Scott Joseph Studio Limited v The Commissioners for HMRC

The issue in this decision is whether parts of the Appellant’s appeal should be stuck out under Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 on the basis that the Appellant has no reasonable prospects of success.

I was served an hearing bundle for the purposes of the hearing. There were no witness statements but Mr Joseph gave limited evidence in the hearing about aspects of the Appellant’s business and the VAT dispute.

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 Appellant is a company incorporated on 4 May 2020 by its owner and sole director Mr Joseph with a business stated to be that of graphic design. Its place of business is Mr Joseph’s rented home.

The Appellant was registered for VAT as an intending trader with an effective date of registration of 1 April 2020 (“the EDR”).

The Appellant has made claims for input tax recovery in periods 07/20 to 09/23, including making an error correction notice for pre-registration input tax. The Appellant did not declare any output tax in any of these periods.

By assessments dated 8 February 2024 HMRC denied £62,511.66 of the Appellant’s claims for input tax. The assessments were the subject of an internal review which on 18 April 2024 upheld the assessments in full. The Appellant appealed to this Tribunal.

On 10 April 2024 HMRC applied to the Tribunal to strike out £49,674 of the Appellant’s appeal.

This decision is concerned with whether to grant HMRC’s application and if so in respect of which parts.

This is an application by HMRC to strike out part of the Appellant’s appeal under Rule 8(3)(c) of the Tribunal Rules;

“The Tribunal may strike out the whole or a part of the proceedings if…

(c|) the Tribunal considers there is no reasonable prospect of the appellant’s case, or part of it, succeeding.”

The Upper Tribunal in HMRC v Fairford Group plc (in liquidation) & Ors [2014] UKUT 0329 (TCC) provided guidance for the Tribunal as to how to apply this test at [41]:

“In our judgment an application to strike out in the FTT under Rule 8(3)(c) should be considered in a similar way to an application under CPR 3.4 in civil proceedings (whilst recognising that there is no equivalent jurisdiction in the First-tier Tribunal Rules to summary judgment under Part 24). The Tribunal must consider whether there is a realistic, as opposed to a fanciful (in the sense of it being entirely without substance) prospect of succeeding on the issue at a full hearing, see Swain v Hillman [2001] 2 All ER 91 and Three Rivers (see above) Lord Hope at [95]. A ‘realistic’ prospect of success is one that carries some degree of conviction and not one that is merely arguable, see ED & F Man Liquid Products v Patel [2003] EWCA Civ 472.  The tribunal must avoid conducting a 'mini-trial'. As Lord Hope observed in Three Rivers, the strike-out procedure is to deal with cases that are not fit for a full hearing at all.”

I accept this is the correct approach to apply in this application.

HMRC have rejected the Appellant’s claim for a number of reasons, including that there was no evidence of the Appellant carrying on a business or intention to make taxable supplies. Those arguments are the subject of the main appeal but this application was made on more limited grounds. Further, the application proceeded on the assumption that the Appellant was carrying on a business and making taxable supplies but HMRC have reserved its position to make that argument at the full appeal. I have proceeded on that basis.

HMRC made this application on three grounds each ground applied to discrete groups of input tax claims and can be considered in isolation, in effect three applications to strike out parts of the Appellant’s appeal. Those grounds are:

It is not possible or appropriate to consider the large number of individual input tax claims in this application. I have therefore sought to decide this matter by category and leave it to the parties to apply to each individual claim.

It became apparent from the papers and at the hearing that the Appellant’s input tax reclaims which are the subject this application were made on a very simple, that is to say, straight forward, basis. In broad terms Mr Joseph’s position is that a cost should generate a VAT reclaim. It is also clear that Mr Joseph has not appreciated the distinction between himself and his company, the Appellant. Further, the administrative requirements of VAT record keeping and the technical conditions for recovering VAT do not appear to have been obvious to him. All of this has caused Mr Joseph considerable frustration. Nevertheless, whether or not the Appellant has valid input tax claims needs to be considered in accordance with the technical requirements of the VAT legislation.

During the course of the hearing Mr Joseph made a number of wider arguments and complaints about HMRC’s behaviour in the VAT investigation and wider issues with corporation tax and research and development credits. As I pointed out during the hearing these were not relevant to the issues in the strike out application and I therefore do not deal with them in this decision.

Before considering HMRC’s grounds for the application it is convenient to cover first an argument made by the Appellant as to the application of Regulation 111.

The Appellant argues that HMRC’s strike out application must in any event fail because Regulation 111, dealing with pre-registration and/or pre-incorporation expenses, imposes a time limit on HMRC’s ability to assess. That being the case HMRC assessment is out of time and, in effect, the strike out application irrelevant.

On the Appellant’s argument input tax on goods can be claimed up to 4 years before the effective fate of registration and 6 months for services (Regulation 111(2)(b) and (d)).

