20949
INPUT TAX – whether or not there was a genuine supply of services – no – whether it was mandatory that the Commissioners should pursue the issuer of the invoices for a debt due to the Crown – no – appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					BODYGUARD WORKWEAR LTD	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Chairman)
		John Lapthorne FCMA (Member)
					
Sitting in public in Birmingham on 14 & 15 October 2008 and 16 December 2008

Ian Spencer, VAT consultant, for the Appellant

Julian Winkley, Counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

1.	The Appellant appeals against an assessment to tax in the amended sum of £74,374 plus interest dated 4 January 2007 and in respect of tax periods 10/04 and 01/05.  The assessment was raised under Section 73 (2) (a) VAT Act 1994 (“the Act”) to recover input tax claimed by the Appellant on supplies of services which the Appellant claimed to have received from a company called UCAT Ltd (“UCAT”), it being the contention of the Commissioners that no supply had taken place and there was thus no entitlement to input tax.  It was not in dispute that the invoices had been paid.
2.	On behalf of the Appellant, we heard oral evidence from Mrs. Anne Reid and Mr. Anthony Quinn, both officers of HMRC and Mr. Edward Frith, accountant and tax consultant.  For the Respondents, we heard evidence from Mr. Barry Bartley and Mr. Albert Samujh.
3.	The Appellant, Bodyguard Workwear Ltd (“Bodyguard”) manufactures protective clothing for workforces.  On 10 March 2006, Bodyguard was visited by officers Bartley and Samujh.  Their visit was arranged following a reference arising out of an earlier VAT inspection to verify a claim to input tax on certain invoices rendered by UCAT to Bodyguard.  The officers met Mr. Kamal Basra, the managing director of Bodyguard and its accountant Mr. Stephen Power.  Mr. Basra provided copies of the invoices, of which there were seven.  They were dated 11 October 2004, 18 October 2004, 25 October 2004, 1 November 2004, 8 November 2004, 15 November 2004 and 22 November 2004.  The first four purported to be in respect of “services rendered for year ending 31/12/03” and were each in the sum of £62,500 plus VAT.  The latter three were for “services rendered during year ending 31/12/04” and were all for £58,333.  All seven were in the following identical form:
“Executive Services:
Mr. Kamal Kumar Basra
Mr. Prithvi Raj Basra
Mr. Sunil Kumar Basra
Mr. Anil Kumar Basra
Mr. Asha Devi”
4.	Mr. Basra advised the officers that the invoices were in respect of payroll services for three of the Bodyguard directors, namely Anil, Sunil and Raj.  Bodyguard had been looking to outsource its entire payroll.  They had looked on the internet without success but then received a cold call, in around mid-2003, from a gentleman representing UCAT.  Mr. Basra could not recall the man’s name but thought it was Barker although the ledger referred to him as Steve.  Mr. Basra told the officers that he initially decided to pilot a scheme with just three directors.  When asked what the executive services were for, Mr. Basra replied that it was in effect bonus payments for the directors who had entered into contracts of employment with UCAT.  Under the contracts, the directors became employees of UCAT; were paid by UCAT but continued their normal work for Bodyguard.  He went on to say that the men did nothing for UCAT and UCAT did nothing for Bodyguard.  Copies of the contracts were given to the officers.  There was one each for Kamal Basra, Anil Basra and Sunil Basra.  They were in identical form, all were signed but the signatures were undated.  The documents were headed “Employment Contract” and were stated to be made on 1 May 2003.  The contracts were between UCAT and the named employee.  The employee’s duties were stated to be set out in an attached job description of which no copy was available (and it should be said has never been produced if indeed it ever existed).  UCAT contracted to pay the employee a salary of £100,000 per annum at annual intervals at the employer’s discretion.  There were then the usual clauses regarding holidays, sickness etc.  Termination was provided for on written notice and reference was made to a staff handbook for UCAT’s disciplinary and grievance procedures.  As with the job descriptions, no such handbook has ever been produced.  Mr. Basra said he had never visited UCAT’s premises but had checked them out at Companies House and had had some references for them.  No reference could be produced to the officers and none have been produced since.  Mr. Basra thought he had met Mr. Barker some three times in total.  Asked what happened after the invoices were paid, Mr. Basra told the officers the money came back as wages less PAYE deductions.  The wages were then declared as directors’ bonuses on the individual tax returns for 04/05.  The agreement was ended because Mr. Basra thought the service was slipping.  He had to chase UCAT up and felt he could no longer rely on them.
