19772

VAT ASSESSMENT – Appellants supplying design services to a company controlled by the owner of the Appellants – Respondent’s assessment on draft accounts supplied by the Appellants – satisfied that the Appellants’ accountant assured the Respondents that there would be no material alterations to the draft accounts – replacement returns inaccurate – Appellants have failed to satisfy the Tribunal on the balance of probabilities that the assessments were incorrect – Appeal dismissed.
LONDON TRIBUNAL CENTRE

	INTARSIA LIMITED	Appellant One

       CRISPIN DAVID VAUGHAN	                     Appellant Two
T/A THE DESIGN CO-OPERATIVE
	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal:	MICHAEL TILDESLEY OBE (Chairman)
					 CYRIL SHAW FCA                   (Member)

Sitting in public in London on 27 July and 28 July 2006

Timothy Brown, counsel for the Appellant

John O’Flaherty, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	Appellant one was Appealing against an assessment for unpaid VAT in the sum of £47,832 in respect of accounting periods 07/99 and 10/99.
2.	Appellant two was Appealing against an assessment for unpaid VAT in the sum of £65,200 in respect of accounting periods 04/98 and 04/99.
3.	The parties consented to the Appeals being heard together.
4.	We granted the Appellants’ application to amend the ground of Appeal to that the amount assessed was incorrect.
5.	In the decision we refer to Appellant one and Appellant two as the Appellants because they share the same issue in dispute.
The Issue in Dispute
6.	The Appellants were part of a group of companies and businesses controlled by Mr Vaughan. As at 25 September 2000 Mr Vaughan was involved as a director or sole proprietor of 14 known companies, of which nine were registered for VAT. There was no VAT group registration in force. Mr Vaughan considered that his companies would not benefit from a VAT group  registration  
7.	Mr Vaughan’s principal business was the design, refurbishment and construction of premises. All his companies and businesses effectively serviced one client, a Saudi Arabian Sheik (hereinafter called the client), who owned various London properties and an estate of 100 acres on the western sector of the M25.
8.	In 1996 the client instructed Holt Estates, one of Mr Vaughan’s businesses, to carry out a complete renovation of a listed property in London. Holt Estates engaged Caswell Limited, another of Mr Vaughan’s businesses, to undertake the design and construction work. Caswell Limited sub-contracted the design work to the Design Co-operative which was taken over by Intarsia Limited in June 1998. The Appellants were required to account for output tax on the design services provided to Caswell Limited and their other clients.
9.	In 1997 Mrs Maureen Carroll, a VAT visiting officer, visited Mr Vaughan’s premises at Salcombe Park which housed his various businesses in connection with a missing VAT return. She soon realised that this was not a straightforward matter because of the number of businesses controlled by Mr Vaughan. In the next three years Mrs Carroll pursued her enquires through a series of visits to and requests for information from the Appellants. She enlisted the support of Mr Bracken and Mr Pearson. Mr Bracken was called in because of his expertise in protected buildings, and would make his own visits to Salcombe Park as well as with Mrs Carroll. Mr Pearson was the Respondents’ Regional Accountant, whose expertise was required to shed light on the Appellants’ accounting systems. In July 2000 Mrs Carroll raised  VAT assessments against the Appellants on the draft financial accounts prepared by Howard Graham Wood, the in-house accountant for Mr Vaughan’s enterprises and company secretary for Appellant one. Mrs Carroll accepted the Appellants’ representations that the sales figure had been carried forward in each trial balance, and issued revised assessments in October 2000. In October 2002 it was necessary to issue a second revised assessment because parts of the first revised assessment were out of time. 
10.	On 31 May 2001 the Appellants submitted revised VAT returns for the periods in question based on final accounts which showed that they had no VAT liability. In their view the Respondents’ assessments were incorrect because they were compiled from incomplete information in the draft accounts.
11.	The dispute was essentially one of fact, namely, whether the Appellants have satisfied us on the balance of probabilities that the VAT returns of 31 May 2001 were correct.  
Evidence
12.	We heard evidence upon oath or affirmation from:
(1)	Howard Graham Wood, the Appellants’ in-house accountant and Company Secretary for Appellant one. Mr Wood dealt with the Respondents’ enquiries into the VAT affairs of Mr Vaughan’s firms.
(2)	Maureen Carroll, the assessing officer in respect of the assessments raised against the Appellants.
