AA Com Limited & Ors v The Commissioners for HMRC

HMRC contended (in summary) that AAC had reclaimed input tax on invoices that were invalid for VAT purposes. These were principally invoices from ETL, which showed a Hong Kong address and did not include a VAT amount.

AAC did not dispute that the ETL invoices were not valid VAT invoices. The invoices in dispute in the bundle clearly do not include any VAT element and we therefore find that they are not valid VAT invoices for the purposes of claiming a deduction for input tax.

Mr Javaid contended for AAC that the supplies had been made by a different, UK VAT-registered entity that was closely linked to ETL and that HMRC should have exercised their discretion to allow a deduction for the input tax in those circumstances.

HMRC contended (in summary) that VTL had failed to account for purchases invoiced by ETL in its VAT returns and had not accounted for onward sales of those purchases. VTL had not issued invoices to customers who purchased cards supplied by ETL.

Mr Javaid agreed that VTL showed nil purchases from ETL and did not declare the onward sales. His evidence was, first, that this was done by the accountant to show that there was no difference in what would be accounted for to HMRC. He subsequently stated that this was because they had changed to a commission structure from input VAT. As already noted above, we find that neither AAC nor VTL acted as agents on a commission basis but, instead, acted as principal.

Mr Javaid contended in correspondence that the companies did not hold activated cards and that the cards should therefore be regarded as having no value, so that no taxable supply took place. HMRC disputed this on the basis that the cards were single purchase vouchers on which VAT was to be accounted from when the cards were supplied to AAC or VTL.

HMRC contended that the companies should have applied the reverse charge provisions in respect of supplies from ETL. Mr Javaid disputed this on the basis of the contentions made above, that there was an agency arrangement, or no taxable supply, or a supply by a UK company.

We have considered these issues in the following order:

Mr Javaid contended that AAC and VTL had acted as agents for the mobile phone card providers, rather than as principals. On that basis, he contended that the companies were only required to account for VAT on the commission received.

HMRC contended that the evidence indicated that there was no agency agreement and that AAC and VTL acted as principal in buying and selling the cards. Further, the provisions of s47 VATA 1994 meant that, as they were transacting in their own names, they would be treated as receiving and making the supplies from 17 July 2014 in any case.

Mr Javaid’s contention was at odds with his witness statement, which described the companies as making purchases from wholesalers and selling on to retailers. Further, The contention that AAC was acting as an agent was not raised during the HMRC visits; the business model was explained as AAC purchasing phone cards from the manufacturers and selling them principally to retailers although they also sold to some wholesalers. AAC stated that the cards were treated as a purchase and supply of goods or single-purpose vouchers. Once VTL took over AAC’s business, Mr Javaid’s evidence was that it continued to trade in the same way as AAC had done.

Mr Javaid contended that this business model was effectively the same as agency: the companies’ margin between the purchases and the sales should be regarded as commission and so they should only have to account to HMRC for the VAT on that margin, which he considered that they had done. We also noted that, throughout the hearing, he referred to purchasing and selling the cards in a manner consistent with acting as principal, rather than agent.

In correspondence, ‘walkthrough’ information was provided which was contended by Mr Javaid to show that there had been no loss of tax to HMRC in the arrangements used compared to a commission structure. This was to support the contention that the companies should be regarded as having operated on a commission basis. It was also indicated, without any supporting evidence, that VAT invoices had been raised in respect of sales solely because HMRC had stated that this was necessary, rather than output tax being calculated on the basis of commission only.

Considering the evidence before us, we find that the VAT returns were completed on the basis that AAC and VTL were buying and selling the cards: whilst the net VAT due to HMRC might reflect a margin, that does not mean that AAC or VTL only accounted to HMRC for output VAT on their margin. The returns clearly account for input VAT and output VAT on sales and purchases and do not account only for output VAT on commission. The fact that a buy/sell arrangement may produce a similar net output VAT position to agency does not mean that the two types of arrangement are interchangeable.

