Sarwar & Sons Knitwear Ltd v Revenue & Customs [2009] UKFTT 281 (TC)

FTT-Tax
Sarwar & Sons Knitwear Ltd v Revenue & Customs
[2009] UKFTT 281 (TC) · 2009-10-29
[1]The Appellant brought two issues before the tribunal. First, there was an appeal against a misdeclaration penalty in the sum of £4,894, notified to the Appellant by letter dated 20 May 2008 and being in respect of period 09/07. Secondly, the Appellant applied for a partial costs order following its withdrawal of 3 appeals, the details of which I set out below.[2]Each party had lodged one single witness statement. Each party thought that they had lodged an objection to the other’s statement. In fact neither party had lodged any objections. There were therefore before the tribunal two unchallenged witness statements. On behalf of the Appellant there was a statement from Mr. Irfan Sarwar and on behalf of the Respondents, from Mr. Mike Holden, the assessing officer. Both parties put in a bundle of documents, for which I am grateful, and neither party called any oral evidence.[3]On 12 February 2008, Mr. Holden carried out a review of the Appellant following a repayment application. As part of the routine checks, Mr. Holden inspected the invoices from one of the Appellant’s main suppliers, namely Samava Ventures Ltd. (“Samava”). Further checks revealed that Samava had been deregistered by MTIC as from 1 January 2008 due to no trading being done since 1 April 2007. Despite this, the Appellant was reclaiming input tax on invoices from Samava in periods 12/07 and 03/08.[4]In further pursuit of his enquiries, Mr. Holden analysed an input tax claim in period 09/07. The claim was based upon a set of invoices from a company called Najat Ltd (“Najat”). Mr. Holden analysed the copy invoices from each of the two companies, Samava and Najat, and noted the following irregularities. With regard to Samava, the address on the invoices was last used by the company on 17 April 2005; the company number quoted on the invoices related to a non-connected company; Samava had submitted nil returns for periods 06/07 to 12/07 due to non-trading; Samava had been deregistered as from 1 January 2008 due to non-trading and finally on the invoices the spelling of the goods was mis-spelt as “acralyc yarn”. In respect of Najat, Mr. Holden noted that in fact the company registration and VAT registration numbers quoted on the invoices related to a company called Najaat Ltd, which had been deregistered on 26 July 2007. The Najat invoices held by the Appellant were completely different in format to Najaat invoices already in the possession of the Commissioners. He also noted that on the Najat invoices held by the Appellant the supply had been similarly mis-spelt as “acralyc”. Mr. Holden also believed that the font on both sets of the invoices held by the Appellant was exactly the same.[5]Following his analysis of the invoices, Mr. Holden sought from the Appellant proof of payment so that he could verify that the transactions had in fact taken place. Mr. Sarwar advised him that payment for all supplies was in cash and there would be no delivery notes and no receipts. There was in fact no further evidence of the transactions or of payment. Mr. Holden concluded that due to the number of irregularities on the two sets of invoices and the lack of any further supporting evidence, the Appellant would not be allowed its input tax in relation to the invoices from either company. Mr. Holden therefore issued a decision that input tax credit in the sum of £27,474 in respect of the Samava invoices in period 12/07 be disallowed. The Appellant subsequently appealed that decision. He also ruled that input tax in the sum of £4,091 in relation to the Samava invoices for period 03/08 would be similarly refused. The Appellant appealed that decision also. Thirdly, he raised an assessment for period 09/07 in the sum of £32,629 to recover overpaid input tax in the respect of the Najat invoices. The Appellant appealed against the assessment. In relation to 09/07, Mr. Holden also raised a misdeclaration penalty in the sum of £4,894, also appealed by the Appellant.[6]These therefore were the four decisions made by the Commissioners against which the Appellant appealed. In circumstances which I describe below, the appeals were withdrawn against the first three of those decisions, leaving only the misdeclaration penalty before the tribunal but also the application for costs in relation to the three withdrawn appeals.[7]Mr. Holden had written to the Appellant by letter dated 3 April 2008 setting out his conclusions and his proposed courses of action. In that letter he listed as follows the irregularities which he had found in the invoices:
“ Samava Venture Ltd: There is no audit trail / evidence to confirm that the invoices have been paid. Invalid Company number quoted on invoices. Invalid Company address quoted on invoices. Misspelt supply description on each invoice. Font and description (including spelling errors) of the supply is exactly the same on these invoices and the Najaat invoices. HMRC internal trading knowledge of this company. Najaat Ltd: There is no audit trail / evidence to confirm that the invoice have been paid. The company name is misspelt on the header of each invoice. Supply description misspelling on each invoice. Font and description (including spelling errors) of supply is exactly the same on these invoices and the Samava invoices. Misspelt supply description on each invoice. HMRC internal trading knowledge of this company. Sales invoices held by HMRC with respect to and issued by Najaat Ltd do not match the ‘type’ held by you.”