(3)	David Pearson, the Regional Accountant, who had specific expertise in accounting matters.
13.	Each party produced a bundle of documents.
Appellants’ Evidence
14.	 Mr Wood was a Chartered Accountant but had not practised. Mr Vaughan employed him as a book-keeper not as a Chartered Accountant. Mr Wood was aware of basic VAT requirements but did not have specialist expertise in VAT matters.
15.	The contract with the client was on a cost plus basis. Mr Vaughan required the costs of his various enterprises to be prepared in a particular manner which related the costs incurred to specific areas of the renovated building. Mr Wood engaged a computer software firm to design accounting software to accommodate Mr Vaughan’s requirements. Unfortunately the designed software was not fit for purpose which meant that Mr Wood had to find an alternative software package resulting in significant delays with the inputting of accounting data and the production of the Appellants’ invoices for work done.
16.	Mr Wood was reluctant to supply accounting records to Mrs Carroll and Mr Bracken until the problems with the computer software had been resolved and after the accounting information had been entered on to the computer. In the early part of 2000 he gave them the draft accounts on the proviso that they were draft and would require amendment once all the information had been entered.
17.	In May 2001 Mr Wood considered there was sufficient information on the computer system to prepare and submit replacement VAT returns for all Mr Vaughan’s businesses. The Appellants’ replacement VAT returns for the periods in question were submitted on 31 May 2001 and sent by courier to Mr Bracken. Mr Wood was insistent that Mr Bracken told him to submit the replacement VAT returns when the accounts were up to date. Mr Wood did not know the correct procedures for amending previously submitted returns. He believed that he could amend them by submitting replacement VAT returns.
18.	The amounts recorded as sales in the May 2001 replacement VAT returns corresponded with the amounts for the fees receivable in the final accounts for the Appellant companies which were signed off by Mr Vaughan in November 2000, January 2001 and May 2001. 
19.	The Respondents had accepted the final accounts for the purposes of income tax and corporation tax.
20.	The replacement VAT returns declared that the Appellants had no VAT liability for the periods under assessment.
21.	On 11 July 2006 Mr Wood supplied Mr Pearson in response to his fax of 9 May 2006 a list of journal entries for each Appellant company to explain the changes in the replacement returns.
The Respondents’ Evidence
22.	  The Respondents considered Mr Vaughan’s business arrangements and the group structure of his companies and businesses highly suspect and a serious threat to the protection of the Revenue. Mrs Carroll set out the risks in her note number 36 and 37 in the Respondents’ bundle for Appellant One:
“4. Failure to raise sales invoices, and to account for VAT where applicable. The trader avoids his responsibility to account for VAT by two simple expedients:
a.	sales invoices are rarely raised.
b.	The client provides Mr Vaughan with large sums of money which are described as expenses in advance of work. These sums are kept in a client account and distributed between all companies. Receipt of money creates a tax point at which time VAT should be brought to account on standard rated supplies. However, this has never been done since the accounts are treated as working capital and according to VAT guidelines can be viewed as money held in trust for a client. Thus multi thousands of pounds are seen to enter the records of all companies, but little or no VAT is declared. These amounts of money are also placed in call accounts to utilise their investment potential. When payments in respect of supplies are received, VAT is still not brought into account. Tax point principles are thereby totally ignored, and effectively this means that the companies are reclaiming input tax on costs but failing to pass on these costs as invoiced sales. The ongoing failure to produce sales invoices has been consistently blamed on the inadequacies of the computer system. However, it is noticeable that the same problems do not affect the reclaiming of input tax, which is collated on a spreadsheet basis.
5. It is symptomatic of most of the companies that inputs exceed outputs in varying degrees. This is because output tax is not brought to account and input tax on invoices raised by suppliers outside the group are reclaimed. Invoices between associated companies are seldom raised due to the fact that VAT would need to be brought into account. However, when an assessment is raised, Mr Wood immediately states that inter company purchases must be offset against it. Mr Wood appears to implement the same damage limitation exercise continually, thus manipulating the situation to his own advantage”.