For the avoidance of doubt, at this point we are considering only the agency issue: in that context, we make no comment at this stage on the accuracy of the input and output VAT accounted for.

The reporting on the VAT returns is not determinative of a tax position: we therefore have considered the evidence and the submissions made by the parties as to the existence or otherwise of an agency position.

There were no contracts provided between AAC or VTL and any of the mobile phone card providers from which they purchased cards, so there was no clear contractual position. Mr Javaid accepted that, whilst there might have been contracts early on, there were no recent contracts because he considered that there had not been any need for contracts. Neither AAC nor VTL raised any invoices in which they charged the providers for agency services. The card providers invoiced the companies for the cards supplied to them. The limited communications provided with the mobile phone providers do not refer to either company as an agent.

Mr Javaid’s case was that AAC and VTL met the requirements of HMRC’s guidance on agency, for the following reasons:

Mr Javaid contended that the cards belonged to the providers, as they were their products and identified as such. Extracts from the Nowtel and Talkhome website were provided in support of this.

However, there is nothing in those extracts that indicates that title to the products remains with the providers. The fact that they have produced the cards, and that the cards have their branding, does not mean that the providers must necessarily have retained title to (that is, ownership of) the cards. There was no other evidence provided to support the contention that title in the cards did not pass to AAC and/or VTL.

We give no weight to this contention as these are not goods in respect of which the nature and value could be changed; they are end products and not raw (or intermediate) materials for incorporation, amendment or adjustment.

This contention was not supported by the evidence: Mr Javaid accepted in the hearing that the providers did not know the prices at which AAC and VTL sold the cards on to purchasers.

These was no support for this contention: Mr Javaid’s submissions indicated that the companies received what he described as commission of £2,500. In the hearing, he explained that the companies were given extra cards - usually with a face value of £2,500 - by the providers. The companies sold these cards and kept the receipts; there was no evidence as to how much those cards were sold for. On the evidence before us, we consider that the extra cards were effectively an in-kind fee paid to AAC and VTL for acting as distributors; taken together with the other evidence, this did not amount to commission paid to an agent.

Mr Javaid’s agents had contended in correspondence that the companies’ profit margins were too small for them to be acting as principal, and that the risk taken by a principal in respect of, for example, bad debts meant that they would require a larger reward. They contended that the very low margins meant that AAC and VTL had to be acting as agents.

In the hearing, however, Mr Javaid accepted that AAC and VTL did take the risk on bad debts as they would be liable to pay the providers even if AAC and VTL were not themselves paid by their customers.

Weighting up all of the evidence, we find that neither AAC nor VTL were acting as agents. The companies clearly dealt with the cards as principal, buying and invoicing customers in their own names. They were able to set their own prices, albeit constrained by what the market would bear. The providers did not know the prices at which the cards were sold. The companies bore the risk of bad debts. Mr Javaid’s evidence was that the companies made a profit on the sale of cards purchased, in addition to the amounts earned from the sale of the extra cards provided to them. None of this is consistent with an agency arrangement.

The ‘walkthrough’ information was of no assistance; it was not evidence that the companies had operated on an agency basis. It provided calculations to show that a commission/agency structure would result in similar amounts of VAT being due to HMRC; a calculation on a hypothetical basis showing little or no difference in VAT is not evidence which supports a finding that a commission/agency arrangement existed. Even if the VAT accounted for would be the same or similar, it does not mean that a particular commercial arrangement could be deemed to have existed where there is no evidence in support of such an arrangement.

As we find that AAC and VTL were acting as principals, not agents, they were liable to account for input VAT on purchases and output VAT on sales, not simply to account for output VAT on their commission.

We have not discussed the provisions of s47 VATA 1994, which could deem a person to be acting as principal in certain circumstances, as there has been no need to do so.

Given that finding, we now turn to consider the remaining issues with regard to each of AAC and VTL.

