[2011] UKFTT 134 (TC)

TC001008

Appeal number TC2010/3879

VAT – INPUT TAX – Appellant claimed VAT on certain items of expenditure – was the expenditure incurred in the furtherance of a business carried on by the Appellant – no business carried on but if there was no clear nexus between the expenditure and the business – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	DR JOHN HERBERT SMALLEY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE)

					
Sitting in public at Phoenix House, 1-3 Newhall Street, Birmingham B3 3NH on 7 February 2011

The Appellant appeared in person

Helen Bunce of HM Revenue and Customs, for HMRC

© CROWN COPYRIGHT 2011

DECISION

1.	The Appellant appealed against HMRC decision to amend his VAT return for the period ended 31 July 2009 from a repayment of ₤1,651.64 to nil.
2.	The dispute concerned whether the Appellant was entitled to claim VAT on various items of expenditure incurred during the quarter, the details of which are set out in the table below:
Expenditure Item	VAT claim (₤)	Invoice Supplied	
Legal expenses	1282.07	Yes	
Accountancy	166.54	No	
Motoring	183.43	No	
Mobile phone	7.89	No	
Security Items	7.17	No	
Green Cone – Kompo	2.60	No	
Kettle	1.94	No	
Total	1,651.64		

3.	The Appellant indicated that he was not pursuing the claim of ₤2.60 in respect of the Green Cone – Kompo which left in dispute input tax to the value of ₤1,649.04.
4.	The Appellant contended that the disputed items of expenditure were incurred in connection with his business which comprised a range of activities. In the Appellant’s view the fact that the majority of the expenditure was not linked with his present work for the Department of Defence in the USA was irrelevant and immaterial. HMRC on the other hand submitted that the expenditure was of a private and personal nature which had no relationship to any business carried on by him. In those circumstances he was not entitled to claim VAT on the expenditure items.
5.	The Tribunal heard evidence from the Appellant and Susan Helen Mullen, the HMRC Officer who dealt with the Appellant’s claim.  A bundle of documents was admitted in evidence.
6.	After hearing the evidence and the parties’ submissions the Tribunal dismissed the Appeal. The Appellant requested a written copy of the Tribunal’s findings and reasons.
The Law
7.	Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 provide:
“167 – 	A right of deduction shall arise at the time the deductible tax becomes charged.
168.	 Insofar as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: The VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person”.
8.	The Value Added Tax Act 1994 provides:
“24-(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say – 
VAT on the supply to him of any goods or services;
VAT on the acquisition by him from another Member State of any goods, and
VAT paid or payable by him on the importation of any goods from a place outside the Member States; 
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him…
    (6) Regulations may provide 
(a) for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a taxable person from other Member States and VAT paid or payable by a taxable person on the importation of goods from places outside the Member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases…
25-(1) A taxable person shall in respect of supplies made by him, and in respect of the acquisition by him from other Member States of any goods; account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.
      (2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
26-(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax for supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
      (2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business – taxable supplies; supplies outside the United Kingdom which would be taxable supplies if made within the United Kingdom; (c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection”.
9.	Under sections 24, 25 and 26 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 to him in the furtherance of his business. Section 24(6) (a) of the 1994 Act enables the making of Regulations which specify the requirements for successful input tax claims. 
10.	The following requirements must be met for input tax credit to be available:
(1)	a supply must have taken place;
(2)	the input tax credit must be claimed by the taxable person to whom the supply is made:
(3)	the supply must be chargeable to tax at the rate claimed;
(4)	the claimant must hold satisfactory evidence of his entitlement to input tax credit;
(5)	the supply of services must be used or to be used for the purpose of any business carried on or to be carried on by him.
11.	HMRC accepted that the Appellant had incurred the expenditure. HMRC did not challenge those items of expenditure which were not evidenced by VAT invoices. The disputed issues concerned whether the Appellant was carrying on a business, and if he was, whether the items of expenditure were incurred in the furtherance of his business. The burden was upon the Appellant to establish on the balance of probabilities that the expenses had been incurred in the furtherance of his business.
Was the Appellant carrying on a business?
12.	The Appellant’s VAT registration was received by HMRC on 17 March 1987. The VAT 1 stated that the Appellant’s business activity was the import and export of machinery and spares. The date of his first taxable supply was 1 April 1985. During the period 1987/88 to 1997/98 the respective values of the Appellant’s outputs and inputs declared in his VAT returns were ₤14,656,482 and ₤14,171,012.
13.	The Appellant submitted no VAT returns from 1998. In 2004 HMRC sent out a VAT 484 which the Appellant returned on 29 March 2004 stating that the business had not ceased but none of the outstanding returns had been completed. HMRC decided not to take action regarding the outstanding returns because the Appellant was coded as a repayment trader. 
14.	In May 2008 Ms Durant of HMRC contacted the Appellant. Ms Durant recorded that the Appellant had ceased trading in 1998 and that he agreed to be deregistered for VAT purposes. In January 2009 the Appellant stated that he wished his VAT registration to remain. The value of his sales was expected to be ₤70,500 per annum. HMRC decided to reinstate his VAT registration. The Appellant submitted a return for the period 1 December 2008 to 30 April 2009, which included claims dating back to 2004. HMRC disallowed the majority of the claim. No appeal had been made against this decision.
