cash payments from its customers.  This meant that at the end of the relevant period it owed BKW approximately £60,000 in respect of purchases for which it had taken an input VAT credit but as the carcasses had not yet been supplied to the customers and therefore they had not paid the 75% balance of the price, it had not accounted for the output VAT on the unpaid sums due from them.  HMRC expressed no disagreement with this method of accounting for VAT.
Correspondence about BKW, RTV and Soundmania
20.	When the Appellant’s VAT return was filed, it was selected for verification by HMRC as it was a repayment claim.  When HMRC were provided with supporting details of the Appellant’s input VAT, they made enquiries about the three main suppliers.  They established that none of them had made VAT returns covering the period in question, and none of them could be contacted using the information supplied by the Appellant.  
21.	In an email dated 29 February 2008, the HMRC officer (Mr Grigg) informed the Appellant that Soundmania had been insolvent and (so far as he was aware) not trading since 1 June 2007, RTV appeared to be no longer trading or at the address declared and BKW did not appear to have traded at the current address for over a year.  His email included the following:
 “In order to release your claim for input tax I need to see clear evidence of trading or updated details on the above so that I can validate their activities also.
Could you please therefore review your records & supply further evidence to support these transactions.”
22.	Mr Grigg has since retired and did not give evidence before us, but a copy of his diary for Saturday 19 January 2008 was produced, showing what appears to have been a note of a conversation with BKW’s landlord at its trading premises.  It includes the following:
“Fire @ 12 mths ago
Left owing money – not insured
Thinks moved to Gt Hampton St Hockley”
This appears to be the note which underlay his assertion that BKW did not appear to have traded at the address provided by Mr Pervez “for over a year”.  It also seems to have underlain a passage in his later letter to the Appellant dated 14 April 2008, referred to below.
23.	In reply to Mr Grigg’s email of 29 February 2008, Mr Pervez sent an email dated 25 March 2008, as follows:
“Please find attached written confirmation in relation to Soundmania Limited, RTV Productions Limited.
BKW Group I have not traded with since October last year the goods were delivered direct to the customer and payment collected in cash from my premises the contact name was a Mr Shahid Malik and the Mobile Number [number given].
I hope this now clarifies any issues...”
24.	Either attached to this email or faxed to HMRC on the same day was a copy of a letter dated 19 March 2008 from the Insolvency Service (sending to the Appellant a copy of the winding up order made against Soundmania on 20 September 2007) and a letter dated 7 March 2008 to Mr Pervez from RTV, confirming that the two invoices from RTV had been raised and paid in cash.
25.	It seems that Mr Pervez was also of interest to a different part of HMRC, who arranged a meeting with him on 31 March 2008.  That meeting appears to have been mostly concerned with other matters, but unfortunately no proper note of the meeting was available to us, only a letter dated 1 April 2008 from Officer Haynes of HMRC, who had been at the meeting.  In that letter, the only items relevant to the present appeal were requests by Officer Haynes for:
“* Sales and Purchase Day listings for the VAT period 09/07
*  A VAT summary that demonstrates the build up of the VAT figures for the VAT period 09/07.
...
*  Copies of all company bank statements that cover the period 1st May 2007 to 31st December 2007”
26.	Officer Grigg of HMRC wrote again to the Appellant on 14 April 2008, including the following relevant text:
“I am writing further to your reply to my recent correspondence.  I should like to clarify the current position:
1.	I am still awaiting information from the Insolvency Practitioner regarding Soundmania.
2.	I am endeavouring to contact RTV, from the correspondence you supplied, as they appear not to be at the address registered & have not submitted any returns.
3.	I have made further enquiries regarding BKW.  It appears that they have not traded for over a year following a fire at their factory.  Perhaps you can explain where you bought the units from & where they are currently based if still trading?
....