In correspondence, and in the grounds of appeal, there was some contention that the supplies by ETL should not have been subject to VAT because the cards were supplied unactivated and VAT on these products is not chargeable until the cards are activated.

In correspondence with HMRC in July 2017, Mr Javaid contended that there had been no taxable supply made by ETL because the cards supplied were not activated and so VAT was not due on their supply. There was no explanation as to why VAT had been reclaimed on the ETL invoices, if this was the case. The correspondence stated that the cards were passed on to retailers before being activated and that it was the retailers who would have the right to recover input tax and the obligation to account for output tax. The correspondence also stated that these were cards for which the company only had delivery notes, and for which it issued only delivery notes to its customers.

With regard to the contention in correspondence that there had been no taxable supply by ETL because the cards were not activated on supply to the companies, it was clear from the records that were available that AAC had calculated input tax on the basis of invoices issued to them by ETL. The companies had explained in visits that they were invoiced by suppliers once cards were activated.

We consider that it is clear from the invoices that a taxable supply of cards by ETL was made to the companies, which then made an onward supply of those cards, so that Mr Javaid’s contentions in correspondence were not made out: these were not cards in respect of which the companies had only received delivery notes, rather than invoices.

HMRC further contended that the phone cards were single purpose vouchers which are treated for VAT purposes as a supply of telecommunications services which is taxable when the cards are issued, following the change in law in the UK as a result of the decision of the CJEU in Lebara (C-520/10) which concluded that the sale of telecommunications cards such as those dealt with by AAC and VTL was a supply of services made by the provider to the distributor at the time of the initial supply of the card. It was not a supply to the subsequent retailer or user of the card on redemption of the card. As a result, HMRC contended that the supply of the cards to AAC and VTL was a taxable supply.

In the hearing Mr Javaid stated that he did not know what was meant by a single purpose voucher, saying that they dealt with single purpose vouchers if that meant international cards and top-up cards, but he also commented that it was sometimes possible to buy other things with phone credit such as coffee. Accordingly, we conclude that he understood the distinction between single purpose vouchers and multi-purpose vouchers.

Despite Mr Javaid’s contentions, there was no evidence to show that any of the cards purchased and sold by AAC and VTL could be used to acquire anything other than telecommunications services. In the hearing he subsequently amended his comment about using credit to purchase goods to refer instead to the card providers sometimes giving users offers for little things such as coffee. Accordingly, even Mr Javaid’s own evidence did not mean that any credit related to the card could be used to purchase anything other than telecommunications services. He accepted in the hearing that the cards were single purpose vouchers.

Accordingly, we consider that this ground of appeal is not supported by any evidence and does not assist the companies’ position. We find that the supplies to the companies were supplies of cards carrying the right to receive telecommunications services, and that these were taxable supplies of telecommunications services for VAT purposes in the hands of the companies and that activation of the cards had no effect on the VAT treatment of the cards.

Mr Javaid contended, in correspondence and his grounds of appeal, that HMRC should have exercised their discretion under Regulation 29(2) of the VAT regulations to accept alternative evidence of the charge to VAT. He contended that the officer should have considered that:

Hr further contended that the HMRC officer had in fact failed to consider the discretionary powers at all, and that the failure to consider those powers meant that the assessment was invalid.

HMRC contended that they had been provided with no alternative evidence that there had been a charge to VAT by the supplier in respect of the relevant invoices. In this context, they contended that the position was analogous to that in Zipvit [2018] EWCA Civ 1515, where the Court of Appeal concluded that one of the main purposes of the mandatory requirement for a VAT invoice was to enable the tax authority to monitor payment by the supplier of the tax for which a deduction was sought.

It was contended that the purpose of the discretion was to enable taxpayers to provide additional evidence of information which should have been in the invoices but was not. As had been the case in Zipvit, AAC and VTL had not produced any evidence that VAT had been accounted for by the supplier. Therefore, also as found by the court in Zipvit, in the absence of any evidence that the supplier had accounted for VAT, HMRC could not exercise the discretion in Regulation 29(2).