15.	The Appellant was 77 years and for the whole of his adult life had been involved in various businesses. According to the Appellant, he organised his business activities under four separate entities which were:
(1)	Sole Proprietor: export of computer chips and computer software consultancy.
(2)	M&S International Limited: export of computer chips and computer software consultancy.
(3)	Partnership with his brother: bulk gold buying from the Philippines and replacement engines to Egypt.
(4)	Partnership with Elvan Bayrakceken: export of engine and hydraulic spares to Turkey.
16.	In 1999 the Appellant was diagnosed with non-Hodgkins lymphoma and was not expected to live. The Appellant as a result of his illness ran down his business activities and ceased making VAT returns. In 2004 the Appellant had managed to keep his illness at bay and accepted work from his old US colleagues and partners (hereinafter referred to as Sunburst) to write software for them in connection with a contract for the Department of Defence in the USA. The Appellant also stated that in 2004 he resumed  his business  in the import and export of  machine parts principally to Turkey.
17.	The arrangement with Sunburst was that the Appellant would write software for them and on Thanksgiving day  he would send Sunburst a note of what he considered to be the monetary value of his efforts for that year. The Appellant would not receive a payment but the monetary value would be added to the partnership pot and shared out to the members of the partnership after seven years (2011). The Appellant produced no contractual documentation in respect of his arrangement with Sunburst. Further he accepted that he had received no payment from Sunburst in respect of his work. The proposed pay out from the pot after seven years had not occurred and was likely to be delayed for a number of years. Finally the Appellant did not invoice Sunburst for his services. The Appellant adduced no evidence of trading in machine parts since 1999.
18.	The Appellant’s personal circumstances were that he was in receipt of state pension, guaranteed pension credit and attendance allowance. He had no other sources of income except a sum of ₤125 per annum for financial advice and trustee’s fees. The Appellant’s assets had been transferred to a family trust following his illness.
19.	The only evidence before the Tribunal that the Appellant was engaged in a business activity since 2004 was his arrangement with Sunburst. The fact that he  carried on an activity did not necessarily mean that tax was available for credit in respect of the goods or services obtained in order to carry it on. The activity must, in the words of VATA 1994 s 24(1), amount to a "business" which was either carried on or to be carried on. Whether or not an activity amounted to a business was essentially a matter of fact to be determined in accordance with the circumstances of an individual case. However, the decided cases seem to indicate that a person must, at the very least, demonstrate that he was either currently making supplies for a consideration on a recurrent basis in the course of carrying on the activity or moving towards a situation in which such supplies would be made.
20.	  The Tribunal finds that the Appellant’s arrangement with Sunburst did not have the character of currently making supplies for a consideration on a recurrent basis or moving towards a situation in which supplies would be made. The Appellant had received no payment from Sunburst for his services, and the prospect of receiving a share in the pot was not substantiated by the evidence. His dealings with Sunburst did not have the features of a commercial business arrangement. The Appellant did not invoice Sunburst for his services. The terms of his engagement were not regulated by any form of documentation. There was no evidence of any other trading activity carried out by the Appellant. The Tribunal holds that the Appellant had not been engaged in a business as understood in the context of the VAT Act 1994. 
Did the Appellant incur the disputed expenditure items in connection with a business?
21.	In view of the Tribunal’s finding on the first issue, this question is hypothetical.  The Tribunal, however, has decided to deal with it as it formed the principal dispute in the Appeal and on the assumption which the Tribunal does not accept that the Appellant was carrying out a business.
22.	The fact that the Appellant might have carried on a business did not necessarily mean that VAT on goods or services which he obtained was available for credit. There must be a clear link between the expenditure and the business. In Customs and Excise Commissioners v Rosner [1994] BVC 31 Latham J stated that
“There must be a real connection, a nexus between the expenditure and the business. It seems to be that the nexus, if it is not the benefit, must be directly referable to the purpose of the business. By the purpose of business in this context I mean by reference to an analysis of what the business is in fact doing. It is only by identifying what the nature of the business is in that way that one can determine the extent to which any given expenditure can be said to be for the purpose of that business”.
23.	The principal item of expenditure in the Appellant’s VAT claim was legal expenses which related to the Appellant’s action against the HSBC bank. The circumstances of the action concerned the Appellant’s relationship with Elvan Bayrakceken when they were engaged in a joint enterprise of exporting engine and hydraulic spares to Turkey. They set up bank accounts in the United Kingdom and Turkey to overcome the currency restrictions in each country which impeded their trading activities. The Turkish account was in the name of the Appellant but Mr Bayrakceken was the sole person authorised to operate the account. Likewise the UK account with the then Midland Bank was in the name of Mr Bayrakceken but with the Appellant acting as the sole authorised person. In or around 2003 the Midland Bank wrongly sent a copy of the account statement to Mr Bayrakceken who told the Bank that the money was his which he wanted back. The Midland Bank assured the Appellant that it would not remit the monies to Mr Bayrakceken. The Bank broke its word and duly sent the monies banked to Mr Bayrakceken approximately 12 months later. The Appellant subsequently sued the Midland Bank now HSBC for breach of contract, and in so doing incurred the legal expenses which were the subject of the disputed input tax claim. 