6.	I also have concerns with the declaration of sales.  The bulk appears to relate to open contracts seen at our meeting, which makes the figures look weak for December bearing in mind the previous pattern of orders to sales completion.  Can you therefore supply the same sales details & spreadsheet as you did for September to support this.
As stated previously there seems to be more cause for concern as we now have 4 suppliers who are either not trading or not at their designated establishments & no real evidence that transactions have taken place.  We really need to see something more concrete or to talk to the relevant parties to clear up these discrepancies.
I look forward to hearing from you on this matter.”
27.	Mr Pervez did not reply until HMRC had issued their decisions on 4 July 2008 to disallow the Appellant’s input tax.  On 10 July 2008, he wrote to HMRC asking for a breakdown of the “minor errors” in his output tax and also said:
“[I] would ask if you could kindly explain as to what would constitute as satisfactory evidence on input tax.”
28.	In reply to this point, HMRC’s letter dated 4 August 2008 included the following:
“	.....
2	My concern regarding satisfactory evidence is that none of the suppliers identified in my last letter appear to be trading, have not done so for some time & no returns have been presented.  Therefore we need to see clear proof of transactions taking place & details of the businesses/individuals involved where you are still doing business.
.....
As in my previous correspondence I will await your response on these issues.  Please note that this does not prejudice your right to apply to a VAT tribunal should the need arise.
I look forward to hearing from you on this matter.”
29.	The Appellant did not reply to this letter in writing but appealed to the VAT Tribunal on 30 January 2009.
Evidence at the hearing about BKW, Soundmania and RTV
30.	Mr Pervez gave evidence that he was aware there had been a fire which had affected BKW.  That fire had been mainly at the unit next door and whilst it had disrupted production somewhat at BKW, it had not interfered with their ability to supply the Appellant with carcasses.  The only evidence from HMRC in relation to this fire was the manuscript note taken from Mr Grigg’s diary mentioned above.
31.	In relation to Soundmania, HMRC accepted at the hearing that the evidence available to them was consistent with the possibility that the Appellant had traded with Soundmania as he claimed.  Whilst a company voluntary arrangement had been put in place originally, it was possible that Soundmania had continued to trade right up until the time it was wound up in September 2007.
32.	In relation to RTV, all attempts to contact them had failed and no VAT return had been filed for the relevant period by them.
Our findings in relation to the dealings with RTV, Soundmania and BKW
33.	We did not find Mr Pervez’s evidence in relation to RTV and Soundmania convincing.  We consider it extremely unlikely that a business as small and supposedly tightly financed as the Appellant would have spent over £22,000 plus VAT on satellite TV advertising and kitchen appliances which were not needed for the purposes of its immediate trade.  The lack of any credible corroborating evidence was also telling, as was the failure to use any of the appliances supposedly bought from Soundmania in any of the kitchens the Appellant supplied in the period under appeal.  We therefore find that the taxable supplies to the Appellant supposedly reflected in the invoices from RTV and Soundmania never took place at all.
34.	So far as the supplies by BKW are concerned, HMRC did not bring forward any evidence to suggest that the numerous customer contracts between the Appellant and its customers were shams or in any way did not represent real transactions with bona fide third parties.  The copy customer contracts disclosed to them contained names and addresses of customers, so it would have been easy enough to check.  We do not see how the Appellant could have fulfilled its contracts with its customers without itself acquiring the kitchen units from a supplier or suppliers.  There was no material evidence to suggest that it had acquired the units from any other supplier rather than from BKW.  We are therefore satisfied that the supplies to the Appellant took place and were properly attributable to the supplies made by it in the course or furtherance of its business.
35.	The evidence relating to the fire at BKW was (as summarised above) inconclusive and certainly was not a sufficient basis for a finding that the supplies never took place.  And the fact that BKW itself may not have accounted for the VAT is of no relevance, in the absence of evidence that the Appellant knew or ought to have known that the VAT due to HMRC from BKW would go unpaid as a result of fraud.  There was no such evidence before us.
