SM Development North West Ltd v The Commissioners for HMRC

This appeal concerns whether the Appellant is entitled to reclaim input tax and whether HMRC were entitled to refuse to admit alternative evidence.

The appeal and the preceding check by HMRC also included a dispute about output tax on sales made by the Appellant which, for the reasons set out below, is no longer an issue in this appeal.

All statutory references are to the Value Added Tax Act 1994 and references to regulations are to the Value Added Tax Regulations 1995 unless specified otherwise. The relevant provisions in the Value Added Tax Regulations 1995 are reproduced in an Appendix to this decision.

We were referred to a hearing bundle. Mr Stephen Murphy, the director and owner of the Appellant gave oral evidence at the hearing. Ms Jessica Wilkinson, an HMRC compliance officer who had conduct of the investigation from October 2023, provided a witness statement and gave oral evidence. We accept their evidence and we find the facts as set out below.

The Appellant was incorporated on 17 September 2018.

The Appellant began trading on 1 March 2021 as a general builder. Its turnover exceeded the VAT registration threshold on 1 August 2021.

The Appellant was registered for VAT with an effective date of registration of 1 August 2022 (“the EDR”).

The Appellant submitted its first VAT return for the period 1 August 2022 to 30 September 2022 (“the 09/22 Return”) which had the following entries:

On 10 July 2023 HMRC notified the Appellant that they would be checking the 09/22 Return. The details of the correspondence between the parties is not relevant save that we find as set out below.

The Appellant was asked by HMRC to complete a questionnaire about its business activities and to provide information. including bank statements, purchase/sale ledgers and copies of invoices. HMRC considered the information provided and made a number of further requests.

On 22 September 2023 Mr Naveed, in a covering e mail enclosing some information, stated that all stock had been used to build the two houses at Cromley Road (as to which see below).

On 6 October 2023 HMRC issued a notice of assessment to the Appellant which:

On 7 December 2023, following a request for an internal review, HMRC issued the outcome of the internal review which:

On 4 January 2024, the Appellant appealed to this Tribunal.

The original check conducted by HMRC into the 09/22 Return, and HMRC’s assessments, included an assessment of underpaid output tax. The issue is not relevant to this appeal and we are aware that these matters may be the subject of future enquiries by HMRC. Accordingly, the evidence and arguments about whether output tax is due were not explored in this appeal and we only make findings of fact in respect of the output tax issues as background to determining the input tax matters in this appeal.

Mr Murphy’s evidence, which we accept for the purposes of this appeal, was that the Appellant bought a large house at Cromley Road, Stockport, partly demolished it, refurbished the remaining part and built a new house, semi-detached from the refurbished house. The appellant then sold the resulting two houses, 6 and 6b Cromley Road. The evidence was not clear but Mr Murphy’s evidence was that 6b Cromley Road was sold for £630,000 on 26 November 2021. The second property appears to have been sold in October 2022 for £670,000.

The sale of 6b Cromley Road was included in the sales figure reported in Box 6 of the 09/22 Return but no output tax declared. In the questionnaire completed by the Appellant the sales were stated as being standard rated.

Ms Wilkinson decided that there was no evidence that zero rated treatment applied to the sale of 6b Cromley Road or any other sales reported in the 09/22 Return and so in the assessment of 6 October 2023, assessed the Appellant for 20% of the sales amount of £738,465 in box 6.

In the statutory review HMRC the reviewing officer came to the following conclusions on the output tax issues;

The Appellant did not take issue with this outcome and so we have treated the output tax position to be agreed for the purposes of this appeal.

Leaving aside output tax issues, this appeal concerns whether the Appellant is entitled to recover the input tax claimed in the 09/22 return.

HMRC have rejected the Appellant’s input tax reclaims for two reasons:

We have not been given an accurate breakdown of the proportion of Appellant’s claim that is dependent on each of these arguments but do not believe that is necessary for the purposes of deciding this appeal.

The burden of proof is on the Appellant in this appeal.

