19154
	OUTPUT TAX — CMT trader — extensive stock of unaccounted for hangers — suppression of sales — subject to a minor amendment on quantum — appeal dismissed

	INPUT TAX — credit claimed for supplies suspected of being non existent — supplier in any event not a registered person — appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 	
	MUHAMMED PERVAIZ	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Lady Mitting (Chairman)
						Peter Whitehead	

Sitting in public in Manchester on 13 June 2005

The Appellant did not appear and was not represented

Jonathan Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	The Appellant, Muhammad Pervaiz, at all material times carried on, as sole proprietor, a cut make and trim manufacturing business of adult clothing.  He traded under the style “Maze”.  The decision under appeal was that of the Respondents to assess Mr Pervaiz in the sum of £24,732, plus interest, the assessment covering the period 07/01 to 07/02.  The assessment comprised two elements namely under declared output tax of £17,751 and disallowed input tax of £6,981.  Both elements were under appeal.  
2.	We took the unusual step of hearing the appeal not only in the absence of the Appellant but knowing that the hearing notice had not been served upon him.  Mr Pervaiz had originally been represented by Mr Philip Rayner who was the representative on record. However, by letter dated 21 March 2005, Mr Rayner informed the tribunal centre that he was withdrawing his representation and he gave the last known address for the Appellant in Gants Hill, Ilford, Essex.  On 7 April 2005, the tribunal, of its own motion, directed that the Appellant should confirm in writing his intention of pursuing the appeal otherwise it would stand dismissed without further direction.  That direction was served upon Mr Pervaiz at the Gants Hill address and he responded from that address by letter dated 18 April confirming that he was still pursuing the appeal.  The hearing notice was sent out on 18 May 2005 to the same address but was returned on 27 May by the Royal Mail marked “addressee has gone away”.  On 24 May, a witness statement was similarly returned.  The Respondents had received a similar notification from Mr Rayner but they then received a further letter from him dated 20 May advising that he had been asked to and had agreed to continue to advise Mr Pervaiz and he subsequently entered into correspondence with the Respondents over certain outstanding matters.  In a letter of 24 May 2005, the Respondents advised Mr Rayner that the substantive hearing had now been listed for 13 June 2005 and it was the intention of the Respondents to defend the assessment in its entirety.  The tribunal centre, on the morning of the hearing, contacted Mr Rayner to ask for contact details of his client but he had no further address or contact details for him and was not in fact himself able to reach him.  
3.	We took the view that it was the responsibility of the Appellant, if he changed address, to notify the tribunal centre of that change of address and that if he failed to do so, the case could not be merely put off until he saw fit to reappear.  We therefore saw no reason not to hear the case under Rule 26(2) of the Value Added Tax Tribunals Rules 1986.  Mr Pervaiz, of course, has the right to apply under Rule 26(3) to have the decision set aside, such application having to be made within 14 days of the release of the decision.  However, as there is no current address for Mr Pervaiz, he almost certainly will not receive the decision within 14 days of its release and we were anxious that his right under Rule 26(3) should not run out of time.  We therefore, with the consent of Mr Cannan, exercised our power under Rule 19(1) to extend the time limit in Rule 26(3) and we direct therefore that the 14 day time limit should not begin to run against Mr Pervaiz until he becomes aware of the tribunal’s decision.  It was therefore subject to this direction that we agreed to hear the case under Rule 26(2).  
4.	We heard oral evidence from the assessing officer, Mr Roger Perkins.  Mr Pervaiz had been registered for VAT with effect from 1 April 2001, the commencement of trading.  Mr Perkins became involved as a member of the JOFIT (Joint Operational Fashion Industry Team).  JOFIT is made up of representatives of a number of agencies and part of its duties is to pay educational visits to new traders to help them to understand their responsibilities.  Mr Perkins paid such a visit on 9 and 10 April 2001.  Mr Perkins had some reservations about the Appellant’s record keeping and he doubted that he had fully grasped his responsibilities in relation to VAT and PAYE.  He allowed the registration to proceed but recommended a further visit after a couple of returns.  
5.	A further visit took place on 2 September 2002 followed up by visits on 5 September and 25 September.  During the course of these three visits, Mr Perkins interviewed the Appellant and his accountant, Mr Sadat, and inspected the business records and premises.  Mr Perkins noted purchase invoices from three suppliers namely Rowley UK, PTD Trading and Choices (GB).  The invoices from Rowley UK were an immediate cause for concern because Mr Perkins had become aware in recent weeks of a number of false invoices from Rowley UK in connection with other traders.  The invoices purported to be for CMT services.  The PTD and Choices invoices stood out because they also were for CMT services and Mr Perkins could see no reason why Mr Pervaiz should be sub-contracting out.  He already knew that the VAT number used by Rowley UK had legitimately belonged to a completely unconnected and genuine business, Rowley Auto Services.  Further checks revealed that the VAT number used by PTD Trading had indeed been allotted to a telecommunications business in Newark and the Choices VAT number also related to a totally different concern.  It was thus apparent to Mr Perkins that all three of these companies had hijacked VAT numbers from other legitimate concerns.  