5.	Mr. Basra also produced to the officers a document headed “Contract for the Supply of Consultancy Services”.  This was dated 12 January 2004 although there was no indication  when it had been signed on behalf of the parties.  The contract was between UCAT and Bodyguard and recited that UCAT was engaged in the provision of consultancy services and had agreed to provide to Bodyguard services set out in an Assignment Schedule.  There was no copy of the Assignment Schedule available and again none has ever been produced.  The agreement provided for UCAT to draw up a timesheet which was to be signed by or on behalf of Bodyguard.  Charges were then payable by Bodyguard to UCAT calculated by reference to the number of hours for which UCAT had worked and the hourly rate and other expenses in accordance with the rates of payment as set out in the Assignment Schedule.  Monthly invoices were to be rendered.  The agreement was to be terminated upon completion of the assignment.  No timesheets have ever been produced.  Mr. Basra was asked what the consultancy services referred to were for but he seemed initially uncertain.  He referred to a recruitment service, to advice on stakeholder pensions and to human resource issues generally.  Mr. Power added that UCAT would also be providing the operation of the payroll and advice on all employment matters.
6.	Mr. Bartley on checking the figures was able to establish that the entire payment to UCAT, less the VAT, (£425,000) appeared to have come back in the form of remuneration and appeared on the employees’ tax returns as employees of UCAT.  It was thus apparent that UCAT had itself charged nothing for its services and had taken no profit.  The officers considered that there had been no supply.  They could not see that anything had changed within Bodyguard in the light of the arrangement with UCAT.  There was no correspondence between Bodyguard and UCAT; no timesheets; in fact nothing to demonstrate how UCAT had operated.  The services were stated to be in respect of five employees whereas officers were told it was in fact only three and this was borne out by what documentation was made available.  Mr. Bartley followed up the visit by a confirmatory letter of his view dated 29 March 2006.
7.	There then ensued extensive correspondence between Mr. Bartley and Mr. Spencer, who was brought in by the Appellant to advise.  He sought to clarify what had been said in interview and set out the position to be as follows.  Bodyguard was seeking the provision of a payroll and consultancy service.  Although Mr. Basra had told the officers they were not  in touch with anyone else, Mr Spencer maintained that Bodyguard had been in contact with other providers of similar services but elected to go with UCAT.  It was decided that rather than lodge with UCAT the salaries to be paid to the employees and have UCAT merely act as agents, it would be better for UCAT to employ the staff and then provide the staff to Bodyguard.  This would take the physical administration of the payroll away from Bodyguard and remove certain obligations of an employer.  UCAT would also then become responsible for all personnel issues.  Given that the relationship was a new one, it was decided that the proposed method should be trialled by just three directors being employed by UCAT and then supplied by them to Bodyguard in the capacity of executive directors.  If the trial was successful then over an agreed period of time the whole workforce would transfer.  Initially the trial had been a success but after a period of time it became obvious that UCAT could not provide the service that it had promised and the agreement was terminated with the three directors being reemployed by Bodyguard.  It was Mr. Spencer’s view that the three directors had contracts of employment with UCAT; UCAT had made a contract with Bodyguard to provide executive services and it was conclusive that UCAT had made a taxable supply of staff to Bodyguard.
8.	In the ensuing correspondence, Mr Bartley continued to hold his view highlighting the absence of any corroborative documentation such as job sheets, termination correspondence, the Assignment Schedule and timesheets.  Mr. Bartley pointed to the discrepancy in dates between the consultancy contract and the employment contracts and indeed to the discrepancy in the number of employees covered by the arrangement.  Mr. Spencer responded that Bodyguard had taken the decision to outsource personnel issues in early 2003 and to this end had contacted a number of providers and indeed had held preliminary discussions with them.  The trial itself did not begin until 2004 although contracts for the three directors had been provided during 2003 whilst preliminary discussions between UCAT and Bodyguard were taking place.  It remained Mr. Spencer’s view that unless the Commissioners viewed the arrangements as a sham, the fact that a valid invoice had been produced entitled Bodyguard to recover its input tax.  In response to a request for further information and corroboration, Mr. Spencer said (letter 7 August 2006) that the reason that there were no job descriptions, Assignment Schedules or timesheets was that the three directors being employed by UCAT were providing Bodyguard with the services which they always had provided whilst employed by Bodyguard.  Such documents were therefore unnecessary.  The agreement to terminate the contract was verbal and not written.  It remained Mr. Bartley’s view, backed up by his Supply of Services Team, that there had been no supply and there was therefore no entitlement to input tax.  Mr. Bartley subsequently raised his assessment.