HMRC’s first reason for denying input tax recovery is that most of the supplies predate the EDR and so input tax cannot be recovered under general rules but must satisfy the additional conditions set out in Regulation 111(2), that is the goods must not have been consumed:

“(2)

No VAT may be treated as if it were input tax under paragraph (1) above—

(a)

in respect of—

(i)

goods or services which had been supplied, or

(ii)

save as the Commissioners may otherwise allow, goods which had been consumed,

by the relevant person before the date with effect from which the taxable person was, or was required to be, registered;”

As set out below, we were taken to 6 of the invoices produced by the Appellant. 4 predated 1 August 2022, one postdated it and one did not have the relevant year so it was not possible to tell.

The Appellant did not address this issue either in correspondence or in the hearing. The Appellant produced no evidence that the goods were still held by the Appellant at EDR and not “consumed”. Indeed, it was the Appellant’s clear case both in its grounds of appeal and in correspondence that they had been used before 1 August 2022. The point was not taken by either party but we note Regulation 111(2)(ii) appears to permit HMRC some discretion.

We agree that insofar as the time of supply of the purchase of the relevant goods predates registration, Regulation 111 applies and the Appellant must satisfy the conditions in Regulation 111(2)(a)(ii). Insofar as the input tax claim relates to supplies predating the EDR we therefore find that the Appellant is not entitled to claim the relevant input tax.

The second reason given by HMRC for refusing input tax recovery was that the Appellant had not produced relevant valid VAT invoices or the alternative evidence requested by HMRC which might persuade HMRC to exercise its discretion under Regulation 29(2) to permit recovery.

Regulation 29(2) provides:

“(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.”

The primary evidence required by Regulation 29(2)(a) is a VAT invoice from the supplier. The VAT invoice is the document required to be issued by the supplier in accordance with Regulation 13. That document must contain the information and otherwise comply with the conditions set out in Regulation 14.

During the check HMRC requested a number of VAT invoices from the Appellant, initially in respect of the five largest supplies but then in respect of other purchases. We were taken in the hearing to the following invoices:

These invoices, represented by a rough estimation of both parties at the hearing some 25-40% of the input tax being reclaimed. We understand that there were no other invoices produced by the Appellant to HMRC to support its claim.

The alternative information and documents requested by HMRC and provided by the Appellant were as follows:

Ms Wilkinson was very clear in her evidence that if there were no invoices or only defective invoices she was prepared to consider other evidence, particularly if there had been bank statements showing payments by the Appellant. However, the alternative evidence produced by Appellant did not show a sufficient link between the VAT reclaimed and purchases and payments made. Further it was not possible to identify whether the purchases related to sales made before or after EDR. There may well be recoverable VAT but HMRC was unable to identify it. The position was made worse by uncertainties about when the Appellant should have been registered by, the timing of the sales of the properties and their proper VAT treatment.

The burden of proof in this appeal was on the Appellant to show on a balance of probabilities, that either it had valid VAT invoices to support the input tax claim or that HMRC unreasonably refused to accept alternative evidence.

The Appellant accepts that it has not produced VAT invoices for most of the input tax claim and has not supplied to HMRC good alternative evidence. Mr Murphy accepts in hindsight he should have kept better records, but he did not at the time realise he had to because this was before he was advised that the Appellant could register for VAT.

Insofar as the Appellant has produced invoices, we agree with HMRC that they do not meet the conditions in Regulation 14.

In our view HMRC has given the Appellant every opportunity to demonstrate it was entitled to recover the input tax claimed in the 09/22 return. We accept Ms Wilkinson’s evidence that had suitable alternative evidence such as bank statements, an accurate purchase ledger or VAT account been provided she would have exercised HMRC’s discretion in Regulation 29(2) and considered accepting the alternative evidence. However, we agree that in the circumstances HMRC was entitled to decline to exercise its discretion under Regulation 29(2) as the Appellant failed to produce suitable alternative evidence to justify input tax recovery.

Decision

We therefore find that in respect of those supplies where the time of supply predates the effective date of registration the Appellant is not entitled to reclaim its input tax.

Further, we find that the invoices produced to us did not comply with Regulation 14(1). Finally, we find that as regards the entire claim for input tax (whether evidenced by such invoices or not) the Appellant has not established that HMRC was unreasonable in refusing to exercise its discretion under Regulation 29(2) to accept alternative evidence.

The Appellant is therefore not entitled to the input tax claimed in the 09/22 return.

Accordingly, the Appellant’s appeal is dismissed.

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.