20659

VAT – INPUT TAX – ASSESSMENT – recovery of input tax paid on supplies of goods and services connected with a mobile display unit and on a supply of a photocopier – mobile display unit no obvious and clear association with the Appellant’s business – Appellant failed to discharge burden regarding supplies connected with  mobile display unit for use or intended use for the purpose of the Appellant’s business – satisfied that photocopier purchased for use in the Appellant’s business – Appeal dismissed:  mobile display unit – Appeal allowed:  photocopier

MANCHESTER TRIBUNAL CENTRE

	KDP (UK) LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      CHRISTINE OWEN FCA           (Member)	  

Sitting in public in Manchester on 17 January 2008, final submissions 5 March 2008 

Nigel Gibbon, Director of VAT & Customs Appeals Omnis VAT Consultancy Limited, for the Appellant 

Nigel Bird, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against an assessment for unpaid VAT in the sum of £8,003.00 plus interest dated 26 July 2006. The assessment covered four VAT accounting periods.
2.	The assessment concerned the following sums recovered by the Appellant as input tax:
Period	Item	Input Tax Reclaimed (£)	
September 2003	Projector	1,491.08	
	Lens	204.48	
Total		1,695.56	
January 2004	Canon Copier	174.83	
Total		174.83	
February 2004	Multi media projector and lens adaptor	1,500.98	
	International Patent Application	961	
	MPEG2 player	317.19	
Total		2,779.17	
March 2004	Vehicle MXO4 CKJ (a commercial van)	1,662.50	
	Interior Framework of vehicle	1,429.75	
	Modifications to vehicle	262.50	
Total		3,354.71	
Grand Total		8,004.31	