9.	In cross-examination, Mr. Samujh was asked by Mr. Spencer if there was any evidence of collusion between UCAT and Bodyguard.  Mr. Samujh replied that he had seen no such evidence and his stance was merely that there quite simply was no supply.  Mr. Bartley, on the other hand, in reply to a similar question was of the view that Bodyguard had not acted innocently.  He had referred the case as a suspected fraud but understood that no action was being taken.  He confirmed that in the absence of any such action, Bodyguard would not be considered by the Commissioners to be fraudulent.
10.	By letter dated 5 December 2006, Mr. Spencer sought a reconsideration of the decision to assess.  He set out the factual background to the arrangement and also raised a number of points for consideration.  First, why would Bodyguard pay UCAT in excess of £500,000 if it had not received any supply?  Secondly, if UCAT were not making a taxable supply, why did the Commissioners allow them to register for VAT and why would UCAT charge £75,000 VAT if there had been no supply?  Thirdly, the Commissioners should act equitably in the treatment of registered traders and if the input tax is reclaimed by the Commissioners then they should not retain the amount paid by UCAT as output tax.  Fourthly, if output tax had not been accounted for, UCAT should be pursued for recovery of a debt due to the crown.
11.	The reconsideration was carried out by Mrs. Reid.  She described herself as not independent but as impartial.  She had seen all the correspondence and had discussed the case with the case officers.  On all the facts known to her she took the view that there had been no supply.  With UCAT taking no profit on the transaction, she also could not see the arrangement as the normal actions of a commercially aware business.  Further, she believed that Bodyguard had not acted in good faith in a way  consistent with the actions of a reasonable taxpayer and business entity.
12.	Mrs. Reid went on to consider whether there were grounds for remitting the disallowed input tax under ESC 3.9, the final paragraph of which reads as follows:
“Where such a person has made a supply to a taxable person and, on the invoice, showed or represented an amount as VAT, the recipient of the supply has no logical entitlement to treat that amount as his input tax.  If it is clear that the taxable person who received the supply has treated such an amount as input tax in good faith, action to recover the amount so deducted may be remitted on grounds of equity.”
Mrs. Reid did not believe Bodyguard had acted in good faith but more crucially she did not believe there had been any supply.  Discretion therefore could not be exercised in Bodyguard’s favour under this extra statutory concession.
13.	Mrs. Reid then turned her attention to the point raised by Mr. Spencer about the equity of recovering input tax from Bodyguard rather than pursuing UCAT.  To address this issue she sought guidance from the Policy Unit whom she briefed by email dated 19 July 2007.  In her email she set out the facts of the arrangement as known to her.  She had also looked into the position of UCAT and was able to advise the Unit that UCAT had never traded, had disappeared and had not accounted for output tax.  Mrs. Reid added, in her email, that it was the Commissioners’ belief that Bodyguard was complicit in the “VAT fraud” which, although not proven, would have given them a cash flow bonus in the form of the input tax.  Unfortunately Mrs. Reid was treating the enquiry as that of a “non-supply” with its technical meaning rather than a case of “no supply”.  She therefore referred the Unit to the guidance notes V1.35, Section 14.3.  This provides that in the case of a non-supply where tax is charged but not accounted for, because the supplier cannot be assessed as there is no liability to account for tax on non-supplies, the Commissioners can take corrective action against either the supplier or the recipient depending on which course is likely to be the more successful or economical.  Given UCAT’s now known trading position, Mrs. Reid recommended the Unit that Bodyguard should continue to be pursued and the assessment defended.  Mr. Spencer in cross examination referred Mrs. Reid to UCAT’s VAT returns which in fact, he maintained, indicated that Mrs. Reid had not been correct when she said that UCAT never traded.  The return for 03/04 declared taxable sales of £1,100.  For 06/04 a corrected return declared outputs of £15,200 against inputs of £90,000.  Returns had not been submitted for any subsequent period.  Mrs. Reid explained that she had not been aware of any of this.  Her sole concern was to check UCAT’s returns for the relevant periods to see if the corresponding output tax had been accounted for.  It had not, as no returns for the periods had  been put in.
