SM Development North West Ltd v The Commissioners for HMRC [2025] UKFTT 1252 (TC)

[2025] UKFTT 01252 (TC)Case No TC09665
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 26 August 2025Date Judgment date: 17 October 2025
By remote video hearing
Appeal reference: TC/2024/00231
VAT –DENIAL OF INPUT TAX –WHETHER SUFFICIENT EVIDENCE TO JUSTIFY INPUT TAX RECOVERY – NO – APPEAL DISMISSED
Before
TRIBUNAL JUDGE IAN HYDEGILL HUNTER
Between
SM DEVELOPMENT NORTH WEST LTDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentMr A. Naveed for AppellantsMr M. Imam, litigator of HM Revenue and Customs’ Solicitor’s Office for RespondentsDECISION

Introduction

[1]This appeal concerns whether the Appellant is entitled to reclaim input tax and whether HMRC were entitled to refuse to admit alternative evidence.[2]The appeal and the preceding check by HMRC also included a dispute about output tax on sales made by the Appellant which, for the reasons set out below, is no longer an issue in this appeal.[3]All statutory references are to the Value Added Tax Act 1994 and references to regulations are to the Value Added Tax Regulations 1995 unless specified otherwise. The relevant provisions in the Value Added Tax Regulations 1995 are reproduced in an Appendix to this decision.

The facts

[4]We were referred to a hearing bundle. Mr Stephen Murphy, the director and owner of the Appellant gave oral evidence at the hearing. Ms Jessica Wilkinson, an HMRC compliance officer who had conduct of the investigation from October 2023, provided a witness statement and gave oral evidence. We accept their evidence and we find the facts as set out below.

The Appellant

[5]The Appellant was incorporated on 17 September 2018.[6]The Appellant began trading on 1 March 2021 as a general builder. Its turnover exceeded the VAT registration threshold on 1 August 2021.[7]The Appellant was registered for VAT with an effective date of registration of 1 August 2022 (“the EDR”).[8]The Appellant submitted its first VAT return for the period 1 August 2022 to 30 September 2022 (“the 09/22 Return”) which had the following entries: Box 1 VAT on sales £21,693.03 Box 2 VAT on EC acquisitions £0 Box 3 Total VAT due £21,693.03 Box 4 VAT reclaim £68,556.28 Box 5 net VAT £46,683.25 Box 6 total value of sales £738,465.00 Box 7 total value of purchases £345,806.00

HMRC’s check and the appeal

[9]On 10 July 2023 HMRC notified the Appellant that they would be checking the 09/22 Return. The details of the correspondence between the parties is not relevant save that we find as set out below.[10]The Appellant was asked by HMRC to complete a questionnaire about its business activities and to provide information. including bank statements, purchase/sale ledgers and copies of invoices. HMRC considered the information provided and made a number of further requests.[11]On 22 September 2023 Mr Naveed, in a covering e mail enclosing some information, stated that all stock had been used to build the two houses at Cromley Road (as to which see below).[12]On 6 October 2023 HMRC issued a notice of assessment to the Appellant which:(1) increased the output tax due from £21,693.03 originally declared in the 09/22 Return to £123,077.50; and(2) denied the Appellant the recovery of the £68,556.28 input tax claimed.[13]On 7 December 2023, following a request for an internal review, HMRC issued the outcome of the internal review which:(1) reduced the output tax assessment from £123,077.50 to £16,553.37; and(2) upheld the denial of input tax.[14]On 4 January 2024, the Appellant appealed to this Tribunal.

the output tax issues

[15]The original check conducted by HMRC into the 09/22 Return, and HMRC’s assessments, included an assessment of underpaid output tax. The issue is not relevant to this appeal and we are aware that these matters may be the subject of future enquiries by HMRC. Accordingly, the evidence and arguments about whether output tax is due were not explored in this appeal and we only make findings of fact in respect of the output tax issues as background to determining the input tax matters in this appeal.[16]Mr Murphy’s evidence, which we accept for the purposes of this appeal, was that the Appellant bought a large house at Cromley Road, Stockport, partly demolished it, refurbished the remaining part and built a new house, semi-detached from the refurbished house. The appellant then sold the resulting two houses, 6 and 6b Cromley Road. The evidence was not clear but Mr Murphy’s evidence was that 6b Cromley Road was sold for £630,000 on 26 November 2021. The second property appears to have been sold in October 2022 for £670,000.[17]The sale of 6b Cromley Road was included in the sales figure reported in Box 6 of the 09/22 Return but no output tax declared. In the questionnaire completed by the Appellant the sales were stated as being standard rated.[18]Ms Wilkinson decided that there was no evidence that zero rated treatment applied to the sale of 6b Cromley Road or any other sales reported in the 09/22 Return and so in the assessment of 6 October 2023, assessed the Appellant for 20% of the sales amount of £738,465 in box 6.[19]In the statutory review HMRC the reviewing officer came to the following conclusions on the output tax issues;(1) The sale on November 2021 was before the EDR and so, even if VAT were due, it would not be payable in the 09/22 Return.(2) A number of other supplies upon which the Appellant had accounted for output tax of £5,139.16 had also taken place prior to the EDR and so should not have been included in the 09/22 Return.(3) There was an outstanding issue as to whether the Appellant’s EDR should be treated as being an earlier date.(4) As a result, the output tax assessment should be reduced from £123,077.50 to £16,553.87, that is £5,139.16 less than the £21,693.03 originally declared by the Appellant.[20]The Appellant did not take issue with this outcome and so we have treated the output tax position to be agreed for the purposes of this appeal.

