Weekly VAT Update – 24 January 2017
Validity of Input tax deduction under self billing arrangement
In this Court of Appeal decision the taxpayer was a scrap metal dealer who operated under the self billing arrangement, even though he did not have the required self billing agreements with suppliers in place. In October 2008 the taxpayer was visited as part of HMRC’s “National Scrap Metal Campaign” and from this, it was found that four of the suppliers had deregistered for VAT. This meant that the self billing documents were not proper “tax invoices” HMRC wrote to the taxpayer in March 2009 confirming that the self billing invoices were not valid for input tax deduction purposes and an assessment, under Section 73 of VATA 1994.
The taxpayer asked for a local review to be carried out by HMRC and the taxpayer’s representative asked HMRC to exercise its discretion to accept alternative evidence for input tax deduction as per Regulation 29(2). Largely because the taxpayer had operated the self-billing system incorrectly, HMRC said that it would be inappropriate. On appeal the Fist Tier Tribunal ruled in favour of the taxpayer on the basis that the assessment was not valid as HMRC had not exercised its discretion properly.
There then ensued a convoluted passage in the case in which the Upper Tribunal referred the matter back to the First Tier Tribunal but the case ended up at the Court of Appeal. The Court of Appeal held that the Upper Tribunal had made a mistake in referring the matter back to the First Tier Tribunal. It believed that the First Tier Tribunal had determined that HMRC had not exercised its discretion in accordance with Regulation 29(2). If HMRC could have shown that it had exercised its discretion and the result was the same, then the assessment would still stand. However there was nothing to demonstrate that HMRC had considered other evidence in support of input tax deduction, and that it was not clear if HMRC would have raised an assessment had they done so. The Court of Appeal therefore allowed the traders appeal and restored the decision of the First Tier Tribunal that had allowed the appeal against the assessment.
This appeal matter had been processing for eight years and if nothing else demonstrates that complying with procedures in the correct manner and order is imperative.
Input Tax on construction of a sound studio never used
Gravel Road Records Limited appealed against HMRC’s decisions (a) to deregister it for VAT with effect from 29 May 2009, (b) to reduce a VAT repayment claim to ‘nil’ for the period 03/12 and (c) to issue a VAT assessment relating to the previous VAT returns on which VAT had been reclaimed. These actions were consequent upon HMRC’s conclusion that no business activities had taken place during the period of VAT registration and that the Appellant therefore had no entitlement to claim repayment of the input tax it had suffered. The appellant had registered as it was planning to trade as a sound recording studio. It had signed a contract to acquire an existing business but it was not in a position to offer production and sound recording services immediately because it first had to construct the studio. To that end it took a lease of industrial premises in Wantage and engaged builders to undertake the necessary conversion work. The space that was to be created included the recording studio with an office at the front, a ‘meet and greet’ area and a kitchen and toilets. Mr Townsend, a director, produced photographs of the studio facility during construction and at completion, as well as invoices in respect of rent, rates and electricity.
Initially two clients were going to use the studio and the estimated income was £140,000 per year. In any event, by the time the recording studio was ready CMR Nashville/Django Productions, as well as another company that had agreed a fee of £36,800 had decided to use another recording studio. Mr Townsend said that had the construction of the studio been completed within the projected timeframe and without technical delays that had been encountered, then the level of projected business from these two clients would have made economic sense and would have allowed the Appellant to gain an industry-faced reputation that could have generated an increased and unsolicited client base later on. Unable to find alternative clients the Appellant ceased to trade in 2012 and forfeited its lease.
The Tribunal considered that the scale of investment in the construction and equipping of the recording studio in leased industrial premises points to an intention to pursue a commercial business activity. The construction and equipping of this recording studio does not appear to the Tribunal to be a ‘hobby’ activity. It was financed almost entirely by a third party, Icealarm Limited, and there was nothing to contradict Mr Townsend’s evidence that Icealarm was investing in a recording studio that was intended and designed (and had at the outset the potential) to repay its investment and to make a commercial return for it on that investment. It found that the Appellant at all times intended to carry on a commercial business activity that was intending to make taxable supplies and was entitled to request that it be registered for VAT. The Tribunal therefore conclude that HMRC were wrong to cancel the Appellant’s registration retrospectively from the date of registration. The Tribunal allowed its appeal on that issue, and following on the assessment designed to recover input tax previously repaid to the Appellant should also fail and the decision to refuse repayment of input tax claimed for the period 03/12 should be reviewed. A good result for the trader, and an interesting case for intending traders with capital assets to construct before trading can take place.