14.	Mr. Spencer also put it to Mrs. Reid that UCAT should not in fact have been registered at all.  It transpires that a decision was made on 12 March 2007 to compulsorily de-register UCAT with effect from 1 July 2004.  Mrs. Reid had not been aware UCAT had later been deregistered.  Her concern was whether or not they were registered at the time the invoices were issued, which they were.
15.	Mrs. Reid’s request for guidance came before Mr. Quinn.  As asked, Mr. Quinn treated the problem as one of non-supply and applying 14.3 he supported Mrs. Reid’s supposition.  There was no chance of recovery from the supplier, therefore the assessment against the recipient should be pursued.  Mr. Quinn accepted that his advice would have been totally different had he known it was a case of no supply rather than non-supply.  He admitted that in reality his input was of very little value.  Having received Mr. Quinn’s advice, Mrs. Reid wrote again to Mr. Spencer by letter dated 17 August 2007, confirming her original view.
16.	No evidence was called by Mr. Spencer from Bodyguard itself and it fell therefore in effect to Mr. Frith to put Bodyguard’s case to the tribunal.  Mr. Frith is a self-employed accountant and tax consultant and was brought in by Bodyguard to deal with HMRC in relation to queries which they had raised with regard to the company’s corporation tax position.  Mr Frith told the tribunal that Bodyguard had been experiencing difficulties with its payroll and on the advice of its auditors had looked at bringing in an outside agency.  UCAT came to Bodyguard’s attention by way of a mailshot.  The company had looked at no-one else.  Bodyguard contacted UCAT, who offered to take over the entire human resource function.  The proposal was that all Bodyguard’s employees should enter into contracts of employment with UCAT.  An agreement would then be entered into between UCAT and Bodyguard under which UCAT would provide Bodyguard with the services of those employees.  Bodyguard decided they would initially trial the arrangement with just three of its staff, namely the managing director, Mr. Kamil Basra and two of his brothers who were not directors (contrary to what Mr. Basra had told the officers in interview and Mr. Spencer had repeated in correspondence).  The remit in respect of the three brothers was that they would be employed by UCAT under contracts of employment and UCAT would charge Bodyguard for their services.  They would continue doing for Bodyguard precisely what they had always done.  Nothing would change in their day to day roles.  After some time, communication between Bodyguard and UCAT became less good.  UCAT could not be reached.  They had billed Bodyguard, who had paid their invoices, and UCAT had paid the individuals having deducted and accounted for PAYE.  Mr. Frith was asked why the invoices purported to refer to five people rather than the three who were contracted to UCAT.  Mr. Frith put this down to an error in UCAT’s accounts department.  Miss Rainbow of HMRC had queried Bodyguard’s corporation tax payments.  Mr Frith provided Miss Rainbow with the employment contracts and the consultancy agreement and gave her all the information about the arrangement which the Commissioners were later given re. the VAT.  Miss Rainbow, we were told by Mr. Frith, accepted that there was a supply of services but her query was whether any of the payments could properly be attributed for corporation tax purposes to the year ending 31 December 2003 as they were in fact actually made at the end of the following year.  The issue which Miss Rainbow had was purely and simply one of timing of the payments in the accounts.  She had no problem accepting that there had been a supply.  Mr. Frith succeeded in persuading Miss Rainbow that the payments had been correctly recorded at the correct time and had been properly charged in the accounts and her enquiry concluded in January 2008 with no outstanding issues.