The issues in this appeal

[21]Leaving aside output tax issues, this appeal concerns whether the Appellant is entitled to recover the input tax claimed in the 09/22 return.[22]HMRC have rejected the Appellant’s input tax reclaims for two reasons:(1) Most of the input tax predates the EDR; and(2) The Appellant has not produced VAT invoices or suitable evidence to justify HMRC exercising its discretion to accept alternative evidence.[23]We have not been given an accurate breakdown of the proportion of Appellant’s claim that is dependent on each of these arguments but do not believe that is necessary for the purposes of deciding this appeal.[24]The burden of proof is on the Appellant in this appeal.

Pre EDR input tax

[25]HMRC’s first reason for denying input tax recovery is that most of the supplies predate the EDR and so input tax cannot be recovered under general rules but must satisfy the additional conditions set out in Regulation 111(2), that is the goods must not have been consumed:
“(2) No VAT may be treated as if it were input tax under paragraph (1) above— (a) in respect of— (i) goods or services which had been supplied, or (ii) save as the Commissioners may otherwise allow, goods which had been consumed, by the relevant person before the date with effect from which the taxable person was, or was required to be, registered;”
[26]As set out below, we were taken to 6 of the invoices produced by the Appellant. 4 predated 1 August 2022, one postdated it and one did not have the relevant year so it was not possible to tell.[27]The Appellant did not address this issue either in correspondence or in the hearing. The Appellant produced no evidence that the goods were still held by the Appellant at EDR and not “consumed”. Indeed, it was the Appellant’s clear case both in its grounds of appeal and in correspondence that they had been used before 1 August 2022. The point was not taken by either party but we note Regulation 111(2)(ii) appears to permit HMRC some discretion.[28]We agree that insofar as the time of supply of the purchase of the relevant goods predates registration, Regulation 111 applies and the Appellant must satisfy the conditions in Regulation 111(2)(a)(ii). Insofar as the input tax claim relates to supplies predating the EDR we therefore find that the Appellant is not entitled to claim the relevant input tax.

Invoices or alternative evidence

[29]The second reason given by HMRC for refusing input tax recovery was that the Appellant had not produced relevant valid VAT invoices or the alternative evidence requested by HMRC which might persuade HMRC to exercise its discretion under Regulation 29(2) to permit recovery.[30]Regulation 29(2) provides:
“(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of— (a) a supply from another taxable person, hold the document which is required to be provided under regulation 13… provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other … evidence of the charge to VAT as the Commissioners may direct.”

Invoices

[31]The primary evidence required by Regulation 29(2)(a) is a VAT invoice from the supplier. The VAT invoice is the document required to be issued by the supplier in accordance with Regulation 13. That document must contain the information and otherwise comply with the conditions set out in Regulation 14.[32]During the check HMRC requested a number of VAT invoices from the Appellant, initially in respect of the five largest supplies but then in respect of other purchases. We were taken in the hearing to the following invoices:(1) Universal Granite UK - dated 10 June 2021 for £2,881.90 plus £576.38 VAT. Ms Wilkinson’s criticism was that it predated EDR and the VAT number was wrong.(2) B&M Henderson – dated 16 April for £1,302.40 plus £260.48 VAT. Ms Henderson pointed out there was no year in the date. The invoice refers simply to “refurbishment” so there is no indication as to what the goods were used for. Further, HMRC could not work out whether it had been paid and whether those goods were held in stock at EDR.(3) Brickies - dated 22 February 2022 for £638.82 plus £127.76 VAT. Ms Wilkinson’s criticism was that it predated EDR and was invoiced to the Appellant at a different address.(4) Brickies - dated 9 May 2022 for £3,697.99 plus £739.60 VAT. Ms Wilkinson’s criticism was that the invoice predated EDR and there was no indication the purchase was connected the Cromley Road. Further this was part one of a longer invoice which had not been sent to HMRC. We take Ms Wilkinson’s reference to be to the invoice being “page 2”, the items on the invoice total £339.36 plus VAT but the total is £3,697.99 plus VAT.(5) Brickies - dated 15 July 2022 for £1,117.45 plus £223.49 VAT. Ms Wilkinson’s criticism was that the delivery address was Heaton Moor Road which was an odd address. Further, it predated EDR.(6) Brickies – dated 10 August 2022 for £5.549.76 plus £1,109.95 VAT. Ms Wilkinson’s criticism was that this was expressly stated not to be VAT invoice.[33]These invoices, represented by a rough estimation of both parties at the hearing some 25-40% of the input tax being reclaimed. We understand that there were no other invoices produced by the Appellant to HMRC to support its claim.