[8]Following the submission of the Commissioners’ List of Documents, Mr. Rayner wrote to the Commissioners by letter dated 6 August 2008 applying for copies of certain of the documents listed namely some correspondence, Samava invoices, Najaat invoices and the Samava Companies’ House details. By letter dated 8 August, the Commissioners responded by providing the correspondence, the Samava invoices and the Companies’ House details for Samava but failed to enclose the Najaat invoices. Therefore at this stage, Mr. Rayner only had in front of him the Samava and Najat invoices held by his client. Certain correspondence followed between the Commissioners and Mr. Rayner and on 15 September 2008, Mr. Rayner applied to the Tribunal for Further and Better Particulars of a number of issues including “the sales invoices held by HMRC with respect to and issued by Najaat Ltd do not match the type held by you”. Mr. Rayner received nothing further from the Commissioners and the cases came before the tribunal on 13 May 2009 in a pre-trial review. Mr. Rayner requested an example of the Najaat invoice held by the Commissioners which they claimed did not match those held by the Appellant and production of this was incorporated into Judge David Demack’s Decision Notice. The Commissioners responded on 9 June 2009 giving further and better particulars but still not providing a copy of their Najaat invoice. In the absence of the production of this invoice, Mr. Rayner made a further application to the tribunal by letter dated 6 July and finally by letter dated 8 July 2009, the Commissioners forwarded to Mr. Rayner a copy of the Najaat invoice held by them.[9]On receipt of the Najaat invoice, Mr. Rayner realised immediately that the chances were that the Appellant’s invoices were fictitious and he advised that the appeals should be withdrawn. As he advised the tribunal, he believed himself to be in the position where he could no longer represent his client. His advice was accepted and the appeals were therefore withdrawn by letter dated 1 September 2009.[10]In his witness statement, Mr. Irfan Sarwar describes how he came to trade with both Samava and Najaat. I need not go into the details of Samava as the misdeclaration penalty before the tribunal relates only to the Najaat invoices. In relation to Najaat, Mr. Sarwar says:
“Similarly I had a visit from Mr Nasir from Najaat Ltd who also offered to sell me yarn. We did not buy full loads from Najaat and the yarn was delivered in a truck. The yarn from Najaat was in different style of boxes from that supplied by Samava. These boxes were a totally different shape and difficult to handle. Mr Nasir delivered the goods and collected payment. I made checks on both companies and the documents are listed in the List of Documents supplied by Portcullis VAT Consultancy.”