17.	Mr. Frith was asked in cross-examination what evidence there was of UCAT having done anything under the consultancy agreement.  His response was that during the eighteen-month duration of the arrangement, no human resources issue arose.  If it had done, UCAT would have dealt with it but as it was, they merely had to attend to payment of their employees.  Mr. Frith did not know how the brothers were paid from May 2003 to November 2004.  He suggested it would be by way of directors’ loan account but then accepted that only Mr. Kamal Basra was in fact a director.  He then suggested that as the brothers all lived in the same house they might have gone unpaid and pooled resources for their living expenses.  Mr. Frith confirmed that 1 May 2003 was the effective date when the brothers entered UCAT’s employment but could not explain the time lapse between that date and 12 January 2004 when the consultancy agreement appears to have been set up.  He also confirmed that the three brothers continued to provide exactly the same services to Bodyguard as they had been doing when employed by Bodyguard and there would therefore be no outward manifestation of any change.  Mr. Frith did not know why, when or how the agreement between UCAT and Bodyguard was terminated.  He had told Ms. Rainbow that Bodyguard had been “badly let down” by UCAT but accepted that this was supposition.  When UCAT disappeared he assumed they had been doing something they should not but he was not actually aware of any triggering event.
Legislation
18.	The relevant legislation is set out in the Value Added Tax Act 1994.  Section 4 provides for the charging of VAT on a taxable supply of services made by a taxable person in the course of furtherance of his business.  Section 5(2) defines a “supply” as “all forms of supply, but not anything done otherwise than for a consideration”.  Section 24(1)(a) defines input tax in relation to a taxable person as the VAT on the supply to him of any goods of services being goods or services used for the purpose of any business carried on by him.  Sections 25 and 26 give a taxable person the right to credit for input tax incurred by him.
Case law
19.	We were referred to the following cases:
•	Genius Holding BV v Staatssecretaris van Financien Case 342/87 ECJ [1991] STC 239
•	Farm Facilities (Fork Lift) Ltd v Commissioners of Customs & Excise LON/86/655, 2366
•	Royal College of Obstetricians and Gynaecologists and others v Commissioners of Customs & Excise MAN/96/967, 14557
•	The Withies Inn Ltd v Commissioners of Customs & Excise 14257
•	Van Boeckel v Commissioners of Customs & Excise 1981 2Aller 505
•	Rahman v Commissioners of Customs & Excise (No. 2) 2002 EWCA
•	Sandell v Commissioners of Customs & Excise 9665
Submissions
20.	Mr. Spencer’s submission was basically twofold.  First UCAT had made a supply to Bodyguard for which Bodyguard had paid and Bodyguard was therefore entitled to recover its input tax.  Secondly, if the tribunal finds that no supply took place then the Commissioners should not have pursued Bodyguard for recovery of input tax but should have looked to UCAT for recovery of a debt due to the Crown.  Mr. Spencer’s arguments in respect of his first contention that there was a supply were twofold.  First, the facts and the evidence demonstrated the existence of a supply.  Secondly and further, the Commissioners, in the form of Miss Rainbow, had already accepted that the three Basra brothers were employees of UCAT and that a supply had been made by UCAT to Bodyguard.  The documents and evidence in front of Miss Rainbow were exactly the same as those which were before the VAT officers and it was not therefore open to the officers to reach a conclusion which differed from that already reached by Miss Rainbow.  Bodyguard had, argued Mr. Spencer, a legitimate expectation that it would be dealt with in an even-handed manner and it should not be subjected to different treatment by the same institution on precisely the same evidence.  Further, the decision to assess was not made on best judgment because not only did the officers not consider all the information which was available to them but because they believed that Bodyguard was complicit in a fraud, their objectivity was compromised and their decision tainted.  The officers should have consulted Miss Rainbow and ascertained why she had reached the decision which she had and they should also have consulted with their own PAYE team.  There were further resources open to the officers and they had deliberately chosen not to avail themselves of them.  Mr. Spencer’s alternative argument that, in the event of the tribunal finding there was no supply, the Commissioners should have pursued UCAT rather than Bodyguard was based on a reading of paragraph 5, schedule 11 VATA which provides as follows:
“5-(1) VAT due from any person shall be recoverable as a debt due to the Crown.
(2) Where an invoice shows a supply of goods or services as taking place with VAT chargeable on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoice as VAT or, if VAT is not separately shown, to so much of the total amount shown as payable as is to be taken as representing VAT on the supply.
(3) Sub-paragraph (2) above applies whether or not – 
(a)	the invoice is a VAT invoice issued in pursuance of paragraph 2(1) above; or
(b)	the supply shown on the invoice actually takes or has taken place, or the amount shown as VAT, or any amount of VAT, is or was chargeable on the supply; or
(c)	the person issuing the invoice is a taxable person;
and any sum recoverable from a person under the sub-paragraph shall, if it is in any case VAT be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.”