Regulation 111(2) provides insofar as relevant:

“(2)

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

(a)

…

(b)

subject to paragraph (2A), (2C) and (2D) below, in respect of goods which had been supplied to, or imported or acquired by, the relevant person more than 4 years before the date with effect from which the taxable person was, or was required to be, registered;

(c)

…

(d)

in respect of services which had been supplied to the relevant person more than 6 months before the date with effect from which the taxable person was, or was required to be, registered; or

(e)

…

(2A)…

(2B) In paragraph (2) above references to the relevant person are references to—

(a)

the taxable person; or

(b)

in the case of paragraph (1)(b) above, the person to whom the supply had been made, or who had imported or acquired the goods, as the case may be.”

Thus, on the Appellant’s argument, as the EDR is 1 April 2020, input tax can be reclaimed on goods from 1 April 2016 and for services 1 October 2019. HMRC are subject to the same time limit and so it’s ability to challenge the Appellant’s claims under Regulation 111 expired on 1 October 2020 for services and 1 April 2024 for goods.

I do not accept the Appellant’s argument. Leaving aside that HMRC assessed on 8 February 2024, within the Appellant’s time limits for goods, in my view it is clear that Regulation 111 does not impose any time limit on HMRC’s ability to assess. To the extent there is a time limit it is on a newly registered or incorporated taxpayer’s ability to backdate its claim. The time limits on HMRC’s ability to assess are to be found in sections 73 and 77 VATA and set limits based on the prescribed accounting period in which the input tax is claimed. Here the earliest such period is July 2020. No argument has been put forward to me based on those provisions.

I therefore reject the Appellant’s argument.

HMRC argued that £4,921.89 of the input tax claimed related to expenditure by Mr Joseph for personal use. This argument had two aspects, First the costs had been incurred by Mr Joseph personally and not the Appellant and, second, they were expenses of a kind which could not be claimed as input tax.

In the hearing Mr Joseph argued that the Appellant did have a bank account but accepted that the Appellant only made transfers from that account to the Appellant of funds in lump sums and did not reimburse Mr Joseph for specific expenses. Mr Khan argued that HMRC had never been sent any details of the Appellant’s bank account or relevant bank statements. From the correspondence between the parties I understand Mr Joseph’s position to be that he had an account in his name that he used for the Appellant’s business.

As to the type of expenditure incurred there were a large number of purchases but adopting HMRC’s categorisation:

Mr Joseph argued that there was a broad test for what amounted to business expenditure. Further, home based creative businesses have complex boundaries for business and personal expenses. Even if there was an element of personal use, this would need to be the subject of a partial recovery (section 24(5)). All of these issues required a full hearing at which the Tribunal could examine the evidence.

The test to be applied from Fairford is whether there is “a realistic, as opposed to a fanciful prospect of succeeding on the issue at a full hearing” and the Tribunal must avoid a mini trial.

Mr Joseph conceded in the hearing that some claims, specifically the Now TV, betting, credit card and PayPal claims were not valid. We agree and these claims should be treated as withdrawn or otherwise struck out.

On the balance of these claims, in my view the Appellant does not have a realistic chance of winning in a full appeal. It may be (and this should not be taken as expressing any view on substantive merits) in some cases arguable that the nature of the purchases are such that the Appellant could in principle recover the associated input tax, for example computer equipment. However, it is clear that the costs of all these claims were incurred by Mr Joseph and never reimbursed by the Appellant. For pre-incorporation supplies I note Regulation 111(b)(i) but the point must also be the case generally that the purchases were not by the Appellant and the Appellant did not incur the VAT. On that basis I cannot see how the claims could realistically succeed.

HMRC applied for £4,254.01of the input tax claimed to be struck out on the basis that it related to expenditure on zero rated purchases and therefore there was not input tax to recover. The supplies and the input tax reclaims made were as follows:

Mr Joseph argued that in each case there was an argument that the supplies should be standard rated and that the nature of the supply and the legal arguments over their VAT status needed to be considered in a full hearing. Mr Joseph did not offer any further analysis or illustrate why this was the case.

Mr Khan suggested the VAT treatment was clear, with no reason to suggest that the supplies would be standard rated.

Mr Joseph did not suggest the Thames Water bill was anything except the normal utility bill for domestic water and I cannot see how Schedule 8, Group 2 would not apply and Mr Joseph did not offer a reason. Similarly for the TfL costs, which I take to be for underground, buses and so on in London, no reason has been provided by Mr Joseph as to why schedule 8, Group 8 Item 4 for public transport does not apply and I cannot envisage one.

HMRC have mischaracterised the VAT treatment of the rent as being zero rated when it would be exempt under Schedule 9 but that is a distinction without a difference in the current circumstances. The Appellant’s business is run from Mr Joseph’s home which he rents. The Appellant has not presented an argument as to how the rent could be standard rated, for example the space occupied by the Appellant was not a dwelling or that the restrictions on opting to tax in paragraph 5 of Schedule 10 VATA did not apply and the landlord had in fact opted to tax. I cannot see a credible argument that would result in the rent being standard rated.