The discretion under Regulation 29(2) allows, but does not require, HMRC to allow input tax to be deducted where the taxable person supplies evidence of the information which ought to have been in the invoices in the first place but was not.

We note that the burden of proof is on AAC and VTL to show that HMRC’s decision regarding discretion is one that could not have been reasonably made on the basis of the material available to HMRC at the time that the decision was made (Tower Bridge GP [2022] EWCA Civ 998). Our jurisdiction is supervisory; we cannot substitute our own discretion for that of HMRC (Kohanzad [1994] STC 967).

The contention that HMRC failed to consider their discretion at all is not made out. In the course of the hearing we were shown a number of pieces of correspondence from HMRC asking the companies to provide evidence to enable them to decide whether to exercise their discretion in favour of the companies. Mr Javaid could not explain why the information had not been provided, but did not dispute that the correspondence had been received.

In the circumstances, we find that HMRC did consider their discretion and so move on to consider whether their decision not to exercise that discretion in favour of the companies was unreasonable.

There was no dispute that the cards had been supplied, and that payment had been made. However, the companies’ contention that the supply had been made by a VAT registered company and VAT charged was disputed.

Mr Javaid contended that the supply had been made by Nowtel, and that this company was linked to ETL. Although he accepted that the invoices were issued by ETL, that the invoices had a Hong Kong address and no VAT details, and that ETL were based in Hong Kong, he stated that the companies had never received any supplies from Hong Kong and that all communications had been with Nowtel in the UK in respect of these supplies and that payment had been made to Nowtel. He had provided delivery information which showed that the cards had been delivered from addresses in the UK. He had also provided Nowtel’s group accounts for 2015 and 2016 to HMRC which he stated showed that Nowtel controlled all of the group from the UK. He accepted that the Nowtel group had different products under different companies.

Mr Javaid stated in the hearing that the ‘walkthrough’ of their processes referred to above in respect of the agency argument would show that all communications had been with Nowtel and that the invoices were provided by email from Nowtel, rather than ETL directly. They had had no contact directly with ETL or anyone outside the UK. The supply process for products from ETL was the same as that for products from Nowtel. He considered that it was clear that the supplies to AAC and VTL were a UK-to-UK taxable supply as a result.

Mr Javaid stated that he believed that his accountant would have checked that ETL was VAT registered, and he believed that his accountant had told him that ETL was registered as Nowtel UK Ltd. However, Nowtel had refused to provide any VAT invoices for the supplies. Mr Javaid provided screenshots of WhatsApp messages with a representative of Nowtel in which he had asked for copies of such invoices.

We accept Mr Javaid’s evidence that the companies did not receive any supplies which had been shipped directly to them from Hong Kong. However, we do not accept that this must mean that the supply was not made by ETL; orders may be fulfilled by third parties at the supplier’s order - that does not mean that the supplier is not making the supply, nor does it mean that the supplier is based in the country from which the goods are shipped. The invoices clearly show supplies were made by ETL to AAC and VTL.

No due diligence regarding ETL was provided, either to HMRC when requested or to the Tribunal. HMRC were told by AAC staff that the due diligence was kept by Mr Javaid; in the hearing Mr Javaid denied ever having kept any such due diligence and that this would have been done by the accountants.

There was no evidence that Nowtel had made the supplies; whilst they may have passed on invoices, this is equally consistent with them acting on behalf of ETL; that does not displace ETL as the supplier. It also does not mean that Nowtel must have acted to provide a UK fixed place of business for ETL; there was no evidence that ETL had a UK fixed place of business. The assertion that Nowtel’s group accounts for 2015 and 2016 showed that it controlled ETL from the UK was not substantiated: those accounts show only that ETL’s share capital was owned by a UK company. Such ownership alone does not mean that ETL was controlled from the UK, and there was no other evidence provided to show that ETL was so controlled.