Our decision on HMRC’s first ground for refusal of input VAT
36.	It follows that, in relation to HMRC’s first grounds for disallowing the input VAT reflected in the invoices from RTV, Soundmania and BKW (i.e. that the supplies never took place at all):
(1)	we agree that the input VAT supposedly incurred by the Appellant in its dealings with RTV and Soundmania should be disallowed; and
(2)	we find that the input VAT incurred by the Appellant in its dealings with BKW should not be disallowed on these grounds.
HMRC’s second ground for refusal of input VAT
Summary of HMRC’s argument
37.	HMRC’s second ground for refusal of input VAT was broadly as follows.  Regulation 29(2) of the VAT Regulations 1995 (“regulation 29(2)”), so far as relevant in the present case, provides as follows (and the text has remained unchanged since before 2007):
“(2)	At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –
(a)	a supply from another taxable person, hold the document which is required to be provided under regulation 13;
.......
provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other evidence of the charge to VAT as the Commissioners may direct.”
38.	HMRC did not dispute that the Appellant held the relevant documents (the VAT invoices) supplied by BKW at the time it claimed deduction of the input tax due to BKW.  Nonetheless, they asserted that in the later correspondence, prompted by their suspicions about the Appellant’s dealings (in particular the fact that its three main suppliers had all disappeared and failed to render a VAT return covering the period of their supplies to the Appellant), they had directed the Appellant to provide “other evidence of the charge to VAT” incurred by it; that the Appellant had failed to provide that “other evidence”; and that it was therefore disqualified from claiming the VAT as input tax under regulation 29(2).
What direction does HMRC assert was given?
39.	HMRC accept that there was no document entitled “Direction to provide evidence pursuant to regulation 29(2) VAT Regulations 1995” (or with any similar title) which had been sent to the Appellant, nor indeed was there any other document (prior to the statement of case) which made it clear that they were purporting to give a direction under that regulation.  They invited the Tribunal to treat the course of correspondence as a whole and/or certain elements within it as constituting such a direction.  The relevant communications from HMRC to the Appellant were as follows:
(1)	a letter from Officer Dodd of HMRC to the Appellant dated 22 November 2007, in which she said:
“In order for me to verify the Input Tax claimed I require proof of payment for your main purchases.  This may be in the form of Bank Statements, etc.”
(2)	the  email from Officer Grigg of HMRC to the Appellant dated 29 February 2008 referred to at [21] above;
(3)	the letter from Officer Haynes of HMRC to the Appellant dated 1 April 2008 referred to at [25] above;
(4)	the letter from Officer Grigg of HMRC to the Appellant dated 14 April 2008 referred to at [26] above;
(5)	the letter from Officer Grigg of HMRC to the Appellant dated 4 August 2008 referred to at [28] above;
(6)	In a letter dated 13 July 2009 from Officer Hodgson of HMRC to the Appellant (by which time the Appellant had already given notice of appeal to the VAT Tribunal), she said:
“Please would you provide the following information:
.....
2	Any additional documentary evidence you may have to demonstrate that the invoices relate to the purchase of the goods and confirm the use to which they were put.  The documentation available may include:
(i)	Alternative documentary evidence e.g. a supplier statement
(ii)	Evidence of receipt of a taxable supply on which VAT has been charged
(iii)	Evidence of payment
(iv)	Evidence of how the materials purchased were used.
Would you please forward the information to me at the above address within twenty one days of the date of this letter?
Thank you for your assistance in this matter.”
40.	HMRC invited us to regard some or all of this correspondence as amounting to a direction under regulation 29(2) for the provision of the further evidence set out in it.  In doing so, Mr Mansell referred to no authorities, he relied on an interpretation of the wording of regulation 29(2) without reference to any decided cases.
Our view of HMRC’s argument
41.	We do not feel able to agree with HMRC that the correspondence they directed us to amounted to a valid direction under the proviso to regulation 29(2), for three reasons.
