Steel Windows Co Ltd v Revenue and Customs [2005] UKVAT V19158 (22 June 2005) 

	VALUE ADDED TAX — input tax — trader claiming large input tax refund — claim refused by Respondents — claim supported by invoices from dissolved company and from companies with common or family directors — no reliable evidence that stated prices genuine — admission that no payment made — scale of purchases implausible — Appellant’s director unreliable witness — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	STEEL WINDOWS CO LTD	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						John M Lapthorne	

Sitting in public in Birmingham on 24 May 2005

Christopher Gibbons, counsel, instructed by Mushtaq & Co for the Appellant 

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	In this appeal, pursued by its liquidator, Steel Windows Company Limited dispute the Respondents’ decision to disallow input tax of £252,189.59, claimed in the Appellant’s return for the period 06/03.  A second challenge to the Respondents’ requirement that the Appellant give security as a condition of its continuing to trade, is no longer pursued because of the liquidation.
2.	The Appellant was represented by Christopher Gibbons of counsel, who called its former director, Eurfan Chaudhry. The Respondents were represented by James Puzey of counsel who called Sally Fletcher, the officer whose decision it was to disallow the claim.  We had an agreed bundle of documents.
3.	Mr Chaudhry told us that, as its name implies, the Appellant’s business was the manufacture of steel-framed windows although it also intended to go into the manufacture of aluminium frames.  It came into existence by taking over the assets, employees and corporate shell of another company which had gone into receivership, changing its name to its present title in July 2003, although it began to trade in about March 2003, then using the defunct company’s name of Smith Brothers (Tividale) Limited.  Much of the equipment taken over from the administrator was old and in need of replacement and, in the three months covered by the 06/03 return, the Appellant made substantial purchases of machine tools and other equipment for use in the factory, including two fork lift trucks and a lorry and trailer.  In addition, it bought large quantities of materials, for use in the manufacture of windows, including aluminium goods destined for the intended move into the manufacture of aluminium-framed windows.
4.	Mr Chaudhry could not tell us much about the items the company had bought since he concerned himself with accounting matters and not with manufacture and was not an engineer but, he said, all the goods were bought from the companies identified in the invoices which supported the claim, and they had been delivered, and checked against the invoices.
5.	One of the vendor companies was Rockplace Limited, to which Mr Chaudhry had been recommended by his father.  Its director, a Mr Elsmore, visited the Appellant’s premises, and suggested what stock it would need; he also suggested the prices to which Mr Chaudhry and his fellow director, a Mr Poultney, agreed.  The arrangement was that the Appellant would pay the VAT on the invoices Mr Elsmore provided when it was received from HM Customs and Excise, as it then was, with the balance to follow in instalments, although the amount and frequency of the instalments had not then been agreed.  None of the goods supplied by Rockplace – all machine tools – had actually been used and when Mr Chaudhry learnt that the Respondents had serious concerns about the claim, not least because Rockplace had been dissolved in March 2003, Mr Chaudhry telephoned Mr Elsmore and asked him to take the goods away again.  Mr Elsmore had done so and no payment had been made; Mr Elsmore expressed surprise, Mr Chaudhry said, that Rockplace had been dissolved, claiming to be unaware of the fact.  Mr Chaudhry accepted that, whatever we might otherwise decide in relation to the appeal, the claim must be reduced by the sum of £102,838.75, the input tax included in Rockplace’s invoices for which the Appellant no longer had any liability.  
6.	The second company from which, Mr Chaudhry said, the Appellant had bought goods was Leavlite Powder Coating Limited, a company of which he had been a director, the secretary and bookkeeper, in which capacity he had prepared the invoice for the lorry.  Leavlite had gone into creditors’ voluntary winding-up on 27 May 2003, a date later than that borne by the invoices.  As well as a large quantity of materials, a few tools and the fork lift trucks, the Appellant had bought the lorry and trailer from Leavlite; it had thereafter been used by the Appellant for the collection and delivery of aluminium profiles, which were six metres in length.  The lorry had been paid for by offsetting its price against his director’s loan account with Leavlite, and no money had actually changed hands.  Similarly, no payment had actually been made for the fork lift trucks, the tools or the materials.  Mr Chaudhry could not recall the name of the driver of the lorry, but he had been paid by the Appellant after the purchase.  The registered keeper of the lorry was B M Etchco Limited, another company of which Mr Chaudhry had been an officer.  That was done in order to benefit from the latter company’s ability to obtain cheaper insurance.  
7.	The third and last company from which the Appellant had made relevant purchases was Conservatories International Limited, a company of which Mr Chaudhry had never been an officer, although he was its bookkeeper and Mr Poultney and Mr Chaudhry’s father were directors of it.  Leavlite and Conservatories International traded for the same address, though that was based elsewhere.  The Appellant had bought large quantities of aluminium materials from Conservatories International although, rather oddly, the invoices (which again, Mr Chaudhry had prepared himself), gave the specification of the goods, but omitted to mention the quantities, an omission Mr Chaudhry was unable to explain.  He told us that the goods had all been delivered, but he could not recall how much had been paid, nor did he have any evidence that any sum had in fact been paid.