Mr Javaid’s assertion that payment was made to Nowtel for ETL invoices is not supported by bank statements provided in correspondence, which showed payments being made to ETL. Mr Javaid accepted in the hearing that he knew that ETL were involved in the supply and that the invoices were from ETL in respect of these transactions “from day one”.

The WhatsApp messages which purport to show Mr Javaid seeking VAT invoices refer to requests in 2019 and, apparently, 2018. These were sent long after HMRC’s investigations began and do not support any contention that the companies sought, or held, valid VAT invoices in respect of ETL’s supplies at any earlier time.

We reviewed the ‘walkthrough’ information provided in the bundle: the covering email with the information, and the information itself, made it clear that the purpose of the ‘walkthrough’ was not to show that there was a UK-to-UK-taxable supply but, rather, to show that there had been no loss of VAT to HMRC through the companies’ claims for input tax in comparison with a hypothetical commission basis. The ‘walkthrough’ test information was of no assistance with regard to the question of whether the supplies were made by a VAT registered company as it did not contain any information to show that the supplies had been so made.

Accordingly, the contention that the supplies were made by a UK VAT registered company is not made out. To the extent that the companies intended to contend that ETL was registered for VAT in the UK, that has also not been made out as no evidence was provided to support the contention.

We have dealt with this point here because it was raised in the grounds of appeal in respect of the exercise of discretion. It is, however, of no particular assistance - even if the company had been UK VAT registered, the point remains that AAC and VTL did not provide any alternative evidence of information which was missing from the invoices which is required for a valid VAT invoice (notably, but not only, the VAT amount charged).

In the circumstances, we find that HMRC considered the exercise of their discretion. We also find that their refusal to exercise their discretion was reasonable in the circumstances, given that no alternative evidence of the missing information required for a VAT invoice to be valid had been provided.

We note from Zipvit (2018] EWCA Civ 1515) that a failure to provide an invoice which does not show any VAT accounted for is not something which is capable of being corrected by alternative evidence. At [117] of Zipvit, the judge noted that “the inability of Zipvit to produce a compliant VAT invoice [in context, one which shows payment of VAT] in support of its claim to deduct input tax is in my judgment fatal.” Given that no such alternative evidence has in any case been provided, and the evidence shows that no such invoices were held at the time of the input tax claim, we have noted this for completeness.

HMRC maintained that both AAC and VTL should have applied the reverse charge provisions to supplies received from ETL, as these were provided by an entity which belongs in a country other than the UK. With regard to the assessments under appeal, only the VTL assessments relate to the reverse change. HMRC raised assessments on AAC in respect of the reverse charge, but these have not been appealed.

Mr Javaid did not make any submissions with regard to the reverse charge; he relied principally on his contentions that VTL were acting as agents or alternatively that HMRC should have exercised their discretion to accept alternative evidence. He stated in the hearing that the reverse charge was a technical matter which he did not understand and for which he would have relied on his accountants.

AAC and VTL accepted that they did not apply the reverse charge on the supplies received from ETL. It was not disputed that ETL’s address was in Hong Kong or that it was a Hong Kong-registered company. As noted above, there was no evidence that it had a fixed place of business in the UK (whether through Nowtel or otherwise). We accept HMRC’s evidence that ETL was not part of any Nowtel VAT group. We find therefore that ETL belonged outside the UK for VAT purposes.

Having concluded (as set out above) that the supply of cards was subject to VAT as a supply of telecommunications services we note that at all relevant times, the place of supply of telecommunications services for VAT purposes was defined by paragraph 8 of Schedule 4A of VATA 1994 as being in the UK where the services are to any extent used and enjoyed in the UK.

The evidence provided was that the cards were for use in the UK; a user obtained the services by calling a UK access number in order to then place an overseas call with the credit available on the card. As such, we find that the telecommunications services were to be used and enjoyed in the UK.