23.	Mrs Carroll was unable to verify the sales figures in the VAT returns and the Appellants’ annual accounts because the Appellants failed to keep the required records for VAT purposes, in particular copies of all VAT sales invoices. Where the Appellants retained sales invoices, those invoices did not use consecutive numbering, instead they used a cross referencing system with prefixes which Mrs Carroll did not understand.  
24.	On 25 September 2000 and 30 October 2000 Mrs Carroll requested the Appellants to supply an analysis of all sales covering the years 1997, 1998 and 1999 and clarification of the invoice referencing system. The Appellants did not respond to Mrs Carroll’s request.
25.	Mr Pearson was brought in to discover what the problem was in relation to the accounts. He identified that Mr Wood was using the wrong software. Mr Pearson advised Mr Wood to purchase software dedicated to the work of quantity surveyors and to apply for group VAT registration. Mr Pearson found Mr Wood unreceptive to his suggestions.
26.	Mr Pearson discovered that the arrangements set up by Mr Wood had the hallmarks of maximising VAT repayments and minimising the payments of output tax. All the companies and businesses under the control of Mr Vaughan were on different VAT staggers for their returns. Output tax from one company was transferred as costs to another company controlled by Mr Vaughan.
27.	Mr Pearson and Mrs Carroll were not impressed with Mr Wood’s explanation about the problems with the computer software for not keeping accurate VAT records. Mrs Carroll pointed out that the Appellants had a legal responsibility to maintain manual records, if it was not possible to hold them on  computer. 
28.	Mr Pearson and Mrs Carroll denied that Mr Bracken told Mr Wood that he could send in amended VAT returns when the accounts were finalised. Mr Pearson recalled Mr Bracken in April 2000 telling Mr Wood not to send in duplicate VAT returns. Mrs Carroll and Mr Pearson accepted that Mr Bracken paid visits to Mr Wood on his own.
29.	Mr Pearson and Mrs Carroll stated that replacement returns were not the accepted method for making amendments to previously submitted VAT returns. In respect of amounts over £2,000 taxpayers were expected to make voluntary disclosures which had the benefit of giving a full explanation for the amendment to an earlier return. 
30.	Mr Pearson and Mrs Carroll were adamant that when Mr Wood provided them with the draft accounts for the Appellants, he assured them that there would be no material alterations to those accounts when they were finalised.
31.	In view of the assurance given by Mr Wood, Mr Pearson advised Mrs Carroll to carry out a best judgment assessment on the draft accounts, particularly as they had been waiting three years for Mr Wood to supply accurate accounts.
32.	When Mr Wood advised Mrs Carroll that he made in an error with the draft accounts by carrying forward the sales figure from one trial balance to another, Mrs Carroll issued revised assessments taking into account the error made.
33.	Mr Pearson and Mrs Carroll, however, were not prepared to accept the figures in the May 2001 replacement  VAT returns because:
(1)	When Mr Wood was asked to justify the changes in the May 2001 returns, he produced a print out for each of the Appellant companies. The print out provided minimal detail, listing the changes with a standard explanation for each change, namely a credit note had been issued for fees and disbursements. In Mr Pearson’s view the print outs had no provenance. Each of the changes should have had a date, related to a taxable event, a reversed batch number and a full explanation for the change. Further Mr Wood supplied no original documentation, such as a taxable invoice or the credit note, to back up the journal entries.
(2)	Although Mr Wood reduced the value of the Appellants’ supplies, he did not carry the reduction through the linked transactions. Thus the charges made by Caswell Constructing UK Limited to Holt Estates had not been correspondingly reduced. Likewise, Holt Estates had not reduced their bill to the client. Mr Pearson described this form of accounting as “cost plus plus plus” and was totally artificial. In Mr Pearson’s view, Mr Wood was reverting to form by minimising the Appellants’ liability for output tax whilst maximising the benefits for Mr Vaughan’s other companies from the zero-rating of their supplies. The client ultimately paid an inflated bill.
34.	Mr Pearson was aware that the Respondents accepted the Appellants’ final accounts for income and corporation tax purposes but in the context of a back duty claim imposed by the Special Compliance Office. Mr Pearson did not verify the accuracy of the final accounts. 
