20333

VAT – ASSESSMENT – VAT on rents – Respondents concede no output tax due – input tax claimed on charges for management services – Respondents contend no supply of management services – satisfied on balance of probabilities there was supply of management services for consideration – Appeal allowed against the assessment except for a sum for £1,221 which was not disputed by the Appellant   

LONDON TRIBUNAL CENTRE

	TOWER CLEANERS	Appellant
(Partnership)
	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      KEN GODDARD MBE               (Member)	  

Sitting in public in Lowestoft on 11 July 2007

Mrs Marion Ayres for the Appellant 

David Manknell, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against an assessment in the sum of £19,415 plus interest issued on 2 December 2003, which was reduced on review dated 22 May 2006 to £18,813 plus interest.
2.	The assessment comprised three elements:
(1)	£1,221 which was a calculation error in respect of output tax for the week ending 4 February 2002.
(2)	£13,962 incorrectly claimed input tax on management charges raised by Tower Administration Limited for the periods ending 01/03 and 04/03.
(3)	£3,630 which represented VAT on the rents for three shops.
3.	The Respondents in response to directions issued by the Tribunal following the hearing on 11 July 2007 agreed with the Tribunal’s interpretation of the law that no VAT was chargeable on the rents for the three shops. In those circumstances the Respondents have reduced the disputed assessment by £3,630 which left £15,183.
4.	The Appellant did not contest the calculation error of £1,221 which according to Mrs Ayres had now been paid by the Appellant.
The Dispute
5.	The dispute concerned the sum of £13,962 which the Appellant claimed as input tax on management services supplied by Tower Administration Limited. The Respondents contended that the Appellant was not entitled to the input tax because the Appellant had failed to provide sufficient evidence that the management services had in fact been supplied. The Appellant submitted that the supplies had taken place Further the correct amount was £10,494.75 not £13,962.
6.	The issue for determination is whether the Appellant can establish on the balance of probabilities that Tower Administration Limited supplied the Appellant with management services for the periods ending 01/03 and 04/03.
The Hearing
7.	Mrs Marion Ayres, a partner, gave evidence on oath for the Appellant. Mr Malcolm Reader who carried out the review of the assessment gave evidence on behalf of the Respondents. The Tribunal received a bundle of documents.
The Facts Found
8.	We made the following findings of fact:
(1)	The Appellant was a partnership registered for VAT from 15 March 1973 to 1 November 2005. The partners were Mr and Mrs Ayres. The Appellant’s business was the supply of dry cleaning services. 
(2)	In 1973 Mr and Mrs Ayres started the partnership with one shop. The Appellant expanded its business which at its height had 18 shops employing 75 people. In 2004 the partnership was failing, owning just four shops operated by five staff members employed by Tower Administration Limited. The decline was a result of the shrinking market for dry cleaning services, which was perceived by the public as environmentally unfriendly.
(3)	In 2001 the Appellant’s accountant advised Mr and Mrs Ayres to set up a company, Tower Administration Limited, to supply the staffing and payroll services for the Appellant. The principal reason for setting up the company was to provide the Appellant with legal protection against actions taken by employees. Prior to the setting up of the company, the Appellant had been sued by one of its employees.
(4)	Tower Administration Limited operated out of the same business premises as the Appellant. The directors of the company were Mr and Mrs Ayres and their son and daughter. Tower Administration Limited held a separate bank account from the Appellant.
(5)	Tower Administration Limited held the contracts of employment for the staff who worked in the Appellant’s premises. Carlton Baker Clarke, chartered certified accountants, operated the payroll and issued the invoices for the supplies of services from Tower Administration Limited to the Appellant. 
(6)	Tower Administration Limited held the contracts for servicing the washing machines used in the Appellant’s business.
(7)	Mr Clarke of Carlton Baker Clarke confirmed in a letter to the Respondents dated 21 February 2005 that the invoice charges related principally to staff costs including employers’ national insurance. Mr Clarke also stated that there may have been an additional administration charge. The accountants were responsible for calculating the charges recorded on the invoice. The accountants obtained the information regarding staff hours from the Appellant.
(8)	Each invoice issued by Tower Administration Limited covered a four week period of management charges. The accountants, however, sent the invoices for payment at the end of each quarter.
(9)	The value of the monthly invoices gradually reduced from 2001 to 2004 reflecting the downturn in the Appellant’s business. The value of the invoice issued 3 September 2001 was £23,219.32 inclusive of VAT compared with £10,591.23 inclusive of VAT for invoice dated 28 May 2003.
