Nicholas Nehemiah Gayle v Her Majesty's Revenue & Customs, V 20982

20982

VAT – deduction of input tax – whether input tax creditable in respect of supplies for which no invoices held – whether input tax claimed related to supplies to be used in the Appellant’s business

VAT – cancellation of registration – jurisdiction of tribunal – conclusion: deregistration was warranted

Appellant

NICHOLAS NEHEMIAH GAYLE

- and -

Tribunal: CHARLES HELLIER (Chairman)

HELEN FOLORUNSON

Sitting in public in London on 16 December 2008

Mr Gayle in person

David Manknell, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1. This appeal (or rather the two appeals made by Mr Gayle which have been consolidated and are heard together) concerns events in the period from April 2007 to October 2008. That much is fairly clear.

2. On 26 April 2007 Mr Gayle applied to be VAT registered. He made a second application on 8 June 2007. HMRC accepted both applications and gave him two VAT numbers. Mr Gayle submitted his first VAT return – that specified as being for the period ending on 30 September 2007 (the “09/07” period – we shall similarly describe other periods) on 9 September 2007, three weeks before the end of the period. That return bore the VAT registration number from (we think) the first application for registration. On 11 October 2007 Mr Gayle submitted a VAT return for the period to 31 October 2007 – again before the end of the period. That return bore the second registration number. Then further returns were submitted, under the first registration number, for the periods 12/07, 03/08, and 06/08. At some stage the second registration number was cancelled.

3. Thus far the picture is relatively uncomplicated.

4. Before us Mr Gayle explained his approach to the completion of VAT returns. He explained that he completed them on a cumulative basis. Thus if the VAT on his purchases and sales had been:

Sales Purchases

July – Sept 07 100 45

Oct – Dec 07 nil 70

Jan – Mar 08 10 80,

he would have made the following entries on his VAT returns:

09/07 100 45

12/07 100 115

03/08 110 195.

5. Mr Gayle explained that his first sale had been of a number of printed tee shirts. He had been given cheques for £9,000 and £45,000 in payment. The VAT on their sale, £9450, was declared as output tax on the 09/07 return, together with input tax of £4,497.50 (which Mr Gayle told us was an error: it should have been £6902). But the cheques he had been given bounced and Mr Gayle did not receive the money. He has made no further sales. Thus for each period after 09/07 he considered that his cumulative output VAT was – since the inception of his registration – nil.

Leaving aside Mr Gayle’s return for 10/07 we now turn to the 12/07 return. This showed as indicated above, cumulative sales of nil. It also showed (after the correction of a manuscript error which we shall return to shortly) input VAT of £6902. On Mr Gayle’s evidence that is the cumulative VAT since the inception of his business, and the same figure as that which should have been shown as input tax in his first return, since he made no further purchases in this period.

7. Mr Gayle’s return for 03/08 reflects Mr Gayle’s evidence that he made no further sales and made no further purchases. Thus it records output tax of nil, and input tax claimed of £6902.

8. Mr Gayle’s 06/08 return again reflected no further sales in that period – so that his cumulative output tax was nil, but also reflected additional input VAT on purchases made by him (it appears mainly in March and April 2008). We assume that the early delivery of the 06/08 return precluded their inclusion on that return. These purchases we understood Mr Gayle to say included some £548 of VAT, and as a result his declared input VAT for that period was shown as £7450 (= 6902 + 548).

9. Mr Gayle’s approach to the entries in his VAT returns was not that which HMRC were expecting, or that which they recommended. HMRC’s expectation, where a trader has three-monthly returns, is that the entries for input and output VAT will reflect the VAT on sales and purchases for the three months ending with the return date rather than the cumulative figures. And that is indeed what the VAT Regulations contemplate since the prescribed form of return speaks of “VAT due in this period on sales and other outputs” and of “VAT claimed in this period on purchases and other inputs”, and the natural interpretation of those words is that they refer only to what has been sold or purchased in that period rather than cumulatively since registration.

10. But before we turn to the details (about which there is some greater confusion), we should note one other aspect of Mr Gayle’s evidence. He told us that his understanding was that he was entitled to repayment from HMRC in each quarter of the figure shown as the difference between cumulative output and cumulative input VAT. Thus, taking into account relief for the bounced cheques, he was entitled to payments of £6902 in each of the quarters 09/07, 12/07,and 03/08, and of £7450 in respect of 06/08. Mr Gayle explained that these payments would enable him to run his business and to employ someone, and that his employee would assist in the business of claiming further VAT repayments.

11. Now, Mr Gayle’s return for 09/07 showed £9450 of output tax (being the tax on the failed sale of £54,000), input tax of only £ 4,497.50 and EU acquisition VAT of £1,417.50. It thus indicated VAT due by Mr Gayle of £6370. On 10 December 2007 Mr Gayle submitted a form “Error on VAT Returns” on which he showed by reference to the 07/07 period (rather than 09/07) an amount repayable to him of £6902. On the form he explains:

“I had previously sent in a VAT for, but it was the first time I had ever sent a VAT form. I have now excepted my error and I am now positioning my purchases for my company which deals with printing and photography and music and cosmetics and telephone services using a server system – thank you.”

And on 21 January 2008 Mr Gayle sent a second Error on VAT Returns form showing by reference to the period 12/07 VAT repayable to him of £6902. At about the same time he resubmitted his 12/07 VAT return with a correction. The original VAT return had shown input VAT of:

“6,0902”

which was a manuscript error for

“6902”

which was, as Mr Gayle had explained to us, the cumulative input VAT to December 2007. Thus HMRC had, by the end of January 2008, received two Error claim forms for £6902 each, a 12/07 VAT return with a claim for £6902, and the 09/07 return with an amount originally shown due from Mr Gayle of £6370.

12. We mentioned the 10/07 VAT return. This return did not follow the pattern of the other VAT returns in so far as disclosure was concerned although like them it was received in good time- some three weeks before the period end. In this return Mr Gayle showed:

“1. VAT due on Sales 8042

2. VAT due on acquisitions 8042

3. Total VAT due (the sum of 1 and 2) 8042

4. VAT reclaimed on purchases 8042

5. VAT to be paid or reclaimed 8042”

13. From HMRC’s perspective all this was no doubt very confusing. They arranged a meeting with Mr Gayle on 18 February 2008. They learned from Mr Gayle of the bounced cheques and asked for documentary evidence of the inputs on which he claimed the £6902 input tax. Mr Gayle produced a number of petty cash slips but no invoices. HMRC were not satisfied with this evidence. They decided that the best course of action was to reduce both the input and output VAT in the 09/07 (and it appears the 12/07) returns to nil. In pursuit of this practical attempt at a solution various notices of assessment or of over declaration were issued to Mr Gayle.

14. On 22 February 2008 Mr Dowling from HMRC wrote to Mr Gayle explaining that this solution was not the correct one, and withdrawing the earlier notifications. He allowed and disallowed similar items with the same overall effect. On 8 April Mr Gayle was assessed with a misdeclaration penalty in respect of 12/07. On 14 April HMRC wrote effectively disallowing the £6902 input tax claim for 03/08. There was further correspondence.

15. On 23 July 2008 Alpa Adatia, one of HMRC’s officers, met Mr Gayle by prior arrangement. He had been asked to bring documentation supporting the £7,450 input tax claim in his 06/08 return...