35.	On 10 February 2003 Ms Piper of the Respondents’ Appeals Team advised Mr Miller, the Appellants’ then representative, that the Respondents were not prepared to accept the replacement returns of May 2001 because any errors or omissions should be corrected by completing a voluntary disclosure if the tax was in excess of £2,000.
Reasons for Our Decision
36.	Under section 73 of the Value Added Tax Act 1994 the Respondents may assess the VAT due to the best of their judgment where it appears to them that the returns are incomplete or inaccurate.  Best judgment requires the Respondents to consider fairly all the material put before them and on that material reach a reasonable decision as to the amount of tax due.  The Appellants did not dispute that Mrs Carroll’s revised assessments, subsequently amended for out of time periods, were to best judgment rather they asked the Tribunal to find that the figures recorded in the May 2001 replacement VAT returns were accurate. Our responsibility is to decide the correct amount of VAT due on the evidence before us bearing in mind that the burden of proof on the balance of probabilities rested with the Appellants.
37.	We consider that the outcome of this Appeal will be determined by our findings of fact on the following  issues:
(1)	Did Mr Wood provide a credible explanation for not keeping proper VAT records?
(2)	Did Mr Wood give his assurance to Mrs Carroll and Mr Pearson that there would be no material alterations to the draft accounts when they were finalised?
(3)	Did Mr Bracken advise Mr Wood to send in replacement VAT returns on production of the final accounts?
(4)	Were the May 2001 replacement returns accurate?
38.	We were not impressed with Mr Wood’s evidence. He blamed defects in the computer software, Mr Vaughan’s requirements for recording costs and his lack of expertise in VAT for not keeping proper VAT records. The Appellants provided a dedicated design service which used the services of architects. The principal, if not the sole, cost component of the business was the time spent by the architects on the design work. The two key accounting documents for the businesses would be time sheets prepared by each of the architects, and a fees invoice to their client. Mr Wood told us that the Appellants effectively only had one client, Caswell Constructing UK Limited. We are satisfied that the accounting requirements for the Appellants were straightforward, requiring no particular VAT expertise, which any book-keeper let alone a Chartered Accountant would understand. Further, the software problems identified by Mr Wood did not prevent him from keeping a record of contractors’ costs on a spreadsheet for input tax claims. We, therefore, find his explanation for not keeping proper VAT records implausible. In our view he should have retained manual records of time sheets and invoices or used the expedient of a spreadsheet whilst the problems with the computer software were being resolved.
39.	Mr Wood told the Tribunal that the draft accounts given to Mr Pearson and Mrs Carroll were meaningless and that he only gave them on the understanding that he could submit replacement returns when the accounts were finalised. Mr Pearson and Mrs Carroll, however, stated that Mr Wood assured them that there would no material alterations to the draft accounts. We noted that Mr Wood’s letter dated 7 August 2000 in response to the first assessment did not question the status of the draft accounts for raising the assessment. Mr Wood simply pointed out the error of the duplicated sales figure. If Mr Wood considered the draft accounts meaningless, we would have expected him to raise this in correspondence immediately after the Respondents’ first assessment. In contrast, Mrs Carroll in her correspondence on the first assessment specifically mentioned the financial accounts, which was consistent with her interpretation of the conversation with Mr Wood about the status of the draft accounts. We accept the evidence of Mr Pearson and Mrs Carroll that Mr Wood told them that there would be no material alterations to the draft accounts.
40.	Appellants’ counsel contended that Mr Bracken treated the May 2001 replacement VAT returns as voluntary disclosures or, if not, the returns provided sufficient evidence for them to be treated as disclosures. The first limb of  his submission was a question of fact which relied on Mr Wood’s testimony and the fact that Mrs Carroll and Mr Pearson were not  present  at all times when Mr Bracken saw Mr Wood. 