The Commissioners’ policy on paragraph 5 of schedule 11 is set out in their internal guidance notes at V1-35, paragraph 15.  Paragraph 15.1 contains the following:
“Although our powers here are very widely drawn, in practice they are only used to recover amounts incorrectly charged as VAT by unregistered suppliers, ie an unauthorised person.”
The “practical definition” contained in the guidance of an “unauthorised person” is someone who issues an invoice, charging VAT, whilst not registered because they are below the registration threshold or after deregistration.  Mr. Spencer’s contention was twofold here; first that the wording of paragraph 5 is mandatory upon the Commissioners.  In using the word “shall”, the legislature intended that there should be no discretion and that in every single case the Commissioners should pursue the issuer of the invoice.  The Commissioners had therefore misinterpreted the legislation in their drafting of paragraph 15.1 in that they had given themselves a discretion which was not intended.  In the alternative, UCAT was in fact an unauthorised person because although registered when they issued the invoice, they were later deregistered from a date which predated the invoices.  Mr. Spencer’s argument was therefore that if there was no supply, that which was charged on the invoice as VAT could not be recovered as output tax but should have been recovered as a debt due to the Crown and it was against UCAT that the Commissioners should have acted and not against Bodyguard.  Quite simply put, Mr. Spencer’s argument was that it was incumbent upon the Commissioners to pursue monies charged as VAT by UCAT either as under-declared output tax if the tribunal believes that there was a supply or, if the tribunal holds that there was no supply, as a debt due to the Crown.
21.	It was Mr. Winkley’s primary submission that there was no supply.  Summarising the evidence before the tribunal, Mr. Winkley contended that there was insufficient evidence of any supply having taken place.  He further contended that it was not sufficient of itself to demonstrate receipt of a supply and that something was “done” that the Appellant should hold an invoice of tax charged (Genius Holding BV).  In Mr. Winkley’s submission, there had to be a given transaction for the right to deduct to arise; something had to be done in terms of the service received.  He went on to contend that it did not necessarily follow from the fact that money changes hands that the payment amounts to consideration for a supply of services.  There had to be a link between the supply and the consideration.  If the tribunal holds that there was no supply, that, in Mr. Winkley’s submission, is an end to the matter.  What the Commissioners decide then to do is a matter of discretion and that is something over which the tribunal has no jurisdiction (Farm Facilities; Royal College of Obstetricians and Gynaecologists).  In response to Mr. Spencer’s argument that Miss Rainbow’s decision should have been binding and conclusive on the Commissioners as a body, Mr. Winkley submitted that her decision is not fatal in fact or law to the defence of the appeal.  The right to deduct for Corporation Tax purposes was a totally different matter within a different jurisdiction.  The tribunal must simply test the claim to input tax which is before it.
Conclusions
22.	It was accepted by both advocates that the burden of proof as to fact and to law lay with the Appellant.  On the arguments put forward by Mr. Spencer, it appears to us that we have four issues upon which to adjudicate:
1.	Has Bodyguard satisfied the tribunal on a balance of probability that there was, on the facts before the tribunal, a supply?
2.	If not, were the officers, in effect, “estopped” from reaching a different decision to that of Miss Rainbow on the existence or non-existence of a supply?
3.	Did the Commissioners exercise best judgment in raising the assessment?
4.	Should the Commissioners have pursued UCAT rather than Bodyguard?
The existence of a supply
23.	The tribunal was not helped by the absence of any evidence from Bodyguard itself.  There was in effect no firsthand evidence of whatever the arrangement between the two parties may have been.  It was left to Mr. Frith to put the Appellant’s case as best he could but, and this is no criticism of him, there was simply an awful lot that he did not know.  We therefore do the best we can with very limited documentation and no direct oral evidence.