8.	He also accepted that, despite the large sums of money involved, none of the purchases was evidenced by even the most informal of written contracts, and that no guarantees had been obtained.  He was also rather uncertain whether the machine tools were new or second-hand.  No aluminium frames had ever been made, but the Appellant was obtaining supplies in anticipation of being able to start production in November 2003.  
9.	Mr Puzey asked Mr Chaudhry if he could produce Leavlite’s purchase invoices, showing its own acquisition of the materials it had sold to the Appellant; he agreed that Leavlite processed goods of that kind but did not itself use them.  He said he could not do so (although he was Leavlite’s bookkeeper) and could not recall from where the goods had been bought, nor whether they had been paid for.  Nor could he recall how the prices charged by Leavlite to the Appellant – for the lorry, the fork lift trucks, the tools or the materials – had been agreed upon.  Remarkably, he had no recollection of the amount of his director’s loan to Leavlite, nor of the proportion of it attributed to the sale between the two companies; all his records had been taken by his supervisor when he had to declare himself bankrupt.
10.	It was apparent from examination of the invoices that in some instances Leavlite had sold (or purported to sell) goods to Conservatories International which had then sold (or purported to sell) the same goods to the Appellant.  In each case Mr Chaudhry had prepared the invoices, but he could not recall why there had been such a chain of transactions and why Leavlite had not sold the goods to the Appellant direct.  Likewise, he could not recall how the prices charged had been determined, or by whom.  He was, however, adamant that all of the transactions were genuine and that, even though no money had in fact changed hands, payment would have been made but for the Respondents’ refusal to meet the repayment claim and the consequent difficulties in which the Appellant had been put, necessitating the undoing of some purchases, such as that from Rockplace.
11.	Miss Fletcher’s evidence was that she had refused the claim, and had amended the relevant return, because she had seen no evidence to suggest that any payment had been made, and because she had ascertained that Rockplace had been dissolved before it purportedly sold the goods to the Appellant.  She had spoken to Mr Elsmore, about what he knew of the matter.  Mr Gibbons asked us to exclude her evidence of the conversation, which we are content to do since it does not seem to us to add anything of substance to the simple fact that a dissolved company has purportedly sold goods.  We merely comment that it is in our view of little consequence whether Mrs Elsmore knew or did not know that Rockplace had been dissolved.  Miss Fletcher was able to ascertain that Leavlite, which went into liquidation after the sale or purported sale to the Appellant, had not accounted for output tax on that sale; its only subsequent return, filed by the liquidator, included entries only for his own fees.  She had given the Appellant the opportunity of providing further evidence to support its claim, but none had been forthcoming.  Additionally, Conservatories International had failed to provide the evidence she requested of its purchases from Leavlite.  Her conclusion was that she could not be satisfied that a true liability had been incurred, and she therefore disallowed the claim.
12.	The Respondents’ case, as it was put by Mr Puzey, was that there was a history of companies controlled by the Chaudhry family and their associates selling, or purportedly selling, large quantities of goods to another such company.  The first company then went into liquidation, failing to account for the requisite output tax, while the second company claimed the input tax it had purportedly incurred.  It is unnecessary for us to go so far as to decide whether that contention is correct.  The burden is on the Appellant to satisfy us that Miss Fletcher’s decision to disallow the input tax claim is wrong or, in other words, that these purchases were genuine, in that the goods were supplied in exchange for an enforceable obligation to pay the consideration.
13.	We are not so satisfied.  We can accept that there might be some informality between companies controlled by members of a single family, but the degree of informality here goes beyond the bounds of credibility.  We find it impossible to believe, even in the case of transactions between family companies, that no note of any kind was kept about the manner in which prices had been determined; when the same omission is found in the case of purchases from outsiders, it inevitably casts great doubt on the genuineness of the transactions.  We cannot accept that the director of a dissolved company would continue to trade as if nothing had happened.  This is not a case in which it is said the director had set up a new company, even one with the same name as the old.  Nor can we believe that any genuine seller of goods would be willing to enter into such a casual arrangement as Mr Chaudhry described for payment of the price.  We do not accept that any businessman would buy, in April and May, large quantities of materials he could not use, at best, until November, when (as Mr Chaudhry accepted) the Appellant had secured no orders for aluminium goods and could not know if it would have any success in either manufacturing or selling such goods.  We also do not believe that any honest and careful businessman would insure a lorry used by one company in the name of another; there is an obvious risk that the insurers, discovering the truth, would repudiate liability, because of the deceit.  We do not accept Mr Chaudhry as a witness of truth.  
14.	The Respondents’ decision to refuse the claim was, in our view, correct.  The appeal is therefore dismissed.  We should mention that we have read the transcript of the interview of Mr Chaudhry conducted by Miss Fletcher, but save that there are some discrepancies between what Mr Chaudhry is recorded to have said then and what he told us (a factor which casts further doubt on his credibility) it does not seem to us that it adds anything of substance.

COLIN BISHOPP 
CHAIRMAN
Release Date: 22 June 2005

MAN/04/0291