41.	Mrs Carroll considered it extremely unlikely that an experienced officer as Mr Bracken would advise Mr Wood to submit replacement returns. Mr Pearson recalled Mr Bracken specifically telling Mr Wood not to submit replacement returns. We have no evidence from Mr Bracken as what he did with the replacement returns when he received them from Mr Wood. However, the correspondence from Ms Piper of the Appeals Team clearly indicated that the Respondents did not accept the returns as voluntary disclosures because they were not posted on the Appellants’ VAT account. Further she reminded the Appellants’ then representative of the voluntary disclosure procedure. We infer from the subsequent correspondence that Mr Bracken did not treat the replacement returns as voluntary disclosures. Further Mr Wood was aware from Mrs Carroll’s correspondence of 25 September 2000 that the Respondents required a detailed sales analysis and clarification of the invoice referencing system not replacement returns. We are, therefore, satisfied that Mr Bracken did not advise Mr Wood to submit replacement VAT returns.
42.	We do not consider the second limb of Counsel’s submission relevant to the disputed issue in this Appeal, namely that the returns provided sufficient evidence for them to be treated as disclosures. The Respondents as demonstrated by Ms Piper’s correspondence did not treat the replacement VAT returns as voluntary disclosures. The Appellants accepted that best judgment was not an issue in this Appeal which formed the basis of their successful application to amend the grounds of Appeal. The import of Counsel’s submission was that the Respondents did not consider all the material before them when arriving at their assessment, which was an argument about best judgment not about the correctness of the assessment.  Clearly the accuracy of the replacement returns was highly relevant to the dispute which is dealt with next but that is a different issue from whether the returns should have been treated as voluntary disclosures.
43.	Counsel for the Appellants submitted that the figures in the replacement VAT returns and the Appellants’ final accounts were accurate. Counsel stated that it was grossly unfair on the part of the Respondents to have done nothing with the replacement VAT returns. The Respondents accepted the final accounts for income and corporation tax purposes. Mr Pearson did not verify the figures in the final accounts. Mr Pearson’s analysis that the reductions in the value of the supplies in the replacement VAT returns had not been replicated in the financial statements of the connected companies was irrelevant. 
44.	 We considered Mr Pearson’s evidence compelling. Although he did not verify the final accounts, Mr Pearson examined the print-outs produced by Mr Wood to explain the changes in the value of the Appellant’s supplies. We agreed with Mr Pearson’s assessment that the print outs were worthless. They gave no detailed reasons for the Appellants relinquishing their charges for services to Caswell Construction Limited. The journal entries were not supported by primary accounting documents. The Appellants gave no explanation for why the connected companies did not reduce their costs accordingly. If the Appellants genuinely did not perform the services for Caswell Construction Limited, what reason can Mr Wood have for not making the corresponding adjustment in the accounts for Caswell Construction.  
45.	We placed no weight on the fact that the Respondents accepted the Appellants’ final accounts for income and corporation tax purposes. We were not privy to their reasons for accepting the accounts. We were satisfied that the mere act of acceptance did not confirm the accuracy of the accounts for determining the Appellants’ liability for VAT. 
46.	We are satisfied having regard to all the circumstances that the May 2001 replacement returns were not accurate.
The Decision
47.	We find that Mr Wood was not a credible witness. We are satisfied that Mr Wood told Mr Pearson and Mrs Carroll that there would no material alterations to the draft accounts. We hold that Mrs Carroll made her assessment on accurate information provided by the taxpayer. We conclude that the information in the May 2001 replacement returns was inaccurate. We decide that the Appellants have failed to satisfy us on the balance of probabilities that the Respondents’ assessments for VAT were incorrect. We dismiss the Appeal.
48.	We, therefore, uphold:
(1)	The assessment for unpaid VAT against Appellant One in the sum of £47,832 in respect of accounting periods 07/99 and 10/99.
(2)	The assessment for unpaid VAT against Appellant Two in the sum of £65,200 in respect of accounting periods 04/98 and 04/99.
49.	We direct that the parties agree the matters of interest and penalties consequential upon the outcome of the Appeal within 28 days from release of this decision. In the absence of agreement, we give permission for the consequential matters to be restored to the list before the same Tribunal.
50.	The Respondents applied for their costs. We  find no grounds for departing from the general rule that unsuccessful Appellants before the Tribunal should not pay the Respondents’ costs. This Appeal was not an overly complex one. The Appellants did not abuse Tribunal procedures. We make no order for costs.

MICHAEL TILDESLEY

CHAIRMAN
RELEASE DATE:15 September 2006

LON/02/634