24.	What can be established by the documents is that seven invoices were issued by UCAT to Bodyguard and all were paid (evidenced by authorities from Mr. Kamal Basra to the company bank).  Further, it is also clear that less the VAT and PAYE, the entire sum found its way back to Bodyguard by being paid into the bank accounts or Kamal, Anil and Sunil Basra (evidenced by their bank statements).  Beyond that we are in the realms of incomplete documents, indirect oral evidence and supposition.  In the absence of oral evidence, probably the next best evidence before the tribunal was the note of the interview between the officers and Kamal Basra.  Although in summary form and the officers’ notebooks were not available, the accuracy of the note in evidencing what was said was not challenged by Mr. Spencer.  Although in correspondence he tried to explain away what Mr. Basra had said, without hearing Mr. Basra himself we have no reason to doubt that what Mr. Basra told the officers was exactly what the arrangement was as he saw it.
25.	The evidence before the tribunal totally lacks credibility.  There was a conflict in evidence between what Mr. Basra told the officers, what Mr. Spencer said in correspondence and what Mr. Frith told the tribunal as to the origin of the relationship between Bodyguard and UCAT but what is abundantly clear is that the company carried out no due diligence checks, which in itself is amazing given the value of the “contract”.  No references were available; there was no promotional material; there was no correspondence between the parties and it appears that no-one from Bodyguard ever visited UCAT’s premises.  This then raises the question of exactly what the nature of the arrangement was.  We have seen three employment contracts dated 1 May 2003.  The critical documents which should have been attached to the employment contracts – namely the job descriptions and the staff handbook -, both referred to in the contracts, were not available.  The contract for the supply of consultancy services was dated 12 January 2004.  Nobody could explain why it post-dated the employment contracts by some seven months.  The critical document which should have been attached to this contract was the Assignment Schedule which again was never produced.  There were no timesheets and no details of any division of labour.  There was in reality no evidence of the day-to-day operation of the arrangement.  We were told that the arrangement with the three brothers was a pilot or trial scheme but again there was no evidence as to how the trial was monitored; how long it was to be and how its success would be gauged.  We were told it worked well to begin with but  ended badly when Bodyguard became deeply disillusioned with UCAT.  There is no evidence of this.  Indeed there is no evidence of anything happening at all until the flurry of invoices and payments in the dying stages of the arrangement.  If UCAT was the employer of the three brothers, what did they live on for the first eighteen months of the agreement when it appeared that no money changed hands?  It is also strange that UCAT appears to have made no profit from the arrangement.  The entire sum came back less the VAT and PAYE with UCAT taking nothing for its services.  We were told that this was because over and above the payroll, no services were required of UCAT during the period, but one would expect UCAT to make a charge even if just for the payroll facility.  All in all we cannot accept that there was any genuine arrangement between the two parties.  Reverting to the statutory definition of a supply, namely that something has to be done for a consideration, if one asks what UCAT did for Bodyguard, we believe the answer is to be found in Mr. Kamal Basra’s interview, and that was that nothing was done.  On the evidence before us gleaned from documentation, correspondence, interview notes and the oral evidence which we heard we cannot find that anything was “done” in the legal or factual sense to demonstrate the existence of a supply which would give Bodyguard the right to reclaim its input tax on the invoices.  We therefore find that on the evidence before us, the Appellant has not proved to our satisfaction that there was a supply of services from UCAT to itself.
Were the officers entitled to disregard Miss Rainbow’s decision?
26.	Mr. Spencer’s contention is based upon his assertion that the Commissioners have already accepted that there was a supply between UCAT and Bodyguard and it was not therefore now open to the VAT officers to renege on that.  This immediately begs the question as to whether or not Miss Rainbow had in fact reached a conclusion that there had been a supply of services because it is only if there had been a supply of services that the Appellant is entitled to its input tax.  We heard no evidence from Miss Rainbow and had to rely upon extracts of correspondence which Mr. Frith took us through.  There was nothing before us which could lead us to conclude that Miss Rainbow had reached any such conclusion.  She was applying a totally different test, being concerned solely with the right to deduct for Corporation Tax purposes under Section 74(1)(a) ICTA 1970.  She was satisfied that there was an entitlement to deduct but she did not have to find that there was a supply to enable her to reach this decision.  We have no idea whether Miss Rainbow carried out any in-depth analysis of the arrangement between the parties but it is likely that for her purposes she would not have needed to do so.  Her remit was not to test the VAT compliance of UCAT or the nature of the agreement.  She did not need to consider the substance of the transactions, nature of any supply or the matter of consideration.  Without hearing Miss Rainbow we do not know what she actually thought and how she reached the decision which she did but it is quite likely that she took the paperwork produced to her at face value and on the face of the documentation there would appear to be a bona fide outsourcing agreement for the services of the three brothers.  She appears to have accepted that to all intents and purposes the brothers were the employees of UCAT but this is a far cry from finding that there was, in the VAT sense, a supply of services.  The view which Miss Rainbow reached satisfied her responsibility for Corporation Tax.  It did not address Value Added Tax.  Mr. Spencer’s argument was also based upon the assumption that Miss Rainbow had the precise same evidence as the VAT officers.  We adopt Mr. Winkley’s point that in fact what she did not have was the evidence of the interview between Mr. Basra and the officers and this to us said more about the arrangement than anything else.  We do not therefore believe that the Commissioners were bound to accept that there was a supply merely because Miss Rainbow had been satisfied that there was a right to deduction for Corporation Tax Purposes.