I therefore agree with HMRC that there is no realistic prospect of the Appellant succeeding in arguing that these supplies were standard rated.

HMRC have applied to strike out £40,499.14 of the Appellant’s appeal on the ground that the Appellant did not provide HMRC with a VAT invoice or, in the absence of an invoice, alternative evidence sufficient to enable HMRC to exercise their discretion under Regulation 29(2) to accept alternative evidence.

Mr Khan explained that in deciding to make the strike out application HMRC took this point in respect of those input tax claims where the Appellant has failed to provide any evidence at all. Where there is some evidence HMRC did not think it appropriate to apply for a strike out and those claims are part of the balance of the appeal not subject to the strike out application.

The relevant requirement under consideration here is that, even if the taxpayer is otherwise entitled to recover input tax, in order to be entitled to input tax recovery it must either hold a VAT invoice or HMRC must exercise its discretion to permit the taxpayer to hold alternative evidence. The relevant provisions are in Regulation 29(1) and (2)):

“29 Claims for input tax

(1)

Subject to paragraph (1A) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable save that, where he does not at that time hold the document or invoice required by paragraph (2) below, he shall make his claim on the return for the first prescribed accounting period in which he holds that document or invoice

…

(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 VAT invoice must contain the information and otherwise comply with the conditions set out in Regulation 14.

Where the taxpayer does not hold such an invoice then, under Regulation 29(2), HMRC may direct that the taxpayer should hold evidence other than a VAT invoice. If HMRC decline to exercise their discretion then the trader’s input tax claim fails because it has not satisfied the evidential requirements in Regulation 29.

Where a taxpayer challenges HMRC’s exercise of that discretion the test to be applied is set out by the Upper Tribunal in FS Commercial Ltd v R & C Commrs [2025] BVC 502;

Mr Joseph argued that the test in FS Commercial did not apply on the grounds that the Appellant’s appeal was under section 83(1)(c) and (p) where the Tribunal has full appellate jurisdiction. I disagree, section 83(1)(c) and (p) simply gives the taxpayer the right to appeal against a denial of input tax or the amount of an assessment. Within the VAT legislation there are instances, such as Regulation 29(2) where the issue concerns the exercise of HMRC’s discretion and the Tribunal has a more limited supervisory jurisdiction. Necessarily those circumstances will arise when there has been an appeal under section 83(1)(c) and (p). FS Commercial binds this Tribunal and I will apply it.

It is relevant to note that the test is to be applied based on the evidence held by HMRC at the time, not any further information that might be provided later by the taxpayer.

In considering HMRC’s strike out application therefore and applying the cumulative effect of Fairford and FS Commercial, the test is whether there is a realistic prospect of the Appellant successfully arguing in the full appeal that HMRC, in refusing to accept alternative evidence, reached a decision that no reasonable body of Commissioners could have reached.

HMRC’s position is that, as regards the input tax claims subject to this strike out application, the Appellant produced no relevant evidence at all.

Mr Joseph argued that he had produced a lot of evidence during the nearly 11 months of the enquiry. If it was not provided it was because HMRC failed to ask for it. In any event additional information could be provided to bridge the gap. Modern business practices mean that evidence can be provided by alternative means such as electronic invoices, bank statements, e mail confirmations and digital payment confirmations. Further, this type of factual issue is inappropriate for a strike out application and should be considered in a full hearing.

Whether or not HMRC exercised its discretion under Regulation 29(2) in inherently fact sensitive and not particularly suitable to a strike out application. However, the Tribunal’s jurisdiction is supervisory and so the bar for the taxpayer to overcome is high.

In the current circumstances Mr Joseph argues that he has provided a lot of evidence and he can provide more. The only evidence a Tribunal can consider is that which was provided at the time HMRC exercised their discretion not to accept alternative evidence. For current purposes I take that to be either the assessment of 8 February 2024 or the review conclusion letter of 18 April 2024.

I note from the hearing bundle that HMRC has made a number of requests in 2023 for documents. Mr Joseph has responded to those requests. However, whilst the evidence that has been provided by Mr Joseph may be extensive, it relates to his purchase of the goods and services. The Appellant did not have a bank account, the bank statements produced to HMRC were in Mr Joseph’s own name and Mr Joseph has not pointed to any evidence that the Appellant bought the goods and services which are the subject of the input tax claim.

In the circumstances, and conscious that in a full hearing the Appellant would need to overcome a high bar in showing that HMRC reached a decision that no reasonable body of Commissioners could have reached, I find that the Appellant has no realistic prospect of success on this point.

For the reasons I have set out above HMRC’s application to strike out the Appellant’s claim in part is granted.

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.