Alternative evidence

[34]The alternative information and documents requested by HMRC and provided by the Appellant were as follows:(1) Questionnaire: the Appellant completed the questionnaire sent by HMRC, including: (a) The Appellant in the questionnaire notified HMRC that the Appellant’s agent was Mr Naveed. (b) The reason given for recovering the VAT on purchases was that; “our client built a brand new house and sold it also did some refurbishment work” (c) Sales were stated to be standard rated.(2) Bank statements: in response to HMRC’s requests to see bank statements the Appellant provided a scanned spreadsheet prepared by Mr Naveed purporting to show bank entries. HMRC considered the spreadsheet to be inadequate and requested copies of the original bank statements showing business name, account number and bank letter head. This was never provided. Ms Wilkinson said that the spreadsheet did not show that the invoices had been paid and without the bank letter head and the other information accepting this information was a revenue risk.(3) VAT account: the Appellant was asked for an explanation of how the figures were reached in the 09/22 Return. The Appellant provided a purchase daybook analysis of the £68.556.28 of input tax claimed but showed daily totals not individual invoices. Further it provided a day and month but not a year. HMRC could not reconcile the workings provided against the invoices provided by the Appellant. HMRC told the Appellant this was insufficient and repeated the request for a VAT account referencing HMRC’s guidance on what it should contain. This was never provided.(4) purchase/sale ledger: the Appellant provided a spreadsheet purchase ledger from 20 December 2021 to 4 February 2023. HMRC noted that the total VAT in the ledger is £20,709.58, much less than the VAT reclaimed in the 09/22 Return. Further, it was not possible to identify which purchases related to supplies made before or after EDR.(5) a stock and asset list; HMRC noted from the purchase ledger that purchases had been made before the EDR and asked for information on whether the purchases were goods or services and whether they were still held as at the EDR. Mr Naveed confirmed by e mail on 22 September 2023 that all stock had been used for the house build and renovation.[35]Ms Wilkinson was very clear in her evidence that if there were no invoices or only defective invoices she was prepared to consider other evidence, particularly if there had been bank statements showing payments by the Appellant. However, the alternative evidence produced by Appellant did not show a sufficient link between the VAT reclaimed and purchases and payments made. Further it was not possible to identify whether the purchases related to sales made before or after EDR. There may well be recoverable VAT but HMRC was unable to identify it. The position was made worse by uncertainties about when the Appellant should have been registered by, the timing of the sales of the properties and their proper VAT treatment.

Discussion

[36]The burden of proof in this appeal was on the Appellant to show on a balance of probabilities, that either it had valid VAT invoices to support the input tax claim or that HMRC unreasonably refused to accept alternative evidence.[37]The Appellant accepts that it has not produced VAT invoices for most of the input tax claim and has not supplied to HMRC good alternative evidence. Mr Murphy accepts in hindsight he should have kept better records, but he did not at the time realise he had to because this was before he was advised that the Appellant could register for VAT.[38]Insofar as the Appellant has produced invoices, we agree with HMRC that they do not meet the conditions in Regulation 14.[39]In our view HMRC has given the Appellant every opportunity to demonstrate it was entitled to recover the input tax claimed in the 09/22 return. We accept Ms Wilkinson’s evidence that had suitable alternative evidence such as bank statements, an accurate purchase ledger or VAT account been provided she would have exercised HMRC’s discretion in Regulation 29(2) and considered accepting the alternative evidence. However, we agree that in the circumstances HMRC was entitled to decline to exercise its discretion under Regulation 29(2) as the Appellant failed to produce suitable alternative evidence to justify input tax recovery.

Decision

[41]We therefore find that in respect of those supplies where the time of supply predates the effective date of registration the Appellant is not entitled to reclaim its input tax.[42]Further, we find that the invoices produced to us did not comply with Regulation 14(1). Finally, we find that as regards the entire claim for input tax (whether evidenced by such invoices or not) the Appellant has not established that HMRC was unreasonable in refusing to exercise its discretion under Regulation 29(2) to accept alternative evidence.[43]The Appellant is therefore not entitled to the input tax claimed in the 09/22 return.[44]Accordingly, the Appellant’s appeal is dismissed.

Right to apply for permission to appeal

[45]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 17th OCTOBER 2025