Did the Commissioners exercise best judgment?
27.	Mr. Spencer’s contention that they did not is based upon the fact that the officers believed that there had been a fraud in which both parties were complicit.  The assessing officer was Mr. Bartley.  Mr. Bartley, in his evidence in chief, said that he did not believe Bodyguard acted innocently.  He was asked in cross-examination whether he considered that they acted fraudulently.  He merely repeated that he did not believe that they had been innocent but he went on to say that he had reported the entire matter as a suspected fraud but no further action had been taken.  In answer to a question from Mr. Spencer, Mr. Bartley said that Bodyguard would not be considered fraudulent once the decision not to pursue a fraud case against them had been taken.  Given these answers and the lack of any other evidence against Mr. Bartley, we believe that although he had considered Bodyguard had not acted correctly and had not been innocent, he accepted the decision not to pursue a case for fraud against the company and there is no evidence that his decision to assess was based upon a view that the company had been fraudulent.  There was abundant evidence before him, as outlined in this decision, to indicate that a supply had not taken place and Mr. Bartley quite simply believed that that was the case and that was all he needed to raise an assessment for recovery of the input tax.  Paragraph 9 of his witness statement reads “after consideration of the documentary and other evidence provided by the business, it could not be satisfactorily demonstrated that a distinct and separate supply had been made of employees of UCAT Ltd to Bodyguard.  It was therefore held that no supply had been made and as a result the VAT amounts invoiced could not be treated as deductible input tax.”  There is nothing in this to indicate that Mr. Bartley was being unobjective or that his view or judgment was tainted or flawed.  Considering his actions in the light of Van Boeckel and Rahman, we find no evidence that he did not act to best judgment in raising the assessment and we therefore reject Mr. Spencer’s contention that the assessment was not so raised.
Should the Commissioners have pursued UCAT?
28.	We look first at Mr. Spencer’s contention that paragraph 5 of schedule 11 imposes upon the Commissioners a mandatory duty to have pursued UCAT.  We do not read the paragraph as doing any such thing.  The paragraph provides that where a sum cannot be recovered as VAT, it shall be recovered as a debt due to the Crown.  It does not provide that the Commissioners have to act in every single case.  It would be very strange if it did because there are a number of instances where for example the issuer of an invoice has disappeared or is known to be bankrupt where it would be quite futile to pursue them.  The power to pursue UCAT was discretionary and we see nothing untoward in the Commissioners’ interpretation as set out in V1-35.  The Commissioners did have a discretion whether or not to pursue UCAT and for various reasons they chose not.  It is not within the jurisdiction of this tribunal to judge this decision and we therefore make no comment upon it.  One further point arose in this context and that was the fact that UCAT were retrospectively deregistered.  We do not believe this makes any difference to the findings which we have made in this decision.  At the time the invoices were issued, UCAT was registered and was still registered at the time the assessment and the amended assessments were raised.
29.	In summary, considering all the evidence which was before the tribunal, we find that there was no supply of services from UCAT to Bodyguard.  The Commissioners were perfectly entitled to consider the position of Bodyguard and to take the view, as they did, that there had been no supply and that the company was not therefore entitled to reclaim its input tax on the invoices.  That is the matter before the tribunal and the appeal is dismissed in its entirety.  No application for costs was made and we make no order.

MAN/07/1108

LADY MITTING
CHAIRMAN
Release Date: 5 February 209