3.	The Appellant informed the Respondents by letter dated 4 September 2006 and confirmed at the hearing that it was not pursuing an Appeal in respect of the VAT repayments on the interior framework and modifications to the vehicle (£1, 429.75 and £262.50).  The Appellant accepted that the VAT on these items had been wrongly claimed as input tax because the invoices were addressed to Advantage Motion Media Limited.
The Dispute
4.	The Appellant’s principal business was the import of copper. At the time of the Respondents’ visit on 21 June 2006 the Appellant had recorded no sales since VAT quarter 04/2005 because of an overall downturn in the copper markets. 
5.	Dr Salehi, the sole director of the Appellant, formulated a business concept of a mobile display unit involving the use of visual media for advertising from a motor vehicle. The purchases of the projector, lens, multi media projector and lens adaptor, MPEG2 player and motor vehicle were made in connection with this business concept. Also Dr Salehi instructed a firm of Chartered Patent Attorneys to take out a patent in respect of the mobile display unit.  
6.	The Appellant contended that it acquired the goods relating to the mobile display unit for use in its business. The Appellant supplied them under a rental agreement to an associated business, Advantage Motion Media Limited, which was also under the sole directorship of Dr Salehi.  Further the Appellant incurred expenditure on the services of Chartered Patent Attorneys to secure a patent on the mobile display unit concept with a view later  to selling licences to other businesses permitting their use of the display unit. Likewise, the Canon photocopier was bought for the Appellant’s business but had no connection with the mobile display unit.  In those circumstances the Appellant maintained that it was entitled to recover the VAT on these expenditure items.
7.	The Respondents submitted that the Appellant had given contradictory accounts about whether the goods purchased for the mobile display unit were on loan or rented to Advantage Motion Media Limited. The Appellant provided no contemporaneous documents evidencing its supplies to Advantage Motion Media Limited. Further the goods and services purchased in connection with the mobile display unit did not relate to the Appellant’s normal business activities. The Respondents concluded that the goods and services purchased by the Appellant relating to the mobile display unit were not used for the purpose of its business, in which case the Appellant was not entitled to recover the VAT incurred on those purchases. The visiting officer did not see the photocopier on his inspection of the Appellant’s premises, and decided that it was not used in the business.
8.	The dispute concerned whether the Appellant when making the purchases intended to use the acquired goods and services for the purposes of its business. Where there was no clear and obvious association between the goods and services purchased and the business, the appropriate test of intention was set out in the judgment of Stuart Smith J (as he then was) in Ian Flockton Developments Ltd v CCE Commissioners [1987] STC 394 at 400:
(1) The test to be applied in determining whether goods or services which were supplied to the taxpayer were used or to be used for the purpose of any business carried on by him was a subjective test. That meant that the fact-finding tribunal had to consider what was in the taxpayer's mind, and where the taxpayer was a company what was in the minds of the persons who controlled the company, at the relevant time in order to discover their object 
(2) Where there was no obvious and clear association between the taxpayer company's business and the expenditure concerned, the tribunal should approach any assertion that it was for the taxpayer company's business with circumspection and care and should bear in mind that it was for the taxpayer company to establish its case. It was both permissible and essential to test such evidence against the standards and thinking of the ordinary businessman in the position of the taxpayer company and, if the tribunal considered that no ordinary businessman would have incurred such expenditure for business purposes, that might be grounds for rejecting the taxpayer company's evidence. However, that should not be substituted as the test but only treated as a guide or factor to be taken into account when considering the credibility of the witness.
(3) The Tribunal must look at all the circumstances of the case and draw such inferences as they think fit. In the end it is a question of fact for them whether they were satisfied on the balance of probability that the object in the taxpayer company’s mind at the time the expenditure was incurred was that the goods and services in question were to be used for the purposes of the business.
The Evidence
9.	We heard evidence from Dr M Salehi, the sole director of the Appellant company.  Mr P Macklin, the officer who visited the Appellant’s premises and raised the assessments, testified for the Respondents. A bundle of documents was admitted in evidence.
10.	After hearing the evidence and submissions on 17 January 2008 we adjourned part-heard directing the Appellant to produce documentary evidence regarding Advantage Motion Media Limited purported payment of an invoice for rent of the mobile display unit, and the parties to make written representations on the additional evidence. Neither party applied for a further hearing of the Tribunal in accordance with direction 3. We decided to determine the Appeal on the evidence and submissions received at the hearing, and in response to the directions.
The Facts Found
11.	The goods and services acquired in connection with the mobile display unit were purchased between September 2003 and March 2004. The Appellant at that time was trading in the importation of copper. There was no obvious and clear association between the Appellant’s business and the purchases connected with the mobile display unit. 
12.	None of the equipment connected with the mobile display unit was listed as an asset in the Appellant’s original accounts to December 2003 and December 2004.  The value of the purchases recorded in the accounts was £836 which was considerably less than the price paid for the equipment. We place no weight on the amended accounts which were changed as a direct result of the Respondents’ assessment.
13.	The Appellant played down the significance of the original accounts by pointing out that as a small company it did not require audited accounts. Also Dr Salehi did  not consider that the purchases fell within the definition of assets. We find the Appellant’s arguments spurious since the accounts were intended to represent a true and fair view of the state of affairs of the company. A firm of Chartered Accountants drew up the original versions of the 2003 and 2004 accounts.
14.	During the dispute Dr Salehi on behalf of the Appellant has given different explanations for the purchases. He first informed Mr Macklin on 21 June 2006 that the Appellant had not bought or disposed of any business assets during the previous three years. Further the Appellant did not own a commercial vehicle. When Mr Macklin presented Dr Salehi with his findings in relation to the purchases made in connection with the mobile display unit, Dr Salehi explained that the Appellant bought the equipment for Advantage Motion Media Limited as a loan which would be repaid. There were no documents supporting the existence of the loan, and no evidence of repayments of the loan by Advantage Motion Media Limited.
15.	Following the issue of the assessment Dr Salehi gave a different explanation, namely, that the Appellant acquired the assets in connection with the mobile display unit so that they could be rented out to Advantage Motion Media Limited. Dr Salehi pointed out that the Appellant had the capital reserves to purchase the equipment. Also the arrangements made commercial sense allowing for the possibility of selling off Advantage Motion Media Limited if the venture was successful.  Likewise the supplies of the Chartered Patent Attorney’s services to the Appellant gave it flexibility with the commercial exploitation of the patent when granted, which would enable the sale of the associated company whilst retaining the ability to license the use of the equipment by other businesses.