The supply by ETL was, therefore, a taxable supply of telecommunications services by a supplier which did not belong for VAT purposes in the UK. The place of supply of those services was in the UK.

The requirements for the reverse charge provisions therefore applied and we find that VTL should have applied the reverse charge provisions to the supplies received from ETL and therefore should have accounted for output VAT under the reverse charge in respect of those supplies. For the avoidance of doubt, the same would apply to AAC.

AAC and VTL did not challenge the assessments as not being to best judgement, and Mr Javaid did not put any questions in cross-examination to the HMRC witnesses. The assessments were based on the ETL purchase figures provided by the companies. Having considered the evidence before us, we consider that the provisions of s73 VATA 1994 are met and, bearing in mind the principles derived from Van Boeckel ([1981] STC 290), we conclude that the assessments under appeal were issued to best judgement.

We find that the companies have not met the burden of proof on them to displace the quantum of the assessments. The supplies were made to the companies as principals; the supplies were supplies of cards carrying a right to receive telecommunications services, subject to VAT when supplied to AAC and VTL; AAC deducted input tax in circumstances where it was not eligible to do so as it did not hold valid VAT invoices; VTL (and AAC) failed to account for output tax on the supplies received from ETL under the reverse charge provisions; VTL failed to account for output tax on the onward supply of the cards supplied by ETL (this was not disputed by Mr Javaid, who relied on the agency argument in respect of VTL).

The assessments are therefore upheld in full and the appeals against the assessments are dismissed.

Having upheld the assessments, we have established that the relevant VAT returns for AAC and VTL contained inaccuracies which let to an understatement of liability to VAT.

The assessments raised in respect of AAC for the 10/15 periods onwards were not appealed and so those assessments established that there were inaccuracies in the VAT returns for those periods which led to an understatement of liability to VAT.

As such, the initial condition for imposition of penalties for the relevant periods has been established.

The penalties for AAC and VTL were raised on the basis of deliberate behaviour. HMRC contended that this was shown by the fact that HMRC had repeatedly advised AAC and VTL that input tax could only be deducted where a valid invoice had been obtained and also that they needed to apply the reverse charge to supplies from an overseas supplier. Despite this repeated advice, AAC had continued to deduct input tax on supplies from ETL and had not applied the reverse charge provisions to those supplies.

When VTL took over the business from AAC, because of the dispute with HMRC, it continued not to apply the reverse charge to supplies from ETL and also failed to account for output tax on the onward supply of cards from ETL. Given the repeated advice given by HMRC, it was submitted that the companies’ continued provision of inaccurate returns was deliberate.

HMRC also contended that Mr Javaid knew, from his experience with a previous company, that the companies should have been operating the reverse charge on supplies from ETL and that the failure to do so was therefore deliberate.

Mr Javaid had been involved with another company, also called Victory Telecom Limited (Old VTL). This company had carried on a similar trade, buying and selling phone cards. They had used the same accountants as AAC and VTL. That company had omitted purchases from its records and also failed to account for output VAT on the sales. Some of the suppliers of the omitted purchases were based outside of the UK. Old Val, and therefore Mr Javaid, were advised in correspondence and the assessments that reverse charge applied where supplies were received from outside the UK.

Penalties on the basis of dishonesty were raised on Old VTL. Part of those penalties were transferred to Mr Javaid, on the basis that the deliberate behaviour was in part attributable to him. The penalty transferred to Mr Javaid was settled by agreement with HMRC, with Mr Javaid accepting that there had been dishonest evasion of VAT. In the hearing Mr Javaid disputed this, and contended that they had simply wanted to close the matter rather than spend money fighting the assessments and penalties.

Mr Javaid contended that he was acting throughout on accountants’ advice and that this was all too technical for him to understand. He contended that the accountants had advised him to claim VAT in AAC based on the total charged by ETL because the companies had to charge output VAT to customers. When the business was transferred to VTL, he had been advised that they should account for tax only on the margin earned on sales of cards supplied by ETL. He considered that this was the same as commission. He accepted that they did not do the same thing for other suppliers but had not asked why, as he did not have technical knowledge and relied on his accountant. Mr Javaid stated several times during the hearing that there would be correspondence to support this in the bundle. There was no such correspondence.