(10)	Mr Clarke on behalf of the Appellant supplied copies of six invoices issued by Tower Administration Limited to the Appellant for management charges in respect of staff wages from week ending 6 December 2002 to 30 May 2003. Five of the invoices (30 November 2002 to 25 April 2003) related directly to the disputed assessment for the periods 01/03 and 04/03. There was no invoice for the supplies in November 2002 which formed the first month of the disputed assessment.  The invoices recorded VAT at 17.5 per cent which totalled £12,072.17, of which £10,494.75 applied to the five invoices for the period 30 November 2002 to 25 April 2003. 
(11)	The Respondents did not challenge the Appellant’s repayment claims in respect of the supplies of Tower Administration made prior to the period ending 01/03. 
(12)	The Respondents refused to meet the Appellant’s repayment claims for the periods 01/03 and 04/03 because the Appellant failed to satisfy them that a supply had taken place, in particular the Appellant supplied no satisfactory evidence of payment between the Appellant and Tower Administration Limited despite eight requests for the information.
(13)	 As the Appellant only received the invoices from Tower Administration Limited at the end of each quarter, the Appellant paid the weekly wages direct to the staff engaged in its business. The Appellant then at the quarter end paid the VAT on the return for Tower Administration Limited.
(14)	The Appellant produced four cheque stubs recording four payments of £17,382.36, £1,500, £1,503.50 and £5,778.67 respectively to Tower Administration Limited on 14 January 2003, 28 January 2003, 7 February 2003 and 10 February 2003. The payments were for:
•	£17,382.36 – VAT return for Tower Administration  Limited
•	£1,500 – VAT penalties of Tower Administration Limited
•	£1,503.50 – Servicing charges for the washing machines
•	£5,778.67 – Management charges of Tower Administration Limited  
(15)	The Appellant was unable to produce a complete set of documents regarding payments made to Tower Administration Limited because the  archive box for the year in question had been stored in a barn and the documents inside had been destroyed by mice. The Appellant supplied the Tribunal with a physical example of a damaged document.
(16)	Tower Administration Limited submitted VAT returns for periods 11/02, 02/03 and 05/03 but only made the payment on the 11/02 return. The company ceased trading after April 2003. The Respondents instigated winding up proceedings against Tower Administration Limited with the result that it was declared insolvent in January 2004 with a debt of £28,342.50 to the Respondents. The members of staff employed by Tower Administration Limited were made redundant. 
Reasons for the Decision
9.	Section 73 of VATA empowers the Respondents to raise assessments for unpaid VAT or to recover VAT which has been wrongly repaid or credited as input tax to the taxpayer. The assessment issued on 2 December 2003 combined separate assessments under sections 73(1) and 73(2) of the 1994 Act.  The assessment for the disputed input tax was made under section 73(2) on the ground that the Appellant was not entitled to recover the VAT on the supplies of management services by Tower Administration Limited. The Appellant raised no issue about whether the assessment was made to best judgment which applied to that part of the assessment under section 73(1) conceded by the Respondents at the end of the hearing.
10.	Under section 25 of the VAT Act 1994 a taxable person is entitled at the end of each accounting period to credit for input tax paid on taxable supplies of goods or services made by a taxable person. Section 24(6) (a) of the 1994 Act enables Regulations to be made which provide for VAT to be treated as input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the Regulations or the Commissioners may direct either generally or in particular cases or classes of cases. Regulation 29(2)(a) of the VAT Regulations 1995 requires a taxable person to hold a VAT invoice for the supply from another taxable person, in respect of which a claim for input tax is made. Regulation 14(1) of the 1995 Regulations specifies the contents of a VAT invoice. 
11.	The following conditions must be met for input tax credit to be available:
(1)	a supply must have taken place;
(2)	the input tax credit is claimed by the  person to whom the supply is made;
(3)	the recipient of the supply is or required to be registered for VAT;
(4)	the supply is chargeable to tax at the rate claimed;
(5)	the claimant intends to use the goods or services for his business purposes;
(6)	the claimant must hold satisfactory evidence of his entitlement to input tax credit.
12.	The Respondents contested the Appellant’s claim for input tax for the periods 01/03 and 03/04 because the Appellant failed to satisfy them that it had received supplies of management services from Tower Administration Limited. The Respondents limited their challenge to the question of whether the supplies had actually taken place. They raised no other ground for objecting to the Appellant’s input tax claim. The Respondents’ submission of no supplies relied on the Appellant’s failure to provide them with satisfactory evidence of payment for the management services. Further they pointed out that Tower Administration Limited had not accounted for output tax on the supplies of management services to the Appellant during the relevant quarters.  In contrast Mrs Ayres insisted that the Appellant paid for the management services. In her view the Respondents had been premature with their action to wind up Tower Administration Limited, which prevented the company from accounting for the input tax.