[11]In relation to the application for costs, Mr. Rayner’s contention, quite simply, was that had the Commissioners produced the genuine Najaat invoice when originally asked, the appeals would have been withdrawn 12 months earlier. His client was therefore entitled to its costs that had been incurred in the meantime.[12]In relation to the misdeclaration penalty, Mr. Rayner went through the various contentions raised by Mr. Holden in his letter of 3 April, pointing out that in the case of a number of them, there was no way that his client could have known as the allegations related to evidence internal to the Commissioners. He accepted that there was no audit trail but that was purely and simply the way in which the Appellant traded. He denied that the font on the two sets of invoices held by the Appellant was identical by producing enlarged copies of each on which differences were clearly visible. In effect, submitted Mr. Rayner, his client had no way of knowing that the invoices held by him were false. It was Mr. Rayner’s contention that his client believed that he was trading with honest traders. Although there was no supporting evidence, the transactions all took place and the Appellant believed that it was fully entitled to recover the input tax on what it believed to be genuine invoices. The Appellant did not knowingly make any misdeclaration and there was not really any way in which he could have known it. Conclusions with regard to the misdeclaration penalty[13]I accept Mr. Cannan’s contention that the correct approach to the penalty is to look at the facts that were known to the Appellant or should reasonably have been known to it at the time when the return in question was put in, namely October 2007. Unfortunately Mr. Sarwar’s witness statement is brief in the extreme, is limited to the shortest of descriptions of how he traded with Najat and makes no reference whatsoever to the misdeclaration penalty. What the statement does say, however, is that Mr. Sarwar made checks on both Samava and Najaat. This would appear not to be correct. He cross-refers the checks which he carried out to Mr. Rayner’s List of Documents. Of the 7 documents listed, 6 relate to Samava and only the final document relates to Najaat, this being a company search carried out at a much later date by Mr. Rayner. Therefore whilst clearly aware of the need to make checks upon his suppliers, Mr. Sarwar failed to make those checks upon Najat. Had he done so he would immediately have realised that the company with whom he thought he was dealing was not what it was purporting to be. He would also of course have realised that the invoices with which he was being supplied were invalid and could never form the basis of a claim for input tax. It is always open to a trader, in the absence of a valid invoice to supply alternative evidence but again the Appellant has let itself down because there is absolutely no audit trail. The company dealt entirely in cash and held no delivery notes or receipts or any evidence at all that the transactions actually took place and payment was made - or indeed that the goods supplied were consumed within the business. It should also be noted that cash traders have certain obligations, in addition to keeping an audit trail of their dealings. The Appellant company dealt in very large sums of cash and was in clear breach of its legal liability to be registered as a high value dealer under the Money Laundering Regulations 2007. All in all, the Appellant did not act as a responsible trader, aware of his obligations, would have acted. On the two sets of invoices, the word “acrylic” was misspelt in a similar way. Mr. Rayner contended that Mr. Sarwar would not have recognised the misspelling. This however was never put forward in evidence by Mr. Sarwar himself and one can only say that objectively an identical misspelling in sets of invoices from two separate companies should have set alarm bells ringing. All these factors lead to the conclusion that the Appellant did not act, in the course of its dealings with Najaat as a responsible trader should have done and I do not believe that the Appellant’s conduct gives rise to a reasonable excuse for the misdeclaration. Conclusions as to costs[14]The claim for costs relies upon the Commissioners’ failure to produce the evidence that the Najat invoices were invalid. There can be no excuse whatsoever for the Commissioners’ failure to produce their Najaat invoice twelve months earlier. They should have produced it and were clearly at fault in not so doing. However, I do not believe this gives rise to the claim for costs which is now being made. What happened when the invoice was eventually produced was that Mr. Rayner, spotting the discrepancies, set in motion the very checks which the Appellant should have carried out at the outset of his trading. As far as I can see, Mr. Rayner acted perfectly properly throughout. He made numerous requests for the document, immediately acted upon it when he received it and his advice to his client lead to the withdrawal of the appeals. However, I believe it is the Appellant’s conduct which the tribunal should look at in considering whether or not the Appellant is entitled to its costs. Had the Appellant acted in a responsible and reasonable manner at the outset then the company would not have traded with Najaat and the resulting assessment and misdeclaration penalty would never have been made. As far as the Samava appeals were concerned, it was Mr. Rayner’s case throughout that there was no link between the two and he only withdrew the Samava appeals because he felt that they were in some way tainted. Again I do not believe this gives rise to a claim for costs.[15]In summary therefore, I dismiss the appeal against the misdeclaration penalty. Mr. Cannan made no application for costs and no order is therefore made. I also reject the Appellant’s application for costs arising out of the withdrawn appeals. MAN/2008/0678, 0729 & 1495 LADY MITTING CHAIRMAN Release Date: 29 October 2009