6.	Mr Pervaiz maintained that taxable supplies had taken place and indeed paid cheques were later produced by Mr Rayner in respect of all the invoices.  Mr Pervaiz explained that he had one main client, Lady Lee and an increased workload could not be met by his own staff, hence the need to contract out.  Mr Pervaiz had told Mr Perkins that a Mr Rafique had introduced him to Rowley UK.  The system was that Lady Lee would have provided Mr Pervaiz with fabric to be made up by Mr Pervaiz.  Without the knowledge of Lady Lee, Mr Pervaiz passed the fabric to Mr Rafique who would take it away, have it made up and would then return it a few days later to Mr Pervaiz who would give Mr Rafique a cheque in return, the cheques being made payable to Rowley UK.  Rowley UK then apparently “went quiet” and a Mr Rashid came in off the street and offered Mr Pervaiz CMT services with a company called PTD Trading.  The identical system was adopted but then after some four or five weeks, Mr Rafique came back, told Mr Pervaiz he was now working for Choices GB and Mr Pervaiz recommenced business with Mr Rafique.  Mr Pervaiz always handed the fabric to Mr Rafique and Mr Rashid and never visited any of the premises of Rowley, PTD or Choices.  
7.	Mr Perkins told us it did not surprise him that returned cheques were available because in his mind the whole operation fell within a pattern prevalent in the fashion industry.  An employer would pay his staff the national minimum wage for a minimal number of hours, this amount being shown on a pay slip.  The low wage thus declared would entitle the employee to benefits and tax credit.  However, the employees in fact worked substantially longer hours at greater pay and for these they were paid cash in hand off record.  The employer, to effect this, had to have available cash.  This would be made available through the purchase of false invoices.  These invoices would, on the face of it, appear legitimate; they would bear a VAT registration number and would purport to be for supplies of goods or services; they would show a VAT element and the employer would pay the supplier of the invoice the gross amount by cheque.  The supplier would in return repay the employer in cash the amount of the invoice less the VAT.  The employer would claim back the VAT by way of input tax on his VAT return and thus would not be out of pocket and the supplier of the invoice would in effect be paid the VAT element as his commission.  The employer had, in effect, through a system of fraudulent invoices, bought in cash.
8.	The Respondents put in evidence three witness statements, all of which had been served on Mr Rayner and not challenged.  The witness statements were from Mr Terence Richards, Mr Kevin Skipworth and Mr Nasir Patel.  Mr Skipworth was a chartered surveyor and partner in the firm of Snow & Astill who dealt with the letting of commercial premises in Boston House, Abbey Park Road, Leicester.  He negotiated an agreement to rent a unit to a Mr Narsa for six months from 1 December 2001.  The rent was paid.  Mr Richards was the premises manager in charge of the Boston House unit.  In November 2001, he showed two gentlemen round the same unit.  He discussed with them their requirements for a power supply and was told that the current supply would be sufficient as it would only have to service ten machines.  He installed a new sub meter to isolate the supply to this unit from the unit above and he supplied keys to the unit.  Two days later, the name “Rowley UK” was put on the letter box which serviced this particular unit.  Mr Richards regularly visited all the units in the block and was able to ascertain that this unit was never used.  No machinery was ever installed and the new meter which he had installed and which had read zero in November 2001 was still reading zero in March 2002, June 2002 and August 2002.  He would regularly see one of the gentleman whom he had shown round standing next to the mail box and he would merely pick up his mail and then leave.  Mr Richards never saw anyone enter the unit.  Mr Patel was the office manager for the company which owned a building known as Cobden House in Cobden Street. Leicester.  PTD Trading gave Unit 32 Cobden House as its business address but Mr Patel was able to confirm from the records that no invoices had ever been issued to PTD Trading in respect of that Unit.  They had never traded from or occupied that address. 
9.	For all these reasons, Mr Perkins believed that the invoices from Rowley, Choices and PTD did not reflect genuine taxable supplies and that Mr Pervaiz was not therefore entitled to any input tax credits in relation to these invoices.  For the periods under assessment, the only relevant invoices were those from Rowley and PTD.  These totalled £6,981 and formed that part of the assessment.  The payments made to Choices fell into a later period and Mr Pervaiz did not, on the advice of Mr Perkins, reclaim his input tax in respect of those payments.