42.	First, we do not consider that either the requests themselves or the scope of the evidence to be supplied in reply to them is sufficiently clear and precise.  There were certainly some specific items – for example the sales and purchase day listings, the VAT summary and the copy bank statements referred to in Officer Haynes’ letter dated 1 April 2008 – but these were mixed up in the correspondence with many other more general requests for information and evidence, some of which appeared to have been either satisfied or dropped.  When the text of the various letters is examined closely and in context, we find that what HMRC were really asking for was further evidence to back up the Appellant’s claim that the tax invoices were representative of true underlying supplies for which it had paid.  
43.	Indeed, when Mrs Hodgson was asked in cross examination why she had phrased her letter dated 13 July 2009 (see [39(6)] above) in such apparently open terms, she confirmed this was because she was quite happy to consider any evidence provided which had a bearing on the issues she was concerned with, and she purposely worded the letter widely so as to allow the Appellant to provide whatever evidence it could which might satisfy her.  This was perfectly proper and appropriate, but we consider that any later attempt to interpret this letter as a formal direction to provide specific evidence is misconceived.  
44.	The whole tenor, both of this letter and of the earlier letters, was to seek whatever evidence could be provided to satisfy HMRC on the issues that concerned them.  That, in our view, cannot amount to a “direction” for the purposes of the proviso to regulation 29(2); for there to be a direction, HMRC would need to identify precisely and definitively, once and for all, what evidence they require – and a statement that they require the taxpayer to provide whatever evidence he can to address their area of concern, following a long correspondence in which various other requests have been framed is simply not precise and clear enough.
45.	Second, there was nothing in the correspondence to indicate that HMRC were making anything more than just simple requests for more evidence to satisfy them on issues that concerned them.  Given that the consequence of failure to comply with a valid direction under the proviso to regulation 29(2) is total loss of the benefit of the related input tax, we consider that it must be inherent in the concept of a “direction” that the taxpayer is clearly told what he is facing.  It is not, in our view, necessary for such a direction to be given in a standard form with a heading at the top which identifies precisely what it is, but in our view a direction can only be understood and characterised as such if it contains some indication of what it is.  This correspondence cannot, in our view, amount to a direction as it was quite simply not clear on its face that that was what it was.
46.	Third, we do not consider, as a matter of law, that it is open to HMRC to give directions pursuant to the proviso to regulation 29(2) after the event.  The whole scheme of VAT is that a right of deduction of input tax arises when the deductible input tax becomes chargeable (Art 167, 2006/112/EC).  To exercise the right of deduction, a taxpayer in the Appellant’s position must generally hold a VAT invoice from his supplier (Art 178(a), 2006/112/EC).  But this is simply a question of evidence to support the right of deduction.  The right of deduction has already arisen.
47.	The EU law principle of legal certainty (see ECJ case 169/80 Gondrand and subsequent authorities) requires that rules imposing charges on the taxpayer must be clear and precise so that he may know without ambiguity what are his rights and obligations and may take steps accordingly.  If a taxpayer’s right to deduct input VAT crystallises at the time when the input tax becomes chargeable, then it follows from the principle of legal certainty that the taxpayer is entitled to know at that time precisely what evidence he must hold or provide in order to avail himself of that right.  Any attempt on the part of the authorities to impose extra evidential obligations after that time is inconsistent with this entitlement and must fail.
48.	In the present case, the Appellant knew (or should have known, from the law in force at the time) that it was required to hold a valid VAT invoice for its input VAT at the time it made the claim to deduct that input VAT.  It also knew (or should have known) that a right of deduction only arose if there was an actual supply underlying the VAT invoice.  If HMRC are not satisfied that there was indeed an underlying supply, then that is the issue to be tested; they cannot avoid that issue by purporting to make a direction after the event under the proviso to regulation 29(2) and then wholly disqualifying the Appellant from the right to deduct input VAT on the ground that the Appellant has failed to comply with that direction.