24.	The Appellant asserted that the monies in the Bank account related to his business activities, and that the recovery of these monies would enable him to restart his import and export business. The fact that the Appellant’s business may benefit if the claim is successful was not sufficient to meet the statutory test of the expenditure incurred for the purpose of the business. The statutory test is only met if there was a real connection or nexus between the expenditure and the business. The connection must be directly referable to the purpose of the business. Leaving aside the question of whether there is in fact an import/export business, the character of the legal claim was a personal legal dispute between the Appellant and the Bank arising from a purported legal or contractual duty owed by the Bank to the Appellant. The legal expenses were not directly referable to the Appellant’s import and export trading activities. 
25.	The second item of expenditure concerned accountancy fees. The Appellant acknowledged in his letter to HMRC dated 29 October 2008 that the accountant’s fees related to the completion of the accounts for the Appellant’s family trust. The Appellant stated that he could not afford the accountant to do his annual tax returns, Further the Appellant accepted in evidence that the accountant did not compile the accounts for any of his business activities. The Tribunal finds that the accountancy fees were not incurred for the furtherance of any business activity carried on by the Appellant.
26.	 The claim for motoring expenses related to the VAT on parts and services purchased by the Appellant to repair and maintain his two vehicles. They included the purchase of a vacuum hose, screen wash, engine oil and an exhaust. According to the Appellant he undertook frequent journeys to Menwith Hill and Chicksands in connection with his Department of Defence work, and required a vehicle for these journeys. The Appellant stated that his annual mileage was approximately 7,500 of which 2,500 miles was used for private travel. The Appellant did not recover the VAT on the business mileage because it was too complicated. Instead the Appellant reclaimed the VAT on the repairs and services of his vehicles which he considered produced a fair apportionment between business and private use. The Tribunal finds the evidence on the use of the Appellant’s private vehicles in his business unsatisfactory. The claim related to two motor vehicles. The Appellant produced no records of business mileage and of the various meetings at the defence establishments. The purpose of the purported Appellant’s business was the writing of software which was done from his home. The Tribunal concludes that the use of the Appellant’s motor vehicles was at its highest incidental to the purpose of the business. The Tribunal decides that the Appellant failed to establish a connection between the expenditure on the vehicle repairs and the purpose of his purported business.  
27.	The expenditure under the heading of the security items were for repairs to a workmate, the replacement of a cordless drill and miscellaneous Screwfix fittings. The Appellant stated that he used these tools and fittings to effect improvements to the security of his office which were required by the insufferable people at Grosvenor Square. The Tribunal finds that the items bought had a wide range of uses. Further there was no evidence that the items had in fact been used to carry out security improvements, and that such improvements had been installed.
28.	The remaining expenditure items concerned a claim of VAT for ₤7.89 on a mobile phone, and for ₤1.94 on a kettle. The Tribunal accepts that prima facie expenditure on business calls has a connection with the purpose of the purported business. The Appellant, however, did not provide documentary evidence to substantiate that the mobile phone was in fact used for his business. The expenditure on the kettle was deemed necessary to make cups of black coffee which facilitated his work. The Tribunal holds that the expenditure on the kettle was too remote from the purposes of the business.
Decision
29.	The Appellant’s approach to this Appeal was influenced by his view that he was entitled to organise his tax affairs to his advantage provided he did so honestly and within the law. The Appellant considered that if the expenditure item fell under a specific category of allowable expenses in the Table of Allowable Expenses as set out in the Tax Return: Self Employment (full) notes, he was entitled to recover the VAT on it. The Appellant believed that HMRC was alleging fraudulent conduct on his part by its denial of his input tax claim. The Tribunal did not consider that the Appellant had submitted a fraudulent claim. There was no allegation of dishonesty on the part of HMRC. In the Tribunal’s view, the Appellant misunderstood the legal requirements for making input tax claims, in particular the legal definition of business within the VAT Act and of the connection between expenditure and the purpose of the business. In the respect the Appellant’s evidence was not directed at the correct questions with the result that the Appellant failed to satisfy the burden of proof to establish his claim.
30.	The Tribunal decides that
(1)	The Appellant’s arrangement with Sunburst did not have the character of currently making supplies for a consideration on a recurrent basis or moving towards a situation in which supplies would be made.
(2)	The Appellant was not carrying on a business.
(3)	If in the alternative the Appellant was carrying on a business, there was no real connection between the expenditure items in his VAT claim for the period ending 31 July 2009 and the purpose of his business.
31.	The Tribunal, therefore, dismisses the Appeal and upholds HMRC’s decision amending the Appellant’s VAT return for the period ended 31 July 2009 from a repayment of ₤1,651.64 to nil. 
32.	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.

MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 23 February 2011