10.	On the visits in September 2002, Mr Perkins discussed with Mr Pervaiz his use of hangers.  On 5 September, when Mr Perkins went round the premises, he noticed a box of 10,000 hangers in the main store and approximately 5,000 others scattered around.  He was accompanied by Mr Pervaiz who agreed with Mr Perkins’ estimate of 15,000 hangers in stock at that time.  Mr Pervaiz and Mr Sadat also told Mr Perkins that one garment accounted for one hanger and that no credit notes had been issued for any hangers purchased.  They also discussed wastage of hangers, Mr Pervaiz estimating wastage to be approximately 10 in every hundred.  Whilst accepting that there would undeniably be some wastage, it was Mr Perkins’ experience of the industry that such wastage would amount to no more than two or three per cent.  
11.	An analysis of the trading records showed that from April 2001 to August 2002, Mr Pervaiz had purchased 407,100 hangers.  An analysis of the sales invoices on the basis of one garment equalling one hanger and taking into account one or two invoices for the separate sale of hangers, showed that 254,663 would have been used.  There should therefore have been in stock 152,437 on the 5 September instead of the agreed 15,000 actually seen.  Mr Perkins reduced this shortfall of 137,437 in the expected stock by one seventeenth, as he had used 17 months purchase and usage data in his calculations, but was preparing the assessment for a 16 month period.  Mr Perkins believed that the shortfall in expected stock could only be accounted for by undeclared sales and he therefore set about calculating the under declared output tax.  For the five periods covered by the assessment, he apportioned the total output declared between each of the five return periods.  He then apportioned the hangers to each period in the identical percentage, thus giving a number of undeclared garments sold in each quarter.  From Mr Pervaiz’s sales invoices, he calculated that the average price per garment, rounded down, was £0.97 and this was the price that he allotted to each undeclared garment.  He had made an allowance for wastage of five per cent which, given his belief that no more than three per cent was the norm, was in his view generous.  He, in his calculation, applied the wastage figure only to the number of hangers unaccounted for.  In his evidence to the tribunal, he volunteered that he now considered this to have been incorrect and he should have applied the wastage percentage to the entire stock of hangers.  A recalculation of the under declared output tax came to £15,747 instead of the £17,752 assessed.
12.	Once the assessment had been raised, a Notice of Appeal was put in by Mr Rayner.  The grounds of appeal were stated to be “the Commissioners have not used best judgment”.  No further particulars of that contention were given.  Correspondence and discussions took place between the Respondents and Mr Rayner.  Mr Rayner highlighted what he intimated was a flaw in Mr Perkins’ methodology in that for the period 04/02, expected opening stock of hangers was some 3,000 more than anticipated closing stock.  There could not thus have been an under declaration in that period.  Mr Perkins’ response was that there were two ways in which the suppression could be calculated and apportioned.  He had based the apportionment on the total declared outputs.  Mr Rayner had, at least for this single period, based the apportionment on the number of unaccounted for hangers.  If Mr Rayner’s methodology was applied to the entire period of assessment, the amount of the under declared output tax would certainly have given a negative figure for the 04/02 quarter but overall would have given an under declaration of £21,201 as opposed to Mr Perkins figure of £17,752.
13.	In relation to the input tax element of the assessment, Mr Cannan contended that the tribunal should adopt a staged approach.  His primary contention was that section 24(1)(a) of the Value Added Tax Act 1994 (“the Act”) defines input tax as “VAT on the supply … of any goods or services”.  Mr Cannan contended that the inference here was that there had been no supply and therefore the payments made to Rowley and PTD could not include any element of input tax.  
14.	If, however, the tribunal felt that there had been a supply, the second stage was to consider whether or not the supply was a taxable supply made by a taxable person (Section 4(1) of the Act).  Mr Cannan’s contention was that neither Rowley nor PTD were taxable persons as they had never been registered in their own right but had merely adopted VAT numbers legitimately allotted to others.  
15.	If, however, the tribunal were satisfied that the supply had been made by a taxable person then the third question was whether or not the Respondents had acted reasonably in refusing input tax credit.  Regulation 29(2) Value Added Tax Regulations 1995 (SI 1995/2518) provides:
“At the time of claiming deduction of input tax … a person shall, if the claim is in respect of — 
(a) 	a supply from another taxable person, hold the document which is required to be provided under regulation 13
…
provided that where the Commissioners so, direct, either generally or in relation to particular cases … a claimant shall hold … such other evidence of the charge to VAT as the Commissioners may direct”.
Regulation 13 provides that a registered person making a taxable supply to a taxable person must provide a VAT invoice.  Mr Cannan contended that the documents issued were not legitimate invoices because of their invalid VAT number.  The Respondents could not therefore be said to have acted unreasonably in not accepting the invoices.  