13.	Technically the Appellant’s entitlement to claim input tax on the management services supplied by Tower Administration Limited did not depend upon whether it actually paid for the services. The Appellant was eligible for the repayment if the supplies for consideration took place and the other conditions in paragraph 11 above were met. The Respondents relied on the apparent uncertainty about payment to challenge the very existence of the supplies of management services. In view of Mrs Ayres’ evidence of the unorthodox nature of the payments for the services, Respondents’ counsel advanced an alternative argument at the hearing that the supplies were artificial and not bona fide. Although this argument was not advanced in the Respondents’ statement of case we have decided to consider it as part of our deliberations.
14.	We make the following findings of fact about whether Tower Administration Limited supplied management services to the Appellant during the relevant periods:
(1)	The Appellant and Tower Administration Limited were separate legal entities.
(2)	The rationale for setting up Tower Administration Limited was to give protection to the partners of the Appellant from prospective legal action by employees by making Tower Administration Limited the employer of the staff engaged in the Appellant’s business. Tower Administration Limited in turn charged the Appellant for the services of its employees. We found the arrangements between the Appellant and Tower Administration Limited plausible and made for good business reasons. 
(3)	The Respondents did not withhold the Appellant’s repayment claims on the supplies of management services by Tower Administration Limited prior to the disputed periods of 01/03 and 04/03.
(4)	 The wages and national insurance costs of the staff engaged in the Appellant’s business formed a substantial part of the charges for management services invoiced by Tower Administration Limited. 
(5)	There was a reduction in the charges for management services in the disputed periods from the charges imposed in 2001 which corresponded with Mrs Ayres’ evidence about the decline in business and the laying off staff.
(6)	We placed weight on the correspondence from Carlton Baker Clarke, a firm of chartered certified accountants, confirming the existence of the supplies of management services by Tower Administration Limited during the disputed periods.
(7)	  We were persuaded on the balance of probabilities by Mrs Ayres’ testimony and the documents produced that the Appellant met its liability to Tower Administration Limited in respect of its charges by paying the wages direct to the staff engaged in its business and transferring the outstanding balance to the bank account of Tower Administration Limited so that it could meet its VAT liabilities. 
(8)	We consider the Appellant’s method of meeting its liabilities was a practical response to the demands of its business. It ensured that the staff engaged in its business received their weekly wages, and reduced the administrative demands on the Appellant and Tower Administration Limited.
15.	  We are satisfied from the above findings of fact that the Appellant has established on the balance of probabilities that Tower Administration Limited supplied management services to the Appellant during the disputed periods 01/03 and 04/03.  Our findings did not support the Respondents’ assertion that the arrangements between the Appellant and Tower Administration Limited were artificial and without substance. 
16.	  The Appellant supplied copies of invoices of the management charges from Tower Administration Limited covering the period from 1 December 2002 to 30 April 2003. The invoices supplied met the requirements of regulation 14 of the 1995 VAT Regulations, and constituted satisfactory evidence of the Appellant’s entitlement to VAT credit in accordance with regulation 29 of the 1995 Regulations. The amount of VAT recorded on the invoices to 25 April 2004 was £10,494.75 which was about £3,000 less than the assessment. The missing £3,000 would be accounted for by the VAT on the management charge for November 2003 which was not evidenced by an invoice at the hearing. 
17.	In their statement of case the Respondents’ sole ground for the assessment of £13,962 against the Appellant was that no supply of management services took place between Tower Administration Limited and the Appellant. We found otherwise. The Respondents did not challenge the Appellant’s eligibility to the disputed input tax on any other ground. 
Decision
18.	We find that on the balance of probabilities that Tower Administration Limited supplied management services to the Appellant for consideration during the periods 01/03 and 04/03. The Respondents’ assessment for £13,962 was based solely on the ground that no supplies took place. In those circumstances we allow the Appellant’s Appeal against the assessment for £13,962. The Respondents have conceded the Appellant’s Appeal in respect of the assessment for £3,630 the purported VAT on the rents for three shops. The Appellant agreed that it made a calculation error of £1,221 output tax for the week ending 4 February 2002.  The Appellant did not apply for costs. We, therefore, make no order for costs.

19.	In a letter dated 26 July 2007 the Appellant applied for interest on the sums of money wrongly retained by the Respondents. We give leave to either party to apply to the Tribunal to determine the issue of interest in the event of disagreement between the parties about the appropriate order of interest.  

                             

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 5 September 2007

LON/06/710