Weekly VAT Update – 23 May 2017
Right of recory of input tax in respect of a design and build contract
This First Tier Tribunal case is very interesting as it involves the property sector and a related company providing a design and build construction service – a business model in the property sector that so many will recognise. The appellant was Oval Estates (Bath) Limited (OEB), the recipient of the design and build services. The family that owned it also owned many other companies, many SPVs for specific building projects, and most, if not all of them, contained the name Oval.
The case concerns the recovery of input tax of £33,350 in respect of a supply from one of the other Oval companies, as well as a penalty of £28,346. The invoice in question was from Oval Building Contractors (OBC) no. 265 which stated:
“Quantity 1.00 Details Works carried out on Unit 3 Unit Price 166,747.90 Net Amount 166,747.90 VAT Rate 20.00 VAT 33,349.58 Total Net Amount 166,747.90 Carriage Net 0.00 Total Tax Amount 33,349.58 Invoice Total 200,097.45.”
The figure of £166,747.90 was supported by a valuation. It appears that not all invoices relevant to the case were 100% accurate and, because OBC became insolvent, the flow of funds between related companies was not fully supported by an audit trail.
HMRC contended that invoice no. 265 was not attributable to an identifiable supply, that the description of the supply was inaccurate, that the invoice was not a valid VAT invoice, that there was no evidence the invoice had been paid, that the invoice was connected with fraud and, finally, to justify the penalty that OEB had engaged in “deliberate and concealed behaviour”.
The case was a straight fight as to the facts with the two parties putting their opposing evidence to the tribunal. Although the invoice, in respect of VAT law was invalid, the Tribunal found that it was clear that the supply was to OEB who had a right to deduct the input tax, and also that the invoice in question had been paid partly by offsetting. With regard to the allegation of fraud, HMRC argued that the invoice had been raised when OBC knew that it would not be able to pay the VAT to HMRC because of its insolvency. But the Tribunal found that the delay in posting the invoice was innocent and due to work pressures, rather than deliberate conduct and it declined to find that OEB was dishonest or fraudulent. The appeal therefore succeeded and the input tax was recoverable – no penalty was therefore due.