16.	In relation to the output tax elements of the assessment, Mr Cannan argued that there was clear evidence of suppression and that the methodology used by Mr Perkins was perfectly reasonable.  
Conclusions 
17.	The burden of proof is on the Appellant who, in relation to the input tax, has to satisfy us on a balance of probability that he received genuine supplies from Rowley and PTD and further that Rowley and PTD were taxable persons and thus entitled to charge VAT on those supplies.
18.	Without hearing the Appellant, it is difficult for us to make a definitive finding that there were no genuine supplies by Rowley and PTD.  However, on the evidence which we have heard, we should think it highly unlikely that there were.  There was no evidence put before us that Rowley or PTD existed in any form other than on paper and certainly no evidence that either were capable of carrying out CMT services.  There was clear unchallenged evidence that the business address used by Rowley was not in fact used for any purpose at all, other than apparently for mail.  The evidence in relation to PTD was that the address on their invoices was not a genuine address and that they had never occupied those premises.  Mr Pervaiz had told Mr Perkins that he had never visited the premises of either company and it seemed to us inconceivable that he would commit thousands of pounds worth of fabric provided to him by Lady Lee to Mr Rafique and Mr Rashid to take away when he had not known either of the men beforehand and had no idea to where the fabric was to be taken.  
19.	Even if, however, there had been genuine supplies, those supplies were not made by taxable persons.  Neither Rowley nor PTD had ever applied for registration and had never been registered for VAT by the Respondents.  All that they did was to hijack and use on their “invoices” a VAT number allotted by the Respondents to other legitimate traders.  Given that neither Rowley nor PTD were actually registered, the only remaining question was whether or not they were registerable (Section 3(1) of the Act).  As Mr Cannan pointed out, there is no evidence of supplies by either to anyone other than Mr Pervaiz and the supplies to him clearly would bring neither to the registration threshold.  Mr Pervaiz’s claim for input tax credit must therefore fail in respect of the Rowley and PTD invoices as neither set were issued by a taxable person.  Neither could therefore properly charge VAT and there could be no claim for repayment.  The view taken by the Respondents that these were false invoices was in our opinion an entirely reasonable view and it cannot be said that they in any way acted unreasonably in reaching the decision which they did to refuse the claim for credit.
20.	Turning to the output tax, we are perfectly satisfied, on the basis of the evidence before us, that there was a suppression of takings and a consequential underdeclaration of tax.  There was a clear surplus of hangers ordered over hangers used and no other suggestion has been put forward as to why this should be.  The only conclusion can be that they were in fact used in the course of the business but the sales were not declared.  The only matters which we can see which have been raised in relation to this element of the assessment is the percentage of wastage allowed by Mr Perkins and the methodology of the calculation.  Mr Pervaiz put forward no reason as to why there should be such a high degree of wastage as ten per cent or indeed any evidence as to why his wastage should be any higher than the trade norm.  We believe Mr Perkins to be more than generous in allowing a five per cent reduction where in his experience two per cent or three per cent would have been more usual.  As far as the methodology is concerned, one standard method has to be adopted for the entire calculation.  If Mr Rayner’s method had been adopted throughout rather than just for the one quarter, it would have led to an increased overall assessment albeit one quarter would have been  less.  Different methodologies cannot be applied to different quarters and if Mr Perkins’ calculations produced a lower overall assessment then that is the method which should be adopted.
21.	The only ground of appeal was, without any amplification, that the assessment was not to best judgment.  Neither Mr Rayner nor Mr Pervaiz ever put forward any grounds upon which that contention was being made but for the sake of completeness, we should say that we have looked at the assessment in the light of Rahman v Commissioners of Customs and Excise (1998) STC 826 and are satisfied it was made to best judgment.
22.	There is no evidence that the assessment was raised dishonestly, vindictively or capriciously.  It clearly was not a spurious estimate or guess and was not wholly unreasonable.  Mr Perkins spotted, before the hearing, that he had made one error in his calculation of wastage.  This was a genuine mistake, put right at the earliest opportunity and there is certainly no evidence of bad faith.  
23.	In summary, therefore, insofar as both the input tax and output tax elements of the appeal are concerned, the appeal fails.  There should however be the recalculation of the suppressed output tax which should now stand at £15,747 instead of £17,752.  Subject to this, the appeal fails in its entirety.
24.	Mr Cannan made an application for costs in the sum of £1,000 which we grant.    
25.	Finally, having dismissed the appeal with costs, we once again draw Mr Pervaiz’s attention to the direction which we made in paragraph 3 relating to the extension of his time limit for applying to have this decision set aside if he so wishes.

LADY MITTING
CHAIRMAN
Release Date:

MAN/03/0070