Mr Javaid also contended that the business model meant that he would not have been able to do business if he could not deduct input tax in respect of the supplies from ETL, as the companies’ margin was approximately 0.5%, which meant that they would be unable to account for 20% VAT on the onward sales without an input tax deduction.

Mr Javaid accepted that he did not consider that the failure to provide invoices was a reason to stop purchasing from ETL: he considered that HMRC should have stopped ETL from issuing invoices from Hong Kong.

From the evidence before us we conclude, on the balance of probabilities, that the inaccuracies in both returns were the result of deliberate behaviour.

Given the assessments and penalties raised for Old VTL in similar circumstances, which had the same accountants, we do not consider it plausible that Mr Javaid (and therefore AAC) were not aware of the need to have valid VAT invoices in place before deducting VAT. Mr Javaid agreed in the hearing that input VAT could only be deducted where the legal requirements for deduction were complied with.

We also do not consider it plausible that Mr Javaid (and therefore AAC and VTL) were not aware of the need to apply the reverse charge on supplies from outside the UK. Even if he did not know the precise detail (and we note that he had qualified as an accountant, albeit not in the UK) we consider that he would have been aware that such supplies needed to be dealt with in a particular way for VAT and could not simply be treated in the same way as UK supplies; he would certainly have been reminded once HMRC advised AAC of the need to account for the supplies under the reverse charge provisions.

We consider that there was a deliberate choice made on behalf of AAC not to apply the reverse charge because doing so would mean that the company would make a loss on sales of ETL cards. Rather than cease to do business with ETL, the company chose to deduct an amount of input tax which it had not been charged and continued to do so even after HMRC had informed them that they did not have the required evidence to do so and had advised them that the reverse charge provisions should be applied.

Given the dispute with HMRC in respect of AAC led to VTL taking over the business of AAC, we consider that the choice to continue to do business with ETL and to choose not to account for its purchases and sales of ETL cards was also deliberate. Despite Mr Javaid’s contentions as to commission earnings, VTL did not change the AAC business model; as already established above it was not acting as an agent and, given that it did not account for any other card sales in this way, we conclude that VTL (through Mr Javaid) did not have any reason to consider that they were acting as agents at the time of the transactions or when the VAT returns were completed.

We conclude therefore that AAC and VTL provided VAT returns to HMRC which they knew to contain inaccuracies with the intention that HMRC should rely on those returns with regard to the companies’ input VAT and output VAT positions. We find that the characterisation of the behaviour as deliberate was correct.

Mr Javaid made no submission as to the mitigation given by HMRC in respect of the penalties. Having considered the evidence before us we consider that some of the mitigation given by HMRC was on the generous side, but do not consider that it is appropriate to alter the mitigation given.

For the reasons set out above, we upheld the penalties issued to AAC and VTL in full and the appeals in respect of the penalties are dismissed.

HMRC stated they would transfer liability for a penalty under paragraph 19 of Schedule 24 Finance Act 2007 where either the officer sought to gain personally from the inaccuracy or the company is insolvent or likely to become involved.

HMRC contended that AAC was insolvent; a winding order had been made against it. Although that order had been stayed pending the resolution of these appeals, if the Tribunal were to find in favour of HMRC then AAC would be insolvent. HMRC also contended that VTL was likely to become insolvent if the Tribunal were to find in favour of HMRC in respect of these appeals, given the small margins on which the company operates. Neither of these contentions were disputed by Mr Javaid.

HMRC contended that it was appropriate to transfer 100% of the penalty to Mr Javaid as he was the sole director of AAC and VTL for the periods to which the penalties relate, and he had accepted that he had control of the companies. As the sole shareholder he would also benefit personally from the inaccuracies.