16.	We were not convinced by the Appellant’s evidence about the rental agreement with Advantage Motion Media Limited. No rent had been paid since the goods were purchased. There were no documents evidencing the agreement. No invoices were issued for the rental supplies until after the issue of the assessment.  The credibility of Dr Salehi’s evidence was damaged by his assertion at the hearing which later proved incorrect that Advantage Motion Limited had paid rent for use of the goods upon which output tax had been accounted. Further we found Dr Salehi’s testimony about the rental arrangements vague and confusing. He was not clear about the terms of the agreement adopting a fall back position that nothing could be resolved until Advantage Motion Media Limited acquired the necessary resources. Dr Salehi offered no cogent explanation for why the Appellant purchased the van but the alterations to it were paid for by Advantage Motion Limited. 
17.	The Chartered Patent Attorney’s invoice dated 5 February 2004 was addressed to Dr Salehi and referred to advice given to him about his instructions. We decided that the contents of the invoice strongly indicated that the services of the Chartered Patent Attorney were supplied to Dr Salehi acting in a personal capacity rather than to the Appellant.
18.	We concluded that Dr Salehi’s evidence regarding the goods and services supplied in connection with the mobile display unit was unreliable. He gave inconsistent and different explanations about the arrangements for the purchase of and the use of the goods in the Appellant’s business. Dr Salehi did not substantiate his explanations with documentary evidence.
19.	 The purchase of the Canon photocopier was not associated with the mobile display unit venture. The purchase occurred at a time when the Appellant was making taxable supplies. The Appellant’s 2004 accounts revealed a turnover of £29,553 which according to the evidence happened in the first six months of the year. We consider that a photocopier has a clear and obvious association with the Appellant’s business, particularly with the administration of the business. The principal reason for rejecting the Appellant’s claim appeared to be that the photo-copier was not located and operating in the Appellant’s premises at the time of Mr Macklin’s visit, which if correct questioned whether the photocopier had been acquired for the purposes of the Appellant’s business. We are satisfied on the evidence that Mr Macklin did not have the opportunity to inspect the Appellant’s premises thoroughly. We accept the Dr Salehi’s evidence that the photocopier was situated in the Appellant’s premises and being used for the purposes of the Appellant’s business.
Reasons for Decision
20.	 The Appellant’s case regarding the input tax claim for the goods and services connected with the mobile display unit depended upon the credibility of Dr Salehi’s evidence. There was no obvious and clear association between the Appellant’s business of copper importation and the purchases connected with the mobile display unit. There was no contemporaneous documentary evidence supporting the Appellant’s claim that the goods and services were being used for the Appellant’s business. The original versions of the accounts for the years relating to the purchases showed that the goods bought for the mobile display unit were not recorded as assets. We found Dr Salehi’s evidence regarding the use of the goods and services associated with the mobile display unit in the Appellant’s business unreliable. He gave inconsistent and different explanations about the arrangements for the purchase of and the use of the goods in the Appellant’s business.  
21.	The Appellant in its final submission emphasised  that there was no financial gain to Dr Salehi by the Appellant claiming the VAT on the supplies relating to the mobile display unit instead of making the claim through Advantage Motion Media Limited which was a VAT registered business. We placed no weight on the submission because it was not central to the disputed issue. We did not consider the submission relevant to the credibility of Dr Salehi’s testimony, which we assessed from the perspective of coherence of his explanations rather than an examination of his motives.  
22.	We noted that the Appellant’s additional submissions pursuant to the Tribunal directions of 17 January 2008 mentioned the possibility of a Mr Davies giving evidence at a further hearing if required about retaining the assets and patent within the Appellant’s business. The Appellant, however, made no application for reconvening the Tribunal to hear the evidence in accordance with the directions. In those circumstances we considered that it was not our role to interfere with the Appellant’s conduct of its case. We disregarded the references in the additional submissions to the potential evidence of Mr Davies.
23.	The High Court in Ian Flockton Developments Ltd decided that the test for determining whether the goods and services relating to the mobile display unit were used by the Appellant for the purpose of its business was a subjective test, namely, what was in the mind of Dr Salehi (who controlled the Appellant) at the time the disputed goods and services were purchased.  The High Court emphasised that we must consider all the circumstances with the burden of proof on the balance of probabilities resting with the Appellant.  We hold on the facts found summarised in paragraph 20 that the Appellant has failed to satisfy us on the balance of probabilities that  the goods and services connected with the mobile display unit were supplied to it for the purposes of its business.
24.	We consider that the circumstances of the Canon photocopier were different from those pertaining to the goods and services connected with the mobile display unit. Essentially the photocopier did have a clear and obvious association with the Appellant’s business. The principal factual dispute between the parties was whether the Canon photocopier was situated and operating in the Appellant’s premises at the time of Mr Macklin’s inspection, which we found in favour of the Appellant. We are satisfied that the Canon photocopier was purchased for the purposes of the Appellant’s business. 
Decision
25.	 In view of our reasons given above we hold that the Appellant was not entitled to recover VAT in respect of the projector, lens, multi-media projector and lens adaptor, international patent application, MPEG2 player and motor vehicle. We, therefore, dismiss the appeal in respect of those goods and services, and uphold that part of the assessment which relates to them. 
26.	We note that the Appellant in its additional submission suggested that the assessment utilised the wrong figure for the VAT claimed on the Chartered Patent Attorney’s supplies, and should, therefore, be reduced accordingly. The assessment used the sum of £961 which represented a disbursement for “official fees”, rather than £297.50 which was the VAT charged on the supplies. The question whether the assessment should be reduced accordingly depends upon what the Appellant was repaid, £297.50 or £961. This is a matter which can be resolved between the parties unless we are advised otherwise.
27.	 We hold that the Appellant was entitled to recover the VAT on the Canon photocopier. We, therefore, allow the appeal in respect of the photo-copier, and direct that the assessment should be reduced accordingly.
28.	We note that the Appellant withdrew its Appeal in respect of the VAT repayments for the work done to the vehicle.
29.	We were asked to reserve the position in respect of costs. The parties are at liberty to make application for costs provided application is made in writing to the Tribunal with a copy to the other side within 28 days from release of the decision. Our preliminary assessment is that we are unlikely to make an order for costs because the Appellant was not successful with the substantive dispute under Appeal, and there appears to be no grounds justifying departure from the Respondents’ general policy of not pursuing costs against unsuccessful Appellants.  

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 24 April 2008

MAN/