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Andrew Needham, Director of VAT Specialists Ltd, highlights a further selection of recent VAT cases.

Tribunal says HMRC was right to disallow use of margin scheme due to poor records

The appellant operated a second-hand car dealership which ceased trading by May 2007. The case concerned an appeal by the appellant against an assessment by HMRC for £73,384 in VAT on sales of second-hand cars over a three-year period.

The appellant accepted that accounting errors had led to an underpayment of VAT (and his own accountant had made a voluntary disclosure after auditing his books), but he felt that his business was entitled to operate under the benefits of the second-hand cars margin scheme as laid down in VAT (Cars) Order 1992 (SI 1992/3122), which allows VAT to be accounted for on only the profit margin of sales. HMRC's position was that VAT Notice 718 establishes in law that a pre-requisite of the margin scheme is that the trader keep adequate records, as laid down in the Notice. These include a stock book and copies of both purchase invoices and sales invoices.

HMRC contended that the appellant failed to keep such records. During a VAT inspection, the officer noted a dearth of sales invoices, and took the appellant's books away for inspection and VAT audit. Following the examination of the records, HMRC formed the view that the record-keeping conditions of the margin scheme had not been met, and issued a notice of their intention to assess for VAT due on the total sales consideration over the past three years. Although the appellant’s accountant received permission to reconstruct the accounts in order to meet the requirements, and submitted new records in the time allowed, HMRC found these inadequate, and went ahead with the assessment. The accountant had been forced to create a new stock book and issue new sales invoices based on copies of purchase invoices obtained from the other dealerships with which the appellant traded. Furthermore, not every transaction had been fully traced. To HMRC, this confirmed that record-keeping had indeed been inadequate. The reconstructed accounts which they would have accepted referred only to new copies of purchase invoices and sales invoices being obtained, not the issue of new invoices. HMRC therefore raised the assessment, although in the course of the hearing, they did accept that the amount should be reduced to £72,508.

The Tribunal found that, as the appellant had failed to keep the records that were required by law as a pre-condition of operating the margin scheme, he had no right to benefit from the scheme, and HMRC were within their rights to assess him for VAT on the full amount of his sales receipts. The appeal was thus dismissed. The Chairman felt that there was some question as to whether the appeal was, in fact, against HMRC's rejection of the reconstructed accounts, and some doubt as to whether the jurisdiction of the Tribunal covered such a question. However, for the avoidance of doubt, he gave it as his opinion that it had been reasonable of HMRC to reject the reconstructed accounts given the circumstances above. Therefore, the appeal was also dismissed on those grounds.

Alan Thornhill t/a ‘Motormill’ (VTD 20,858)

Tribunal says HMRC was right to issue a special method override notice

The appellant, a High Street optician chain, appealed against an override notice issued by HMRC in respect of previously agreed partial exemption special method, and a resultant assessment for approx £400k for VAT overclaimed. Regulation 102 gives HMRC the power to direct or agree a special method that is a fair and reasonable reflection of the use of costs. Para 3 says that the method will continue in use until HMRC approve or direct its termination. HMRC did not terminate the appellant’s method, but served an override notice.

The appellant claimed that the notice failed because it did not indicate what it must have done in order to comply with it. The Tribunal dismissed the appeal, finding that the wording of the override notice served in accordance with regulation 102 was not ambiguous. Regulation 102B is clear on what a trader has to do to comply with the law, just not how to comply. HMRC are not required to instruct the taxpayer on how to comply with the law.

The case analyses the inappropriateness of 'zoning' (using rental apportionment as a means to calculate the rent for a whole shop) as a means to reflect use. Following the decisions in Optika Limited and Banbury Visionplus, the Tribunal concluded that the appellant did not segregate its business based on area, the whole of the shop was used for the whole of the business, and 'zoning' was not an appropriate measure. Most of the floor space was used in the provision of mixed supplies. A segregated method based on floor-space was distortive. The Tribunal said that an override notice did not require a business to cease using the current method, but did require an additional calculation (for the difference between the amount recoverable under the method and the amount properly recoverable). It is incorrect to assert that HMRC should have told the taxpayer what method would be appropriate (such an indication would have amounted to a direction, and was not a course open to them).

Vision Express UK Ltd (VTD 20,870)

Tribunal says loft conversion company was acting as a principal for VAT purposes

This case involves the supply of loft conversions, and whether the appellant and a connected company were supplying the conversions as principal, or acting as agents on behalf of a number of other businesses, including a second connected business and two other companies.  The appellant argued that output tax was only due on its project management services, and not the full consideration paid by customers. The second connected business, which provided inspection and design services, was run by the owner of the appellant, and the two further companies were run by his daughter and his ex-wife. By looking at the facts, the Tribunal found that, at no stage were customers aware of the separate companies, and that if things went wrong, clients would seek redress from the appellant. The Chairman highlighted a number of clauses within the contract between the appellant and their customers which were inconsistent with agency treatment. The appeal was dismissed.

A1 Lofts Ltd & A1 Loft Conversions Ltd VTD (20,888)