From the findings above, we conclude that the deliberate behaviour of AAC and VTL was attributable to Mr Javaid; he was in control of the companies and, given his previous experience with Old VTL, we find that he knew that AAC and VTL were not accounting correctly for VAT and that he did not do anything to correct the inaccuracies after they were identified by HMRC. He continued the inaccuracies even after transferring the business to VTL as a result of HMRC’s actions in respect of AAC.

As it was not in dispute that the companies would become insolvent if their appeals were unsuccessful, and as we have dismissed the companies’ appeals and concluded that there was deliberate behaviour with regard to the inaccuracies in the companies’ VAT returns, we find that the penalties were appropriately transferred to Mr Javaid under paragraph 19.

Mr Javaid’s appeal against the attribution of the penalties to him is therefore 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.

ss24(1) and (2) of the Value Added Tax Act 1994 (VATA 1994) define “input tax” and “output tax”. VAT on the supply to a taxable person of any goods or services used or to be used for the purposes of any business carried on by that person is “input tax”. “Output tax” means (in this context) VAT on supplies that made by a taxable person.

s25(2) VATA 1994 requires a taxable person at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under s26, and then to deduct that amount from any output tax that is due from him.

s26 VATA 1994 allows a taxable person credit at the end of any period for the input tax on supplies, acquisitions and importations in the period which relates to taxable supplies made by that person (subject to regulations which set out what may be credited).

s7A VATA 1994 sets out the general rule that services supplied to a taxable person for the purposes of their business are treated as supplied in the country in which the taxable person belongs. The place of supply of a right to services is the same as that in which the supply of the services would be treated as made.

In the relevant VAT periods under assessment, paragraph 8 of Schedule 4A VATA 1994 provided that telecommunications services which were effectively used and enjoyed in the UK were to be treated for VAT purposes as supplied in the UK, even if the supply might be treated as taking place outside the UK under the general rules.

s8 VATA 1994 sets out he reverse charge provisions which apply where a UK business recipient receives services which have their place of supply in the UK from a supplier who belongs outside the UK. In such a case, the supply must be treated as a taxable supply made by the recipient, which must account for output tax on the supply (and can then deduct corresponding input tax where eligible to do so).

s9 VATA 1994 defines the place of belonging of a supplier or recipient of services as being the country where that person has their business establishment; if they have more than one business establishment, then the relevant place of belonging is the business establishment most directly concerned with the supply.

s73 VATA 1994 provides that where a person has failed to keep any documents and afford the facilities necessary to verify such returns, or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.

Paragraph 5 of Schedule 11 VATA 1994 states that VAT due from any person shall be recoverable as a debt due to the Crown. VAT shown on or included in an invoice shall be recoverable from the person who issued the invoice.

The Value Added Tax Regulations 1995 (SI 1995/2518) set out requirements in respect of VAT invoices.

Regulation 13 requires VAT invoices to be provided by taxable persons making a taxable supply in the UK to another taxable person.

Regulation 14 sets out the information required to be stated on a VAT invoice, including the VAT registration number of the supplier, the total amount of VAT chargeable, and the rate of VAT charged.

Regulation 29 states that a valid VAT invoice must be held before input tax can be deducted. This is subject to Regulation 29(2) which states that input tax may be deducted where the taxable person “shall hold, or provide, such other evidence of the charge to VAT as the Commissioners may direct.”

Schedule 24 Finance Act 2007 sets out provisions imposing penalties on taxable persons who give HMRC documents with inaccuracies. The level of the penalty will depend on whether the behaviour which led to the inaccuracy was careless or deliberate and sets out the basis on which mitigation will be given.

Paragraph 19 of Schedule 24 provides that HMRC can effectively transfer a penalty imposed on a company for a deliberate inaccuracy which was attributable to an officer of the company. Such proportion of the penalty (up to 100%) as HMRC specify can be transferred to that officer.