Conclusion and decision in principle
49.	We find that the supposed supplies to the Appellant by Soundmania and RTV never took place and therefore HMRC are correct to deny the Appellant the recovery of the input tax shown on the invoices from those two “suppliers”.  See [33] and [36(1)] above.
50.	We find that the supplies to the Appellant by BKW did take place, and the supplies in question were used or to be used by the Appellant exclusively in making taxable supplies and accordingly the Appellant is entitled to deduct the input VAT it incurred on such supplies.  See [34] and [36(2)] above.
51.	The Appellant’s right to deduct the input tax incurred on the supplies from BKW is not affected by HMRC’s claim that the Appellant has failed to comply with a direction from HMRC under the proviso to regulation 29(2).  See [41] to [48] above.
52.	Accordingly we find that HMRC are justified in denying the right of recovery in respect of the input VAT totalling £4,179.75 supposedly incurred on the invoices from RTV and Soundmania, but they are not justified in denying the right of recovery in respect of the input VAT incurred on the invoices from BKW (totalling £13,755.50).
Appropriate form of our final decision
53.	We were not addressed on the precise form our decision should take.  The Appellant’s notice of appeal was phrased as an appeal against HMRC’s decision to disallow recovery of the input tax (i.e. under s 83(1)(c) VATA - “an appeal... with respect to ... the amount of any input tax which may be credited to a person”), but of course the consequence of that input tax being disallowed in this case is that HMRC sought to make the Appellant liable to pay net output tax.  We were not provided with a copy of any standard form assessment or notice of assessment for output tax demanded from the Appellant, the only reference to such an assessment was that contained in HMRC’s decision letter dated 4 July 2008:
“A net amount is thus considered to be properly payable by you in respect of this period and this amount is hereby assessed as tax due”
54.	This statement followed on from text in the letter which stated that the figure shown in box 5 (net VAT to be paid to HMRC) of the Appellant’s VAT return for the period ended 30 September 2007 should be “reduced to” £6,454.07.  In fact the figure in box 5 on the original return was £11,405.57 but this was a “repayable” figure, so the use of the phrase “reduced to” is neither accurate nor helpful.  However, taken in context the intention is clear, that HMRC intended that the Appellant should account for net output VAT of £6,454.07 as a result of the adjustment they proposed to make to its VAT return.
55.	In their statement of case, HMRC did not address the point of precisely what decision the Tribunal was being asked to make.  They did however refer to s 73 VATA as being part of the relevant law, so we infer that they regard the appeal as being made under that section in respect of the “assessment” referred to in their decision letter dated 4 July 2008, possibly in addition to being made under s 83(1)(c).
56.	Whilst the position is not entirely free from doubt, therefore, we take it that our decision is required both on HMRC’s decision to deny input tax and also on the assessment contained or referred to in their letter dated 4 July 2008.  We note that there is no required form for either an assessment or a notice of assessment, though it would have made matters clearer and simpler if HMRC had followed its normal process of raising and notifying an assessment in the usual form.
Final decision
57.	Accordingly, and following on from our decision in principle set out above, our final decision is:
(1)	that the appeal against HMRC’s decision on the amount of input tax that may be credited in the Appellant’s VAT return for the period ended 30 September 2008 is to be allowed in part: instead of the reduction of allowable input tax from £18,703.44 to £1,181.88 made by HMRC, the allowable input tax should be reduced only to £14,523.69 (being the £18,703.44 of input tax originally claimed less the £4,179.75 of input tax referable to Soundmania and RTV); in consequence,
(2)	the assessment notified in HMRC’s letter dated 4 July 2008 should therefore be reduced from £6,454.07 to £Nil; and
(3)	the Appellant will be entitled to a net VAT repayment of £6,887.74 (being his agreed corrected output VAT of £7,635.95 less credit for allowable input VAT of £14,523.69).
58.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 16 December 2010